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Edited Transcript of WTB.L earnings conference call or presentation 25-Apr-17 8:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Whitbread PLC Earnings Presentation

London Apr 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Whitbread PLC earnings conference call or presentation Tuesday, April 25, 2017 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Brittain

Whitbread PLC - CEO and Director

* Dominic Paul

Whitbread PLC - MD for Costa

* Nicholas Theodore Cadbury

Whitbread PLC - Group Finance Director and Executive Director

* Richard A. Baker

Whitbread PLC - Chairman

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Conference Call Participants

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* Alex Brignall

Redburn (Europe) Limited, Research Division - Research Analyst

* Geoffrey D'Halluin

Deutsche Bank AG, Research Division - Research Analyst

* Jamie David William Rollo

Morgan Stanley, Research Division - MD

* Richard Clarke

* Tim Ramskill

Crédit Suisse AG, Research Division - Research Analyst

* Timothy William Barrett

Numis Securities Ltd., Research Division - Analyst

* Vicki Stern

Barclays PLC, Research Division - MD

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Presentation

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Richard A. Baker, Whitbread PLC - Chairman [1]

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I think we're all set. Good morning, everybody, and welcome to Whitbread's results for 2016 and '17.

I'm very pleased to report we've delivered another set of good results, which again demonstrate the strengths of our 2 very strong brands, Premier and Costa. You may not know that Whitbread is one of British -- Britain's longest established and most successful companies, and we celebrate 275 years in business this year. And the board are very aware of our responsibilities to ensure that the company continues to thrive for many, many years to come. As such, we're focused on both driving excellent growth from the company but also managing risk to an appropriate level and the obligation to demonstrate excellence in corporate governance. We operate a conservative approach to the management of our balance sheet, and this provides us with a solid base in turbulent and changing times. Our strong cash flow has enabled us to increase the full year dividend by 6% to 95.8p.

Thank you very much. I will now hand over to Alison.

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Alison Brittain, Whitbread PLC - CEO and Director [2]

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Thank you, Richard. Good morning, everybody, and thank you for joining us for Whitbread's full year results.

I've got a number of colleagues from Whitbread's executive committee with me today, and I'd like to introduce them. I'll just get them to stand up, because why should they be shy: Dominic Paul, MD of Costa; Simon Jones, MD of Premier Inn & Restaurants U.K.; Mark Anderson, MD of Property and Premier Inn International; Louise Smalley, our HR Director; Chris Vaughan, our General Counsel; and last, definitely not least, and no need to stand, Nicholas Cadbury, our CFO. I'd like to start the presentation with a brief introduction and overview of the group highlights for the year. Nicholas, as always, is going to take you through the detail of the number -- in the numbers today, and then he'll hand back to me to give you an update on how we're progressing on the strategic plan. And then finally and the bit you're all looking forward to, I know, we'll be delighted to answer any of your questions at the end of the morning.

So let's start. This is a slide that I presented this time last year and again at the Capital Markets Day in November. It highlights the benefits that Whitbread has from operating 2 businesses, both with strong structural growth opportunities and market-leading brands. These strengths, along with our conservative financial framework, our strong balance sheet and our prudent approach to capital management, enables us to exploit opportunities to grow both in the U.K. and internationally and deliver compounding returns for shareholders. However, in order to deliver our future growth, we do need to develop and invest in our business. In the next few years, we must retain our core strengths but at the same time invest to sharpen our customer focus and innovate to ensure that our leading brands remain relevant and fresh. And we need to build new capabilities in areas of IT systems, digital, procurement and logistics to support the efficient, long-term sustainable growth that we want.

This time last year, I set out 3 strategic priorities for Whitbread: to grow and innovate in the core U.K. business; to focus on our strengths to grow internationally; and to invest in building the capability and the platform to support our long-term growth. Focus and investment in these areas will deliver strong return on capital and long-term growth in earnings and dividends for shareholders. We've made good progress on each of these strategic priorities this year, and I look forward to taking you through the highlights of that later this morning.

But turning now to this year's performance, I'm really pleased to report that Whitbread has delivered another good set of results and another year of strong growth. Total revenue was up 8.2% to GBP 3.1 billion, driven by both like-for-like sales and the continued growth of our business. Both underlying PBT and underlying earnings per share increased by around 6%, which has allowed the board to recommend a full year dividend of 95.80p, up 6%. In addition, we maintained a good return on capital at 15.2% and a strong balance sheet with healthy leverage at 3.2x.

Now turning to the year ahead. In terms of the year ahead, and let's start with a caveat, we are only 7 weeks into the new financial year, but trading has started well. However, in line with other commentators, we remain cautious regarding the consumer environment. Nicholas is going to cover this in more detail, but Premier Inn has had a good start to the year, and Costa has also seen positive like-for-like growth. In the longer term, we remain confident about our customer leadership and unique business models that capture the significant structural growth opportunities in our 2 major businesses. We will continue to invest in the business to underpin good returns and sustainable long-term growth for shareholders. The strong fundamentals across both our brands are going to be outlined in the next couple of slides, and they provide the platform from which we continue to grow.

Starting with Premier Inn. Premier Inn's a unique and winning model. It has a distinct competitive advantage; and continues to deliver strong revenue, profit and return on capital. We have a formidable network strength. We've opened 9,000 rooms in the last 2 years, which are maturing fast. Notwithstanding this significant increase in capacity, we have still managed to grow our Premier Inn U.K. total sales by 9%, like-for-likes by 2.3%; and have maintained occupancy at over 80%, that along with driving another record year for direct bookings. We're really proud of what our customers think of us, and we lead in the market on both value and quality. Our value-for-money credentials have been helped by our new pricing model. Whilst this automated trading engine, which is what we call it, snappy title, is still in a test-and-learn phase, we are excited about the incremental benefits to both the business and to our customers as it develops. Our strong brand has also translated well into a new market in Germany. And our first hotel in Frankfurt is currently ranked #1 on TripAdvisor. We've built our pipeline up to 5 hotels and remain confident about the long-term opportunity for the Premier Inn brand, and we will continue to look for opportunities to accelerate the delivery of our strategy in Germany.

On Costa. Costa has grown profits by over 5%. And return on capital also continues to be strong, finishing the year at 45%. Once again, this was underpinned by organic growth through increased base and like-for-like sales, with total sales up 10.7% for the year. We continued to invest and innovate to drive our future performance and brand strength. This includes the introduction of new products, new store designs both in the U.K. and internationally as well as implementing new infrastructure and digital tools. And our investment is paying off. We've retained our position as the U.K.'s favorite coffee shop for the seventh year in a row, an incredible achievement. Customers love our brand, and our large network ensures that we remain the most convenient way to meet their needs for quality coffee.

Later, I'll go into more detail about the progress we've made in the business this year, but let me now hand over to Nicholas to take you through the full year financial results in more detail.

Thank you.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [3]

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Good morning, everyone. Before I start, just to note the previous year was a 53-week year. And to show the underlying performance, all the profit and loss numbers, we'll quote on a 52-week comparative basis. On the slides, you will also see the 53-week comparison as well.

We've delivered revenue growth of 8.2%; and underlying profit before tax, on expectations at GBP 565 million, up 6.2% on last year. And basic underlying earnings per share grew by 6%. This profit was driven by good revenue growth in both of our businesses. Prem Inn had strong total sales growth of 9% with a U.K. like-for-like growth of 2.3%. Restaurant sales grew by 1.2%, with 8 new sites and a small like-for-like decline of just under -- of just 0.3% which was just ahead of the market. And Costa had good total sales growth of just under 11%, with U.K. equity like-for-like up 2%. This was, as previously indicated, at the bottom end of the guidance of 2% to 3% that we gave at the beginning of the year.

As you know, in Premier Inn we are focused on driving total hotel sales and total profit rather than individual revenue per available room. As last year, I've included a page to show the components of our total sales that, hopefully, help explain our good performance. On the bottom right hand of the slide, you can see our total U.K. sales growth of 8.7%. We've then split this out between the regions and London. Working down the page, at the top of the chart on the right you can see the growth in revenue per available room, where we have not added new capacity, which is up 1.4% and was ahead of the Midscale and Economy market. Our new capacity, including extensions, diluted our RevPAR, but the benefit we get from the additional rooms and extensions grows our total sales in these hotels, all as previously guided, which gives us good like-for-like growth of 2.3%. With the help of our new automated trading engine that focuses on the estate as a whole, our new hotels contributed ahead of our expectations with sales growth of 6.4%, to give us total sales growth of 8.7%. In the regions on the left, total sales grew by 9% with good like-for-like sales as we benefited from the strong underlying RevPAR where we haven't opened capacity and, again, from the contribution from extensions.

London continues to be a good market for us with very high occupancy and low market share. We did see a more challenging market in the first 9 months, particularly in the Midscale and Economy sector that is largely focused on the domestic customer, with the 4- and 5-star hotels performing a little bit better as they benefit from the weak pound and the inbound traffic. However, we are pleased with our overall growth in London of just over 7%. Our underlying RevPAR was in line with the economy and midscale market. And performance of the new hotels, which we will show you later, are maturing very quickly, was excellent and add 9 -- added 9% to our total sales growth.

Profit from operations was up 6.8%. Premier Inn & Restaurants profit in the U.K. and Ireland and Germany was up 7%. And international hotel losses was slightly down at GBP 3 million. The losses for our Southeast Asia business will remain in underlying profit until we exit the business later in the year. Costa's profits were up 5.3% to GBP 158 million with international profits of GBP 3.7 million.

The next 2 slides show the margin progression through the year for the 2 businesses. In Premier Inn & Restaurants the margin was maintained year-on-year. Given the cost headwinds in our sector and the investments we are making in systems and improving our customer proposition, we are really pleased with this and show the benefit the leverage -- the benefit of the leverage we get from our growth and the very good progress we have made on our cost-efficiency program. In Costa you can see the benefit we have from our like-for-like growth, and the new stores more than offset inflation. However, we are investing to support our future growth. And the margin percentage was down 80 basis points. This was 20 basis points better than our guidance due to around GBP 2 million of investments in China and in systems that we rephased into 2017, '18. Profit after tax, after non-underlying items, was up 10.5%.

As we align our business to the 3 strategic priorities, we had none -- a non-underlying operating charge of GBP 39 million. This predominantly related to the exit from Premier Inn in Southeast Asia, the closure of our Costa equity business in France and costs relating to our efficiency program. This was net of profits on disposals and properties of around GBP 20 million, including the profit on the sale and leaseback transactions that we did in the year. As we own a number of our Southeast Asia freehold assets going forwards, we would expect a small net cash inflow from these charges as the properties are disposed of.

We continued to generate strong cash flow from operations of GBP 860 million, which both supports our capital investment and also provides us our balance sheet flexibility. This strong cash flow provided a funding to invest GBP 206 million in improving our products, maintenance and systems and technology; and GBP 404 million in expansionary capital that I will talk about in a moment. We also received proceeds from sale and leaseback transactions and the sale of an associate investment in a hotel in Edinburgh, which totaled the proceeds of GBP 207 million, giving us a net overall cash inflow of GBP 20 million.

We continue to be committed to maintaining our competitive advantage through our strong balance sheet and finished the year with debt leverage at 1.1x and our adjusted pension and lease debt leverage at 3.2x. Our debt benefited from the GBP 20 million cash inflow and ended the year at GBP 890 million, which gives us significant headroom compared to the total funding facilities of GBP 1.9 billion. And with the freehold making up 64% of our Premier Inn estate, our balance sheet is in good health.

Continuing on this theme of a strong balance sheet. As set out in our property strategy in November, we have had success in capturing some of the property development profits through forward selling 3 London hotels. The total proceeds will be around GBP 289 million, GBP 186 million of which was received in last year, which we invest in new, high-returning opportunities. As you know, we are careful on the quantum of sale and leasebacks we carry out to ensure we maximize the yield and maintain our strong covenant. By doing this, we were able to achieve a yield of just under 4% at a rent cover that will help us manage future trading volatility. This year, we will plan to generate proceeds of between GBP 100 million and GBP 100 million (sic) [ GBP 150 million ] from sale and leaseback transactions.

Going into our cash capital expenditure in more detail, at the bottom of this page you can see that we invested GBP 610 million of capital, or GBP 424 million net of the proceeds from the sale and leasebacks. Over GBP 400 million of this investment was on future expansion, with GBP 338 million in Premier Inn & Restaurants in the U.K. and GBP 70 million in Germany. To maintain our market leadership, we also invested GBP 144 million in Premier Inn & Restaurants and GBP 64 million in Costa in improving our customer experience, refurbishing and maintaining our hotels and coffee shops, enhancing our IT and digital technology platforms and building our new Costa Roastery.

Return on capital is a prime focus for Whitbread, and on the right you can see that we made good return on capital of 15.2%. On the left, Premier Inn & Restaurants' returns remain a good premium to our cost of capital at 13%. We have over GBP 200 million of capital tied up in future hotel openings. Excluding these investments, return would have been around 14.6%. Costa, in the middle of the chart, continues to make a very high return at 45%. Costa has a relatively light capital base. And as previously indicated, Costa's returns have reduced year-on-year as we built our new Roastery.

Turning to the fourth quarter.

Total sales growth was good at 7.8% in the quarter. We are pleased with Premier Inn's sales growth, which was ahead of the full year at 9.3% due to the new space maturing rapidly. And I'd remind you that we've opened 9,000 rooms over the last 2 years. And we've also seen a pickup in London markets with like-for-like RevPAR growth of 2.7%. We had great sales growth in London, and we are really focused on maturing the new space. London total sales were up 13%, with 11% from the new rooms. And regional sales were up just under 8%, with RevPAR from rooms where we had not added capacity up just over 2%, well ahead of the economy market, and contribution to sales from new hotels up 5%. In Costa total sales were good and up 9%, but like-for-like was down 0.8%. As explained in the third quarter results, the 53rd week last year has offset the comparative weeks. And if we look at Costa on a comparable calendar basis, like-for-like would have been up 0.6%. We did see a more challenging retail environment on the high street, where our sales were down just over 1%, especially in January and February, reflecting the trends seen by the recent retail market footfall data. We are, however, seeing good growth in the channels where we're focusing our pipeline: travel, Drive Thrus, concessions and our fast format Pronto. We are pleased that we continued the good performance from express and we returned to positive like-for-like in China.

We've only had 7 weeks of trading, and the comparatives will be impacted by the timings of Easter, but quickly turning to current trading. Very early indications are that Premier Inn has had a good first few weeks of the year. And Costa's like-for-likes have been positive despite a weaker trend seen on the retail high street. And Express in China have continued to be positive.

On the next 2 slides I've laid out some of the financial considerations for this year. Overall, at this very early stage, our plans are in line with overall expectations.

On the left, Premier Inn & Restaurants, as I showed last year, I've given an indication of some of the components to our total sales growth, with new hotels contributing around 6% growth. New capacity, including extensions, continue to dilute our RevPAR by around 1.5%, but then the additional sales from the extensions adds around 2.5% to our like-for-like sales growth. Room openings will be around 4,200. And in the appendix, I've also laid out the rent expectations which include the costs from the recent sale and leaseback transactions. As previously indicated, we are planning for margins to be down between -- to be between flat and down 20 basis points year-on-year.

Turning to Costa on the right. We are not giving specific guidance on sales growth, but we are confident that our initiatives will give us positive like-for-like growth in the U.K., with the investments we are making particularly in the first half giving us benefits later in the year. However, with some economic uncertainty and rising inflation, we expect the consumer environment to be tougher than the last year, and we do remain cautious. We will open around 230 to 250 stores and install around 1,250 new express machines. With the investments we are making, together with the one-off effects and commodity headwinds, we expect our margins to be down around 120 basis points. This is in line with our previous guidance, including the 20 basis points of investments delayed from last year.

On this page is the capital plans for the year with gross spend of around GBP 650 million to GBP 700 million and proceeds from sale and leasebacks of around GBP 100 million to GBP 150 million.

So in summary, we've had a good year and delivered on the expectations. We have delivered strong profit growth and return on capital. Our balance sheet is in a healthy position of -- with sensible leverage, and we are well funded. As mentioned, although we expect the consumer environment to be tougher, with our cash generation, our strong balance sheet and the momentum behind our cost-efficiency program, we are in good position to make further progress this year.

I will now hand back to Alison to take you through the business in a bit more detail.

Thank you.

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Alison Brittain, Whitbread PLC - CEO and Director [4]

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Thank you, Nicholas.

Right, I'd now like to give you an update on the 3 strategic priorities and the progress we've made in this financial year.

Let's start with Premier Inn and how we've delivered on the first of those priorities, to grow and innovate in our core U.K. business. You will have seen this chart before. I call it the virtuous circle, and it demonstrates how our business model continues to drive profitable growth and strong returns in a number of ways. Our network remains the largest and fastest growing in the U.K., offering our customers unrivaled choice of location. We're building rooms in a number of ways, new hotels in new catchments; hub hotels, our compact city format; and through our hotel extension program. All our formats are reaching maturity quickly and contributing to strong total sales growth. We maintain high guest scores through our comprehensive refurbishment program and supported by the rebranding of our restaurant offer, which is fundamental to customers. In addition, our new automated trading engine has been implemented to build on our strong value-for-money credentials and optimize both rate and occupancy. And this is why we continue to be the U.K.'s favorite hotel brand, a strength that enable us -- enables us to obtain high direct bookings and reducing our exposure to online travel agents. This huge competitive advantage allows us to reinvest more money back into growth, product and brand.

Convenience is a top priority for guests. And with the largest network in the U.K., we are the best-placed hotel chain to get our customers closest to where they want to be. Premier Inn's market share continues to grow ahead of our competitors. Over the last 2 years, we've opened 65 hotels compared to 48 for Travelodge, Holiday Inn Express and Ibis combined. This phenomenal rate of network growth has contributed to our sales growth. And we have maintained occupancy at over 80% and achieved strong returns of 13%. Not only are our hotels well positioned, but they also offer guests consistent quality and value for money, and that builds loyalty. As our virtuous circle of success highlighted, we don't grow our estate at the expense of quality or investing in our existing rooms. Over the last 2 years, we've increased the mix of our latest room designs within the estate from 70% to 84% and we've halved the percentage of legacy rooms. And in terms of guest experience, this chart nicely demonstrates our strengths on 2 key customer criteria, that of quality and value for money. The independent YouGov survey gives us a 20-point gap to Travelodge on quality and a 10-point gap on value. This broadens our appeal to both business and leisure segments and enables Premier Inn to deliver high occupancy across the week and supports our network growth.

In June, we launched a new pricing model across the estate. This automated trading engine aligns our strategy of optimizing both rate and occupancy of every hotel room in order to maximize our total sales growth across the estate. ATE aims to start room prices low and increase them in a systematic way up to the date of stay without price drops, and that's really important to customers because they hate price dips. The chart at the top of this slide shows how we've reduced price dips. The purple line indicates how many price dips we saw during 2015 to 2016, and the pink line shows the number of price dips we saw over the financial year just finished. There's a clear improvement since the launch of ATE, as marked on the chart, enabling us to manage our customer proposition and gives people the confidence to book well in advance of their stay. Occasionally, we are asked why we don't drive our prices higher, especially as our customer satisfaction and occupancy levels are high, and the answer to that is simple: We're a value brand, and we place a lot of importance on retaining our loyal customer base. And also, maintaining price discipline makes it harder for our competitors to compete, and that's why we maintain a price cap on our room rates. However, there are ways we can capture rate across the pricing curve, and this is where our pricing engine comes in. The second graph shows year-on-year like-for-like RevPAR, the purple line, relative to the economy, midscale competitors, which is the orange line. As you can see, during quarter 4, there were a number of event nights where we priced below the market. As the ATE system evolves and learns, we will be able to respond more quickly to event-driven demand and price accordingly, increasing price and filling rooms much more quickly but crucially not sacrificing our value-for-money propositions for customers whilst doing it.

So value for money, consistency and a large network give us great competitive advantage. And it allows us to sell most of our rooms directly to our customers. Over the last 3 years, we've grown our direct distribution through premierinn.com to 88% by investing in our in-house digital capability, the teams, and supported by our brand credentials. Also, total direct booking now stands at 94%. Direct booking is better for the customer, as this is the channel that offers them the lowest prices and also gives them better information about their stay. It's also better for us, as it's our lowest-cost channel and it gives us the greatest insight into our customers.

Over the last 5 years, we've delivered a strong financial performance with increased capacity, occupancy and profit growth. The combination of network planning, dynamic pricing, digital retailing and the growing power of our brand has enabled us to achieve over 80% occupancy while simultaneously growing our available room nights. This underpins our structural growth, and as a result, we've delivered sales CAGR of 9% and improved our EBITDA margins and returns.

London remains a substantial opportunity for Premier Inn. This slide demonstrates the pace of our London room growth relative to the competition and the benefit that we've seen in sales. The left-hand chart shows that we've grown our market share from a low base and opened over 3,000 rooms in the last 2 years compared to just over 1,000 for Travelodge, Holiday Inn Express and Ibis combined. The second chart highlights our strong sales performance relative to the economy and midscale market, especially over the last 2 years. This is underpinned not only by the increase in our capacity but also the fast maturity of our sites. We are typically seeing occupancies of over 80% within 1 year of opening. And at the same time, we are maintaining the overall estate occupancy in London at over 85%, reflecting very strong customer demand for our Premier Inn offer.

hub by Premier Inn is a large part of the London strategy, as the compact format is designed to deliver good returns in high-asset-cost locations. It gives us access to new customer segments in new markets. And we now have 5 opened, 4 in London and 1 in Edinburgh; and a committed pipeline of a further 11 hotels. So far, the performance of hub hotels has been excellent with outstanding TripAdvisor scores and a very good maturity profile and returns.

These are the same charts that you saw for London to show how we're growing our market share in the regions, opening over 3x as many rooms as Travelodge, Holiday Inn Express and Ibis combined over the last 3 years. This has delivered sales growth consistently ahead of the economy and midscale market. And there's a wider gap this year, as our competitors start to reach the limit of their strategy to relentlessly push up customer rates. Essentially, our price and brand value-for-money discipline will constrain their ability to increase prices, whilst we will benefit from faster maturity of new sites. The combination of our broad appeal, large network and implementation of dynamic pricing is delivering room occupancy levels around 75% and generating profits within year 1, whilst at the same time, we are maintaining the total regional estate occupancy at over 80%. With 68,000 U.K. rooms today and a committed pipeline of around 14,500 rooms, we're making good progress towards reaching 85,000 rooms by 2020 and have line of sight to 100,000 rooms beyond that. The pipeline consists of good-quality hotels and extensions, which will deliver returns in line with those achieved today and growing as new hotels mature beyond 2020.

And restaurants remain core to our joint site proposition, as Premier Inn guests demand a good breakfast and dinner option, especially our business guests. Consequently, we achieve higher RevPAR and guest scores at sites where Whitbread deliver the food and beverage as opposed to a third party. This year, we continued to rejuvenate our brands and converted a further 53 Beefeaters to the Orange Cow restaurant format, with the aim of completing all conversion of Beefeaters by the end of the first half of 2017. We also successfully launched a new format for city centers called Bar + Block. That's in 3 locations. And all of them are showing very positive early signs, trading well and receiving great guest scores.

Let's turn now to Costa, and let me take you through progress we've made this year. I'm excited about the opportunities we have to grow Costa. And in November, we shared with you a clear plan to achieve growth in each of our businesses in the U.K., in China, the rest of the world and in express, but let's start with the U.K.

Our U.K. plans focus on capturing profitable growth by sustaining our estate like-for-like growth and accessing new structural growth potential and ensuring the engagement to both our teams and the communities that we work in. Our initiatives fall under a number of categories, and I'll take you through some of those in more detail in the following slides, but in summary, in brand we are amplifying our brand strength by increasing communication with our customers, ensuring that we're always front of mind.

This year, we were inspiring Britain to love great coffee through our TV advertising campaign and social media. Coffee credentials. Coffee will always remain at the core of our business. We're introducing customers to new premium coffee experiences and look to extend the category in the summer months by introducing cold brew, which has been such a success in the U.S.

In food we serve food to complement our coffee; and continue to innovate our offer to support coffee sales and increase transaction values, more of that later.

Channel mix and store experience. Customers' needs differ by location and occasion, so delivering the right format in the right place is fundamental to our sales growth, as well as ensuring that our highest-growth travel channels make up more of our pipeline going forward.

And in digital, our substantial number of loyalty card customers is one of our strengths. And further digital enhancements will increase the personalization of our communication, ensuring that customers remain loyal to the Costa brand.

I'd now like to take you through a couple of those drivers in more detail, starting with our well-loved brand. Costa has been independently voted the nation's favorite coffee shop for the seventh year in a row, an incredible achievement. However, we don't take this for granted. This year, we'll maintain our media share of voice across the country through campaigns like Never a dull cup, which broadcasts our warmth, passion and consistent quality. And we're also continuing to invest in our product to make sure we're delivering on those promises now and in the future. Some of the main reasons our customers remain loyal to the brand are our accessibility, convenience and value. Our network is over double the size of other coffee-led specialists. And even under the continuously changing landscape, where food-led operators are entering the coffee space, we maintain network leadership. Despite our recent price increase, we continued to retain headroom on price when comparing the same-size core offer to both Starbucks and Nero. This means that customers know that, wherever they are, they can get a great quality cup of coffee but also that the cup of coffee will be great value for money.

We have exciting plans for Costa to drive further growth. Last year, we invested in the tools and equipment to facilitate initiatives which we'll deliver this year. This included Merrychef ovens and microwaves. Last year's investments enabled us to launch more products this year, as this chart demonstrates. Our single-origin Old Paradise Street blends have been strong contributors to our like-for-like sales. And we'll continue to capitalize on the trend for premiumization of coffee to drive growth, with 2 more blends launching in May and September. We'll also extend the coffee category into the summer months this year by launching cold drinks such as Frostinos and cold brew. We'll continue to step change our food offer by launching seasonal ranges and using targeted promotions. This year, we'll broaden our offer by introducing hot food and healthier options, especially at lunch, but our initial focus is on breakfast. And by May, we will offer healthy yogurts, hot porridge and hot bacon rolls to increase our transaction values during one of the busiest parts of the day.

Convenience of coffee shops remains a crucial criteria for customers, and our network plan shows plenty of headroom in the U.K. to increase our presence further. This is supported by a more diversified channel growth, with Drive Thrus, retail parks and travel all offering plenty of opportunity. Our travel channels are performing very well, achieving the highest like-for-like growth within our estate; and will therefore make up more of our pipeline going forward, constituting almost 30% of equity store openings this year.

So in summary, our Costa U.K. strategy is focused on specific drivers of growth, including innovation in food and drink products, store design, channel management and technology. And we will continue to drive both space and like-for-like growth by responding to customers' changing preference to retain our leading brand position and capitalize on the growing coffee market.

I'd like now to turn to the second strategic priority: focusing on our strengths to grow internationally.

Germany provides Whitbread with a great opportunity to continue our growth. The hotel market is 1/3 larger than the U.K. with a fragmented competitor set and a high percentage of independents and a value-orientated customer base. This leaves us well positioned to replicate our unique U.K. model in a new market. Our first hotel opened in Frankfurt in February last year. And the feedback has been excellent, achieving very high customer ratings on TripAdvisor, and it's currently ranked the #1 hotel in Frankfurt. We're pleased that, despite not relying on third parties for our distribution, our occupancy levels are maturing well in this new market, highlighting the strength of the proposition. Our room bookings are 100% direct, with 70% made through our website premierinn.de.

We have a committed pipeline of 5 hotels, as shown on the map; as well as a large number under negotiation in target cities. Consequently, we are looking to commit capital in the region of GBP 60 million to GBP 100 million per annum to gather pace in what we perceive to be an attractive market for Premier Inn. In the next few years, in addition to organic development, we will also look for opportunities to accelerate our strategy in Germany through the acquisition of conversion-ready going concerns.

Following on from my review of our international strategy last year, we decided to maintain our position in the Middle East, where we have a successful joint venture with the Emirates Group which is growing and profitable. However, I also announced the withdrawal from our hotel operations in India and Southeast Asia, and we're on track to complete the exit of these markets during this financial year.

Turning now to Costa International. Our equity business in Poland continues to make good progress with high single-digit like-for-like sales growth and the potential to substantially increase our current store count of 131. We also have 259 Costa Express machines in this market which are performing well. Within Europe, Middle East and India, we have a strong and profitable franchise business with a total of 731 stores across 23 countries. Our franchise business has grown rapidly over the last few years, and we've learned a lot about what it -- what makes a successful business model. This will allow us to focus our resources on people and markets where there is an opportunity for us to grow profitably and win market share.

And coming on to China. China is a large market with a burgeoning middle class, and the propensity to drink coffee is rising. This presents an exciting opportunity for Costa to become the clear #2 in the market. We've built a solid foundation from which to grow, and we'll now take a more strategic approach as we narrow our focus across 10 top-tier cities to build scale and brand presence. We will exit or turn around poor-performing stores to improve the overall profitability of the estate. We'll enhance our brand awareness through digital media; build our coffee credentials; and through improved store formats, create the meeting place of choice for our target customers. During this year, we opened 63 new stores and exited 37. In addition, we've introduced 5 new-look concept stores with an improved customer proposition, and although it's early days, results have been very promising. We aim to add additional new-concept stores during the course of 2017, '18, but the success of these stores so far gives us greater confidence in our ability to scale successfully in this growing market. And we will look for opportunities to accelerate our strategy.

Costa Express continues to be an exciting growth engine for Costa globally. Our machines have good economics, strong returns and are supported by a strong market proposition with good partnerships and an excellent IT infrastructure, which makes it efficiently scalable. This year, we installed a record 1,585 new machines, taking our global total to 6,801, with over 10% outside the U.K. We see good prospects in the U.K. and internationally and plan to install a further 1,250 machines this year, and trials in new markets, as well as maintaining our strong contracts with partners in the U.K. In terms of the machines themselves, we've recently implemented a brand-new back-end system which offers us improved scalability through remote machine monitoring and management of content. This is crucial for our future international expansion.

And finally, I'd like to take you through the progress we've made on the final strategic theme: building capability and infrastructure to support long-term growth.

As Whitbread marks its 275th year anniversary, we're reminded of the importance of taking a long-term view of the business. We will invest not only to innovate our core propositions for today but to develop the technology that underpins the business and provides the platform for future growth. This year, we've made good progress in building our capabilities. Our winning teams are at the center of our success. This year, we strengthened our executive team with a number of promotions and new hires. And we were recently placed eighth in The Sunday Times' list of the best companies to work for. This supports our acquisition of the best talent, a fundamental aspect of our business as we depend on terrific people to deliver the very best customer experience every single day. Given the investments we're making and the cost headwinds in our sector, I also believe it's important to put cost efficiency into our DNA. We've added everyday efficiency into our heartbeat model so that it will run right through the company, from our stores to our support center and into our supply chain. In November, I announced a GBP 150 million cost-efficiency program over 5 years to help offset some of the impact of our investments and our sector cost pressures. And I'm pleased to say we've made good progress this year in areas such as procurement, supplier consolidation and labor scheduling, which has helped maintain our margins. For example, in procurement we've successfully renegotiated and consolidated some key contracts to achieve tighter management of our processes and ultimately reduce prices, standardize processes and enforce tougher policies. We've also had a detailed look at our labor force and how it's managed. It's such a large cost for the group that ensuring the right people are in the right place at the right time has significant benefits for our cost base but equally importantly creates a positive impact on both customer satisfaction and team retention. We've also taken a more active approach to our property management, optimizing the estate to deliver shareholder value. This year, we successfully completed the sale and leaseback transactions to fund our future developments. And we continued to use our freehold assets to deliver U.K. growth and unlock future value.

We recognize that technology underpins our future growth, and this year, we've made progress by insourcing our digital teams and consolidating suppliers as well as launching the automated trading engine. Our in-house digital capability now encompasses digital marketing and production, with teams of software engineers building and optimizing our websites and apps, allowing us to move more quickly and reduce costs.

A great example of how Whitbread is driving innovation and efficiency is our new Costa Roastery, which facilitates the growth in the U.K. and globally for the next 20 years. The new Roastery not only quadruples our roasting capacity, but it also enables growth that is more innovative, more efficient and more sustainable. We are able to produce new coffees through an integrated laboratory. And there's also a new coffee academy which can train up to 3,000 baristas a year, putting investment in people alongside investment in technology and in great coffee.

As part of building a long-term sustainable business, we realize that how we do business is just as important as what we deliver. And consequently, our Force for Good program is core to the way we operate, from how we look after our customers and teams, to the way in which we interact with and engage with local communities and how we safeguard the environment. This year, we continued to raise substantial sums for our 2 main charities. We've now raised nearly GBP 9 million for Premier Inn -- for the Premier Inn Clinical Building at Great Ormond Street, which will open this year to coincide with our 275th year anniversary. And we've reached the milestone of GBP 11 million raised for the Costa Foundation. In addition, we continue our successful, award-winning apprenticeship program, with 1,500 team members now completed and over 800 currently in learning.

As part of our commitment to our customers, we strive for high welfare and health targets. We've committed to be 100% cage free on whole shell eggs by 2020. And we have become the largest hotel and restaurant chain in the U.K. to serve sustainable fish, as well as continuing to reduce added sugar in our Costa drinks. We -- finally, we focus on our environmental measures across the group. The electricity we use in our U.K. owned and operated estate is now 100% renewable, and at Costa we've introduced a nationwide cup recycling scheme across all 2,000 stores. This work has contributed to us being identified as leaders in our sector and best in class for 3 areas within the Dow Jones Sustainability Index.

And so in summary, Whitbread has delivered another strong year of growth and returns, and we've made significant progress on our strategic priorities. Our business model is strong and sustainable, supported by our market-leading brands and structural growth opportunities. We continue to be confident in our long-term plans and in our investment in growth, innovation and efficiency. This, alongside our disciplined approach to financial and capital management, will drive long-term growth in earnings and dividends as well as good return on capital, creating significant future value for shareholders.

Thank you very much for your attention this morning. Nicholas and I will now be very happy to take your questions.

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Questions and Answers

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Alison Brittain, Whitbread PLC - CEO and Director [1]

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Vicki, to start, ladies first; Jamie, behind. And then we move to the left of the room.

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Vicki Stern, Barclays PLC, Research Division - MD [2]

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It's Vicki Stern from Barclays. Just a few questions on Costa. Firstly, you talked about U.K. high street like-for-likes, I think, down 1.2%. Back at the Investor Day, you were talking in quite a lot of detail about the ability to be quite flexible about the high street estate given the structure of the leases. Just generally, how are you thinking about the store profile in the high street? Could there be scope for some exits for some of those locations? And more broadly, just sort of quantifying, how many of these stores that you're planning for Costa are going to come from the U.K. versus international? Just secondly, sort of bigger picture on Costa, returns have come down to about 45%. I suppose, do you have a figure in mind as to where you think ultimately the right return on capital employed should settle out? And then just finally, travel stores you said will be around 30% of the pipeline going forward for Costa. Just any sense on the economics of those? Is it a similar square footage, similar kind of economics in terms of profit?

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Alison Brittain, Whitbread PLC - CEO and Director [3]

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So it's a raft of questions there about stores. Why don't I start, so make a few points? Nicholas, chip in with a few points. Maybe even Dominic might chip in with a few points. And if we cover all your bases, that's great. And if we don't, you'll ask us a follow-up, I'm sure. So we have currently around 40% of the estate, I guess, in the equity side in the high street, more than if you include shopping centers and then retail parks on top. We would plan to have a pipeline which was lower than that from a high street presence perspective. And I think we said at the Capital Markets Day that, in 5 years’ time, 70% of openings would not be on the high street and we'd reach about the low-30s level for high street as a percentage. We're not unhappy with the high street, so don't get me wrong. We've got lots of places in the U.K. where Costa coffee is a fantastic addition to high streets. And we are the nation's favorite coffee company by some considerable margin, so don't think that we're not profitable in the high street or that we want to have a complete withdrawal from high street, but in a minute, we see some constraints. And it's probably our lowest like-for-like area. And we do see some very high-growth opportunities in other places, hence the shifts and the move, but I don't want people to walk out thinking that we have a big high street problem in our core store. We do have a relatively flexible position in terms of leases. We generally have, unlike some of the big retailers, a very long lease infrastructure. We do have 10- or 15-year leases, but we generally have a 5- or 6-year break period. And so we do have the opportunity to churn, to move stores if the high streets move, to move stores if we're constrained and want a bigger premises or to exit completely out of a particular area. And we intend to use that flexibility for the benefit of growing our business over time. We did see some churn this year. I think we had about 40 stores we churned this year. I'm sure that, that sort of level of churn is not something you -- that we would shy away from on an annual basis. Have I missed anything, Nicholas? How do you think about...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [4]

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The only thing I'd say is that high street will change. It will become more leisure sort of, and so it's going to change the -- what our -- what we offer in our high streets. So it's more -- longer dwell times, better food, all the things we just kind of invest in.

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Alison Brittain, Whitbread PLC - CEO and Director [5]

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I think, enough to cover base. Is that good? Jamie...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [6]

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Yes. Just on returning -- return on capital. We've kind of given that -- we gave indications, I think, kind of at -- the last year that kind of return on capital, I mean, 2 years ago or a year ago hit nearly 50%, which was exceptional, which was not sustainable and not where we wanted it to be overall. And I think we've given indications about 35% to 40% is where we'd like return on capital to be. Again, it's a good return on capital and allows good, sufficient kind of investment back into the business for long-term growth. The last question was about travel and kind of just about the dynamics of travel. Travel is quite a diverse portfolio. You've got, I think, Pronto, which is travel near metro stations. You've got travel where you might have a franchise or an equity store near or in a railway station. And then you've got the kind of Drive Thrus as well. The return on capital is good in all 3 of those locations. Obviously, the square footage in Pronto is very small. Drive Thrus, it's very big. The, I guess, probably only one to call out is probably Drive Thrus, where we are probably looking for about -- we're looking, where we'd like to open about 10 Drive Thrus a year. We've got about just under 50 Drive Thrus today. We think there's a big opportunity in the marketplace going forwards. There is an opportunity to do this freehold, particular in our own Premier Inn sites or in new sites as well. So there tend to be a little bit more capital going into -- there can be up to about GBP 1 million of our capital going into a Drive Thru if we're doing it through a freehold model where you're constructing a building as well.

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Alison Brittain, Whitbread PLC - CEO and Director [7]

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Jamie?

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [8]

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Jamie Rollo from Morgan Stanley. Just sticking with Costa. The price increase you put through in January coincided with the weaker like-for-likes in Jan and Feb. Was there any sort of consumer pushback on that price increase? And sort of secondly on Costa, could you give us a feeling for the sort of speed and maybe the magnitude of the turnaround you expect there? You announced lots of initiatives. I guess we're not going back to the mid- to high single-digit days, but you backed away from the 2% to 3% like-for-like sort of informal guidance. What is a sign of success in Costa, shall we say, in terms of top line like-for-likes? And then just finally, on hotels you quantified the sort of new space impact to the negative 200 basis points for the year. And in the appendix it looks like it's nearly 3% for the fourth quarter. So clearly, the fourth quarter has quite a lot of sort of cannibalization or impact of low occupancy at the new -- of the new hotels. Do you get that back as those hotels mature? And do we sort of start to see that in a better relative RevPAR performance this financial year?

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Alison Brittain, Whitbread PLC - CEO and Director [9]

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Okay, I'll start, but I will ask Nicholas also to chip in. Price, just we missed a month of price lapping, just so to be clear. We...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [10]

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It was 3 weeks.

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Alison Brittain, Whitbread PLC - CEO and Director [11]

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3 weeks, 3 and a bit weeks. So it's a -- they weren't quite coincidental from year-on-year. We didn't see anything outside of our expectation in terms of transaction or response. We certainly didn't see any customer -- major customer response to the price change, and we didn't see anything outside of our expectation from a transactions perspective. On Costa, one of the reasons for not being very precise about guidance is it's a bit of a tricky balance, this one, isn't it, in that we're starting to see some retail data, which we -- you -- everybody in the room will have seen over the course of the last few weeks, which is showing a slightly more constrained consumer in the U.K. who are probably watching the pound in their purse and thinking a bit more about how to spend that wisely. And I think some of the retail guys have started to comment on people using their spending in a different way. Equally, on the other side of the coin, we've seen GDP forecasts which have hotel business users at its core going up to 2%. And we've seen tourism into the U.K. going up. So we've got -- across the business, across Whitbread, we've got various forces at play. And within Costa, if there's lower high -- people on the high street shopping less, then they will visit less even though actually they were -- then are visiting for leisure purposes. So we're offsetting what we think might be a headwind there with a tailwind of having invested quite a lot last year in order to promote and improve our like-for-like, particularly in the food ranges and the coffee ranges, during the course of this year. So we'll see. We're trying to marry up what we think would happen and what would have happened if we haven't done the investment and we haven't got the initiatives flowing through and where we will be and which is why we're being less than precise about what that could look like. But we do expect life to be positive. And we do expect the initiatives to go down well with consumers, and we do expect to gain business as a result of it. Probably we can't really put it any more than that. And on Premier Inn, we're asking about pricing and the performance in Q4. Is that, was that the heart of the question, Jamie?

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [12]

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Did you want to repeat your...

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [13]

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Yes. You gave us a slide where I think it was a 2 percentage point difference between RevPAR and -- RevPAR in unaffected catchment areas and actual RevPAR. And in the appendix I saw something on that. I think it was 270 basis points in Q4, so you had a much bigger impact from openings clearly given this skew last year and this year. And I'm wondering when that comes back because this is obviously dragging down the reported RevPAR because they're coming at lower occupancy but then must ramp up because your maturity profiles [ quite quickly say ]. So when does that come into the RevPAR numbers such the sort of headline underperformance reverses?

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [14]

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Yes. So just I think the kind of point you're looking. Look -- if you look at our underlying -- where we -- the catchments in -- where we were not impacted by -- we didn't add new capacity, RevPAR was actually up 2 -- just over 2%, which was slightly ahead of the midscale and budget market overall. When you look at our kind of RevPAR, we had kind of fairly flat to slightly down kind of RevPAR for like-for-like. Our total RevPAR was up 0.4%. It kind of just shows you that the kind of new space is performing particularly well. The difference on that is really about curbing the dilution we get from the extensions and the new capacity. We've said -- what we've always said, though, on that dilution in the fourth quarter is fourth quarter is a low-occupancy quarter. We've kind of always said that actually, when you're adding new capacity, it has a bigger dilution on your RevPAR in that quarter. So the guidance across the year was for RevPAR dilution to be down about 1.8%. And it was down about 2%, so roughly there, but in the fourth quarter, it has a bigger diluting impact just because it's lower occupancy overall. As you get the maturity, you will -- you should get the maturity impact. This takes about 2 years before your sites go into your like-for-like figures, so you should get to kind of benefit from those, particularly the ones we opened in the last -- the 9,000 rooms we opened in the last 2 or -- 2 years, which are doing well. You will get a benefit from maturity kind of this year and next year from that. The only kind of caveat I'd say for that is that the London sites have matured incredibly quickly. So they're already at a -- the ones we've opened in the last 2 years were already at 80%, so they kind of -- they've got less maturity because they've matured so quickly overall.

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Alison Brittain, Whitbread PLC - CEO and Director [15]

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All right. We'd go over on this side of the room for a sec. Have we got the mic?

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Timothy William Barrett, Numis Securities Ltd., Research Division - Analyst [16]

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Tim Barrett from Numis. Can we just start on Costa? You've given a very specific 120 basis points margin...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [17]

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Circa, yes.

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Timothy William Barrett, Numis Securities Ltd., Research Division - Analyst [18]

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Circa. Sorry. And rough 120 basis points margin outlook. Can you just help us a bit on the breakdown between investment in services, presumably what's in -- a benefit from automation of labor scheduling and like-for-like sales? And then I suppose a bigger picture question on Premier Inn and the hotels market. You mentioned a couple of times Midscale and Economy lagging the total market. Anything you can do to take back a bit of market share or possibly benefit from the currency aspects?

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Alison Brittain, Whitbread PLC - CEO and Director [19]

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I'll take the second question, first. And then you take the first question because it's the hard one, Nicholas. The -- and very technical and very specific.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [20]

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I put circa there. [ It's all right ].

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Alison Brittain, Whitbread PLC - CEO and Director [21]

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So in terms of inbound tourism, which looks like it's on the rise as people are looking to enjoy London at cheaper costs, if you're an overseas traveler, that's -- that largely starts with 4- and 5-star hotels filling up. And then that sort of lags down into the midscale sector. We are and have always been a domestic value-oriented brand. We like being domestic. It does give us in other times of uncertainty great strength. So when there is an outflow of all of those overseas visitors for one reason or another, we get the strengths of having been a, being a domestic player. So we're a domestic business, domestic leisure. We have a small proportion of international travelers. And we will be doing things to encourage more of that by upgrading our websites and looking at how we reach those customers more appropriately on a direct basis outside of our business because, of course, we would like to improve in that area but we don't want to replace our domestic focus with an overseas focus. But that's what makes the difference. It's that, when you've got a -- when it's based on an influx of travelers, it starts in the 4, 5 star. When it's staycation and if staycation takes off this year, then we will see more of that coming through to us.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [22]

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Just on the Costa point, I'm probably going to disappoint you. I'm not going to give you probably too much granularity and just the kind of the bridge. We've given you the bridge for last year on the margin, which hopefully is a kind of rough guideline. There's kind of 2 kind of difference between the bridge that you -- hopefully you'll see in a year's -- well, a number of bridges. The difference, as you'll see, is we've talked about we're going to -- we're confident about the kind of positive like-for-like, but we do think the consumer environment will be a bit tougher this year. In terms of the Costa bridge, what you'll see on the Costa bridge today, for last year, is you don't see the efficiency program coming through because we only started it last year. So you'll, we'll see some efficiencies coming through in the current year. The inflation, last year, you had about 1.2% headwind from inflation. The kind of difference for this year -- a lot of the inflation is the same, National Living Wage, rent et cetera. The one difference is that you've got an additional of about GBP 8 million to GBP 9 million coming from FX and commodity prices, which go against you as well, but the other only thing I'll say, we'll continue to invest. And that kind of -- you kind of -- all the investments you -- Alison showed you, we're very keen to get -- although it might be a bit tougher out there, we're very keen to make sure we continue to invest for that long term over that, so...

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Alison Brittain, Whitbread PLC - CEO and Director [23]

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Behind you.

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [24]

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It's Alex Brignall from Redburn. Just 2 questions, please. So firstly, on distribution you've done a very good job on keeping your distribution internal. And I guess that's a benefit of controlling your hotels versus franchises that don't so much. If you could talk about how that can move in the U.K. and if you're leaving anything that you are not getting because you are not using those channels; and then I guess, if you look into Germany, how that would play out. And do you need to use those channels more because you'll now have the scale and -- or maybe not for a long time? Secondly, on F&B, talking a lot about F&B within the hotels. If you could talk about how you benchmark yourselves against the other hotel groups that clearly do F&B entirely internally and where you are in terms of revenue mix and if there's an ambition as to where that can get to.

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Alison Brittain, Whitbread PLC - CEO and Director [25]

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Okay, again, I'll -- we'll do a double act. I'll start, and Nicholas can finish. And we're starting with direct bookings. And we are strategically keen to maximize direct bookings, so -- and there's 2 reasons for that. One is because we don't pay commissions to OTAs. That's in some ways a second order of business. The first is because we would like a direct relationship with our end customers, that direct relationship allowing us lots of insights into what they do and how they do it and how we help and support them and how we improve our business and able to improve their experience by giving them more information and more insight in terms of their own stay. So strategically it's an important part of the way that we want to run the business. That number will increase. That 94 will go up, not down, and that we -- and we would move away. We do use Booking.com, however. So in terms leaving stuff on the table, we have a limited inventory with Booking.com, which we try and control quite tightly, but that allows us access when we need it. And it allows us access, more access to overseas markets than we have built for ourselves today, but again we are planning to build some of that for ourselves for the future. So you should expect that the trajectory that we expect to see is to be more direct, not less. In Germany we've gone with our direct model. And of course, it is much more difficult because you're a brand-new brand in Germany and so totally unknown, but -- and we have wanted with our first hotel to at least test our ability to operate in a direct environment rather than simply defaulting to an OTA environment, which would be then quite hard to get off. And we couldn't then test direct. You can test direct and move to OTA. You can't start with OTA and then move to test direct. So we are pretty pleased with having been able to mature our hotel in a brand-new market with an unknown brand on a direct basis in the way that we have. And we've got to reasonable occupancies in -- within the first year. As we get bigger and there is more scale, we will continuously review our ongoing use. And if we have to use OTAs in a tactical way, we wouldn't shy away from doing so, as we do in the U.K. today, but our preferred strategic option remains dealing direct with our customers. Was there a second question on that...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [26]

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F&B. And the biggest, kind of closest competitor to us is Travelodge. And they've just had their recent results, and they just talked about the importance of a good breakfast. I think they've got 500 hotels today, and they've got 165 cafés in those that they can give breakfast for. So I guess it just shows how important it is and what they're missing out on, so I think it gives us a kind of structural kind of advantage over that. I mean those...

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Alison Brittain, Whitbread PLC - CEO and Director [27]

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I think they said most of their growth this year had come from improving their F&B offer for breakfast, but they still only have 160 hotels that got it. So it does show you that from -- when we talk about that diagram with the virtuous circle, offering a good food and beverage offer within our core proposition is really important, especially to business customers. Business customers especially want a breakfast and a dinner option.

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [28]

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And of the hotels that don't have at the moment, I mean...

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Alison Brittain, Whitbread PLC - CEO and Director [29]

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We have food and beverage in all of our hotels. We don't supply it ourselves in all of our hotels. So we have a couple of model. We have the joint site model where we run an actual restaurant that external guests will come to. And when we benchmark ourselves, we use the pub benchmarks for the U.K. for normal restaurant pubs, and we make sure that we're managing in line with that market. We run our F&B in Solus' operations, so the restaurant is inside the hotel. And it doesn't really attract customers from outside, but it does service the customers that stay in the hotel. And the third model we have are something we called co-locations, where a third party like a different pub company like Mitchells & Butlers or Greene King operate the pub, which is in the car park of the hotel, and do the breakfast and the lunch and the dinner there. They would be our worst guest scores because it's awfully difficult to encourage a third-party pub company to want to get out of bed to make an GBP 8.99 and kids-go-free breakfast at 6 a.m. in the morning and staff a shift of people to make that fantastic breakfast experience, whereas we consider that to be a core part of the way the restaurant operates and a core support to Premier Inn. So we do that brilliantly well.

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [30]

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And the ones that don't have either the same sort of (inaudible) allow it? Or [ it's how you define ]...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [31]

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It's history.

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Alison Brittain, Whitbread PLC - CEO and Director [32]

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Yes, history, yes.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [33]

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It's history and where we -- the first two where we finally see -- we see a good RevPAR up cycle now.

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Alison Brittain, Whitbread PLC - CEO and Director [34]

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Yes. So importantly, where -- one of the reasons we've got a lot of the restaurants without external access, the sort of internal restaurants, as it were, is because in metropolitan areas we haven't really had a brand appeal sufficiently well in those metropolitan areas, as opposed to those cozy pubs in the out-of-town regional space which are so popular. Our Bar + Block concept, which we launched 3 this year, is absolutely in the sweet spot of being able to play in those metropolitan high streets. And it gives us therefore an opportunity in future new builds in London and in other big cities to put in that joint site model, which gives us a higher RevPAR and higher return on capital. So that was the purpose of that particular invention.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [35]

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Tim?

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Tim Ramskill, Crédit Suisse AG, Research Division - Research Analyst [36]

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Tim Ramskill from Crédit Suisse. 3 questions from me, please. I think, in terms of the margin performance in Premier Inn, I mean, it was a little bit light of the guidance you've given. I know you explained why Costa margins were a little different, so I don't know you if you can give the same explanation there. Secondly, in terms, Alison, of the sort of 5-year efficiency program and cost-saving plan, I know you've been very clear that you're not going to make it very granular, but why does some of it take as long as 5 years? So is there a chance you could achieve things more quickly? Just some sense there. And then the final question: Vicki asked about returns within Costa. It's obviously fundamentally a very high-return sector. And probably for that reason, it's very competitive, so why alter the returns to settle at 35%? Why couldn't they continue to be driven down lower than that over time by very intense competition?

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Alison Brittain, Whitbread PLC - CEO and Director [37]

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If you take the first one, I'll take the second two, yes...

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [38]

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Yes, yes. Yes, just in terms of Premier Inn guidance, we kind of gave guidance kind of the -- we -- at the beginning of the year, we gave guidance actually that Premier margins would be down. Then we gave guidance it would be slightly up. And then they were kind of flat. I guess, as we went through the kind of 2 areas that we probably spent a little bit -- we accelerated some of the investment is one is we dialed up some of our digital teams. And secondarily, we consolidated some of our IT suppliers a little bit faster than we had anticipated. And that's where the 20% -- 20 basis points of margin [ where it would be sure to ] give you benefits going forwards. And it's why, next year, we originally gave guidance of kind of 20 to 30 basis points; and why we're now guiding to more towards flat, 20 basis points overall.

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Alison Brittain, Whitbread PLC - CEO and Director [39]

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Costs, on the 5-year program. Yes, you're right about me not getting granular on that, but it's all not linear. So when -- we've got a number of GBP 150 million. We wanted -- as we said at the Capital Markets Day, we wanted to put a number out not because we really wanted to put a number out but because you guys kept asking us. And it was more a question not so much about what the actual number is, of the quantum type. Was it GBP 10 million I was talking about? Or was it much bigger than that? So we wanted to give you a sort of sense of the size of that prize. Now anything that you schedule out in the early years is much more certain the more you put out into the outer years. And so more -- and so it's not a linear position because in giving you a number which is a 5-year number there is more uncertainty at the tail end of it. So we want to make sure we've got lots of certainty in the first parts of it, but yes, some of it does take time because some of it requires investments to achieve it. And some of it requires time to achieve it. So one of my examples for this would be supply chain is a huge issue for all of our businesses in Whitbread. And we've not necessarily managed supply chain in a holistic manner, but we do have a contractor renewal in 2018, which if we're not prepared for a contract renewal we can't actually go into a tender or bidding process because we'll not put ourselves into a position where we've consolidated our demand, considered our strategy going forward and understand what we're asking people to bid and tender for. So there's quite a lot of work going on now and during this year just simply preparing ourselves for a bidding and tender process on supply chain which should reap significant benefits. And those benefits will then start immediately from the renegotiation of the contract. So that's just one example, but there are a number of examples where, yes, you can see how the -- you see very specifically how the phasing works, what's required and when the costs come through. And there are others which are more front-end loaded and then there's the sort of tail end of things that we think will come through, but we've been much more conservative about how much we put against the outer years than on the former years, where we have got a more discrete price and something that we're working on immediately. What was the last part?

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [40]

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Return on capital.

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Alison Brittain, Whitbread PLC - CEO and Director [41]

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Yes, where should return on capital be. I mean you're absolutely right. I mean anyone, any school of economics is going to say that, if the return on capital gets very high and you've got no barriers to entry, there's going to be an influx of competition till it settles to a normal level. And that's my theory generally in speaking of sort of what you'd call sort of excess returns on capital. What it says to me probably when you got to 50% return on capital is you may not be investing enough in your business to remain competitive. So I think that having the right level of ongoing investment year in, year out to maintain a market-leading brand position and execute against structural growth is really critical. It's much about -- much like in the hotel business where we look at the refurbishment of the rooms, alongside the opening of new. If you don't refurbish the old, eventually that will catch up with you and your brand will be detrimentally impacted. So I do think around the 40% mark is probably -- and when we say 35% to 40%, around that 40% mark is probably where it settles, where you feel that you are getting the return you deserve as a market leader but investing sufficiently to make sure you retain that market leadership.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [42]

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I think, the thing I'll just add to that. If you were an independent at the moment out there, you're probably feeling it quite tough. You're probably on the high street. You're probably seeing all that inflation. You haven't got the leverage from scale coming away. And we're really looking forward to seeing hopefully most of you at our new Roastery in a kind of couple of months’ time. What you'll see there, hopefully, is that we've actually got a laboratory of innovation there that should, hopefully, kind of drive our kind of long-term success going forward as well, which if you were a small independent, again, you won’t. So I'm not saying the independents -- it's the death of the independents. I think lots will do well, but I think they've got a lot more kind of headwinds than we do kind of going forwards. And I'm just going to reiterate we're in a great category at the moment as well. And kind of the U.K. still drinks a lot less coffee than most of our Europeans, and that is changing...

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Alison Brittain, Whitbread PLC - CEO and Director [43]

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Market growth is still there. More hands?

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Richard Clarke, [44]

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Richard Clarke from Bernstein. Just one question. Because you mentioned the Roastery there. You say that the capacity is 4x the capacity of the old Roastery. How are you going to fill 4x? Where do you see 4x growth in Costa? Are you going to start selling more retail, more international territories? How are you going to fill that up? And how much efficiency gains do you get as you fill that up?

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [45]

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Yes...

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Alison Brittain, Whitbread PLC - CEO and Director [46]

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Well, when the original Roastery was built in Lambeth in the '80s, I suspect they never thought they would ever run out of capacity ever. So it has massive excess capacity available because you've got these big roasters. And the same will be true. It -- we have thought ahead. Because although your question is interesting, how do we fill that, we've actually got extension potential that we've secured on the site to make sure that -- at the end of 20 years, if we've hit our capacity, because we think we will at 20 years, that we can grow again in the same site without having to relocate. So actually, this is a 275-year-old business that really is thinking long term in terms of its roasting capacity. So if we take -- if you take our growth trajectory, we would fill that up. We -- it is -- when -- you must come and see it. All of you must come and see it. It's enormously efficient as an operation, and enormously sustainable. And it won't feel to you like it's operating under capacity because it's built in a way that allows you then to sort of add on at peak times and sort of up-weight and down-weight the amount of capability that you use at any particular period. So it doesn't feel unused and unloved. But we do have lots of really great ideas which we haven't yet even developed, about how we might do more in coffee over the longer term, and all of those ideas would need us to roast and/or grind our own coffee in larger quantities. So we'd look to fill it over time, for sure.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [47]

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You take a 30-year view of it, but also the incremental costs of building it twice as big isn't as great, so -- yes?

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Geoffrey D'Halluin, Deutsche Bank AG, Research Division - Research Analyst [48]

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Geoff D'Halluin, Deutsche Bank. 2 questions, please. First of all, I would like to know if you can give us some details regarding your pricing compared to your main competitors for Costa following the price hike we've seen in Feb. And...

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Alison Brittain, Whitbread PLC - CEO and Director [49]

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If it's for Costa, yes.

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Geoffrey D'Halluin, Deutsche Bank AG, Research Division - Research Analyst [50]

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For Costa, yes. And secondly, regarding your medium-term targets. So I guess you gave some medium-term targets in terms of margin last year, saying the margins should stabilize, even slightly growing in a few years ahead. So just if you can comment on that, please.

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Alison Brittain, Whitbread PLC - CEO and Director [51]

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Should we start by asking Dominic to talk about Costa's pricing, as you're the -- in the shop end? And do you want to just grab a mic?

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Dominic Paul, Whitbread PLC - MD for Costa [52]

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Yes.

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Alison Brittain, Whitbread PLC - CEO and Director [53]

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There's one here on the front, in here. And say something about our thoughts on pricing and maybe a bit on the bundling and things to come.

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Dominic Paul, Whitbread PLC - MD for Costa [54]

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So I guess the general thing on our pricing is our cup size is generally slightly larger than our competitors'. So if you compare one of our medium-sized coffees with a equivalent-sized coffee for, say, Nero or Starbucks, I think we're, say, GBP 2.65 for a medium cappuccino, then Nero GBP 2.70 and I think Starbucks at GBP 2.80, so we're actually lower price point. And in fact, even if you're looking at Greggs, if you're looking at flat white, if you're looking at per fluid ounce -- so have you bought a flat white in Greggs recently, hopefully, yes?

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Alison Brittain, Whitbread PLC - CEO and Director [55]

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Not many Greggs in Central London. They'd be more of an independent sector, I suspect, for this crowd.

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Dominic Paul, Whitbread PLC - MD for Costa [56]

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It's a very small serving. It's actually, per fluid ounce, Costa is a very similar price to Greggs for a flat white. And then we also have our loyalty scheme as well. So customers get a good-value price for the coffee, and then we have a loyalty scheme where people can earn points as well. One of the things, one of the points Alison makes about the pricing of the food is that one of the things we'll be doing moving forward is to create stronger value proposition in terms of coffee and food. So we're going to launch a new breakfast range in May. And one of the things we'll do as a launch offer is you -- when you buy a medium-size coffee, you get a bacon butty for GBP 1, for the launch period. What that will do is it will drive increased attachment rate of food versus coffee because our focus is -- on the 5-year plan was very much to win in the breakfast area. We can see that's a growing day part. And we want to do even better in that, so we increase the attachment rate on food to coffee, but also we think it's going to increase footfall of people coming into Costa as well. So it's initiatives like that will both drive customer volume but also, hopefully, the increased attachment rates.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [57]

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And then on the margin question. As we -- kind of the guidance for this year is to be kind of flat to 20 basis points down in Premier Inn & Restaurants and 120 basis points down in Costa. Going forward, we expect kind of margins to kind of stabilize. And hopefully, towards the end of the plan, it might start growing again, but the only thing I'd kind of caveat, though, is your efficiency program, as you say, is GBP 150 million. It's not a flat-line program. You might get some spikes within that, but that's the kind of general direction.

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Alison Brittain, Whitbread PLC - CEO and Director [58]

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Do we have any more questions [ away ]?

It looks like we may have finished, so just remains for me to say thank you very much for your time and attention this morning. It's been a pleasure, as always. If you've got any follow-ups that you want, just grab us here at the end. Otherwise, have a great day, everybody.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director and Executive Director [59]

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Thank you.