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Edited Transcript of WTB.L earnings conference call or presentation 22-Oct-19 8:30am GMT

Half Year 2019 Whitbread PLC Earnings Presentation

London Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Whitbread PLC earnings conference call or presentation Tuesday, October 22, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alison Brittain

Whitbread PLC - Chief Executive & Director

* Nicholas Theodore Cadbury

Whitbread PLC - Group Finance Director & Executive Director

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Conference Call Participants

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* Alex Brignall

Redburn (Europe) Limited, Research Division - Research Analyst

* Ivor Jones

Peel Hunt LLP, Research Division - Analyst

* Jamie David William Rollo

Morgan Stanley, Research Division - MD

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team

* Rachel S. Fox

Goodbody Stockbrokers, Research Division - Analyst

* Richard J. Clarke

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Timothy William Barrett

Numis Securities Limited, Research Division - Leisure Analyst

* Victoria Jane Lee Stern

Barclays Bank PLC, Research Division - MD & Equity Analyst

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Presentation

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Alison Brittain, Whitbread PLC - Chief Executive & Director [1]

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Good morning everybody. Welcome to Whitbread's half year results presentation, and hello as well to everybody that we can't see who is listening through the webcast this morning. I'll start off taking you through some of the highlights from the last 6 months and then I'm going to hand over to Nicholas Cadbury, our Finance Director, who's going to take you through the financial performance in more detail, including the exciting IFRS 16 which will feature prominently in his presentation.

I'll then give you an update on strategic progress that we've made during the first half of the year about our long-term market opportunities and how our resilient model and utilization of short-term levers are helping the business during what are challenging political and economic times in the U.K. And finally, of course, both of us will be happy to answer any questions that you've got.

So starting with that, the ongoing economic and political uncertainty, I guess never more so than today given we have a vote later, and its impact on consumers and businesses has been well publicized during the first half of the year. I'm pleased, however, with how our teams have continued to focus on delivery in Premier Inn during these tough trading conditions as well as completing the separation of Costa. And at the same time restructuring the remaining organization to a new structure fit for a focused international hotel business.

Premier Inn continues to grow its market share in the U.K. with almost 90,000 rooms either open or committed, and our progress in Germany has also accelerated. We opened our third hotel in Munich in September as well as announcing our second acquisition of 3 hotels which will deliver almost 500 more Premier Inn rooms.

To support our ambitious growth in both the U.K. and Germany, we've maintained our focus on the efficiency program with GBP 25 million of savings achieved in the first half of the year. And that efficiency program has underpinned our resilient performance over the last few years. We've achieved around GBP 215 million of savings since its launch in 2016, that being across Premier Inn and Costa. And the efficiency program will continue to be a significant part of our strategy as we go forward.

We generated good free cash flow of GBP 197 million, which enables us to invest in the attractive opportunities for Premier Inn in Germany and the U.K. We successfully completed the return of GBP 2.5 billion of surplus capital to shareholders from the sale of Costa. Our profit before tax for the half decreased by 4.1%, however, due to -- down to GBP 236 million, reflecting the challenging market conditions.

Premier Inn opened almost 1,000 rooms during the first half of the year, which resulted in flat revenue growth as soft market conditions impacted like-for-like growth over the period. The market conditions also impacted our return on capital, which reduced but remained strong at 12.1% for the U.K., which is a good premium on our cost of capital. As well as continuing to grow our U.K. network, we've been focusing more on optimizing our current estate both from a network and a product perspective. As part of this, we were excited to start trialing our new Premier Inn Plus rooms in 2 hotels in London, which have received an overwhelmingly positive response from both business and leisure guests so far. And as a result, we intend to extend to 500 rooms in the second half of the year.

In Germany, with the addition of Munich, we now have almost 600 rooms open and almost 8,000 more rooms in the committed pipeline. Our first hotel in Frankfurt reached a market level rate of occupancy by the end of last year. And our hotel in Hamburg, which opened in February this year, has matured faster than any comparable hotel that we've opened in the U.K. This success has been even more pleasing as it's been achieved with 100% direct bookings and excellent guest scores.

The ongoing political and economic uncertainty in the U.K. has led to the continuation of a subdued market especially in the regions where most of our hotels are located. Conversely, we've seen a good performance in our smaller London market, which is driven by international visitors and, therefore, the strength of the pound. Due to our high exposure to the weak regional market, we've been focusing on things within our control, prioritizing a selection of short-term mitigating actions. Many of these actions are detailed on this slide and range from pricing and product initiatives to capital and efficiency strategies and will help us withstand the short-term market headwinds and exit the period of uncertainty in a stronger position.

We constantly review our pricing algorithms to optimize our occupancy and rate mix across the booking curve. And this has been particularly important as we manage the short lead business weakness that we've been seeing this year. Not only do we believe we've made our short lead pricing more competitive, but we've also introduced changes which will allow us to optimize our revenue per catchment more effectively.

We've worked hard to maintain our customer preference scores, which is extremely important to the long-term success of the brand. A recent YouGov Brand Index survey showed that the purchase intent for Premier Inn was over twice as high as our nearest competitor, with consideration levels also far above the peer group.

Recently, we've also been focused more on our business customer segment as a key revenue driver as well as trialing our new Premier Plus rooms, which have the potential to increase our rate mix across the estate.

Our ambitions in Germany continue to grow with GBP 300 million to GBP 350 million of capital allocated for growth this year and similar levels expected in the following years. We'll also spend GBP 150 million to GBP 200 million on growth in the U.K., but our focus in this more mature market has increasingly been on our current assets, segmenting the estate and enhancing and optimizing our large portfolio of hotels.

Implementing our new structure as a focused hotel business has given us the opportunity to review every part of our strategy with renewed vigor. Our 3-point plan to access the attractive structural opportunities for Premier Inn remains intact and continues to be underpinned by our market-leading brand, loyal customer base, high-quality teams, operational excellence and disciplined financial and capital management.

There is still plenty of runway for growth in the U.K. for Premier Inn, and we have line of sight to over 110,000 rooms over the long term. However, we've got the flexibility around how and when we access that opportunity. In the short term, we're reflecting the latest market conditions in our appraisals of new sites and extensions. And going forward, we'll be focusing even more on optimizing the current estate.

Internationally, we're investing more in the structurally attractive German market to ensure that we capture the potential for budget branded hotel rooms both organically and through acquisition. Our 2 acquisitions, along with our organic pipeline, will ensure that we have over 20 hotels open by the end of next year across 13 German cities. Once these hotels are up and running, Germany will be making a material contribution at operating level to earnings, which will only get stronger as the rest of our pipeline unfolds and continues to grow.

We continue to generate further savings through the strong execution of our cost efficiency program, which has helped to offset the material structural inflation that's impacting the hospitality sector. Our immediate focus as part of this program is enhancing our digital skills and fine-tuning our procurement, supply chain and property capabilities.

It's important to remember that we run a long-term business. And where we invest in our hotels, we do so for several decades. During this period, economic cycles are inevitable, and that's why we focus on long-term structural growth markets such as the U.K. and Germany.

It's also why we've developed a unique market-leading business model. It's a platform that is based on a large-scale network, with the #1 brand, high-quality teams, operational excellence, and those things are hard to replicate. The platform delivers brilliantly for guests and has an advantaged margin structure, which, together with excellent execution capability and disciplined financial management, provides a very strong performance over the long term.

I'll now hand over to Nicholas, who can take you through our half year results in more detail. But as a final comment, I would like to thank my teams for their hard work to deliver the strategic progress we've made in the first half of the year. Having a committed and talented team is a significant competitive advantage as we take Premier Inn from a fantastic U.K. hotel business to one with international scale.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [2]

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Thank you, Alison, and good morning, everyone.

I'm pleased to present our interim results. All of the numbers presented today are for our continuing Premier Inn business, that is excluding Costa unless they're marked otherwise.

First, and briefly, I would like to remind you that we now have adopted IFRS 16 accounting standards for the financial reporting of our lease agreements. This is principally for long leases on around 350 of our hotels. The basics of IFRS 16 are that we are required to recognize on our balance sheet a liability for future lease payments and an asset for the right to use the property. However, just to remind you that revenues, EBITDAR and cash flow are entirely unaffected by these changes, which means that our views on unit economics and capital allocation are also unaffected.

Revenue for -- was flat for the half at GBP 1.078 billion, supported by the contribution from the new hotels we have opened over the last year. As business confidence and, more recently, consumer confidence has decreased in the U.K., we have seen the regional hotel market weaken. And as a result, market RevPAR and our like-for-like sales declined. We have executed our efficiency program on plan. But in this tougher environment, together with the high inflation in our sector, our profit before tax has declined by 5.6%.

Earnings per share were up year-on-year by 5.4% due to the share buyback and tender offer program we carried out in the half, reducing the number of Whitbread shares. We continue to have strong discretionary cash flow conversion -- converting 97% of our cash, excluding one-off costs of transactions and separation costs, enabling us to invest in our growth strategy increasingly in Germany and in strengthening our brands. Our return on capital was 10.8%, reducing principally due to the lower U.K. profit and the exciting investments we are making in Germany.

Going into a bit more detail on operational performance. As I'm sure you will have seen from the weekly released U.K. hotel market data, the London market has been strong. And we have seen our sales up 4.5% over the half year and outperformed the market in the last quarter. However, over the same period, the regional market has been difficult, resulting in our U.K. accommodation sales declining by 0.6% and our U.K. like-for-like accommodation sales down 3.6%. This was below the market as a whole for 2 reasons: firstly, as our sales are disproportionately weighted to the regions with 80% of our estate outside of London; and secondly, as we have a higher share of business customers where we saw demand weakening the most and who tend to book later and higher up the pricing curve.

We have a good margin percentage, which means we have a relatively high degree of operating leverage on the upside and on the downside. This, together with the net increase in costs that we guided to at the start of the year, reduced our U.K. EBITDA by 7.2% and resulted in U.K. returns remaining strong but declining by -- declining to 12.1%. As previously indicated, we had losses in Germany of GBP 5 million during the first half, which were on plan and as we get set for the expansion ahead of us. We now have a great team on the ground who are focusing on identifying new opportunities and getting ready for the integration of the Foremost acquisition later this year.

On the left-hand side of this slide, you can see the movement in our margin. As mentioned earlier, we have a strong margin structure, but the trading conditions and continuing inflation impacted them by 2.8% to 23.7%. Cost inflation, in red, was in line with our guidance, which was around GBP 40 million and impacted our margins by 3.7%. We were then successful in offsetting a significant part of these through our cost efficiency program, shown in green, with GBP 25 million savings in the half.

On the right, you can see our return on capital and how the U.K. market conditions, sector-wide inflation and our efficiencies impacted the U.K. And how the growth investment in Germany impacts our overall returns.

As previously mentioned, we have a good level of cash conversion. Our business enables working capital efficiencies, and we focus on deploying our maintenance capital as effectively as possible. Excluding one-off costs of transactions and separation costs, this has enabled us to convert 70 -- 97% of our operating profit in the first half into just under GBP 200 million of discretionary free cash flow. This cash flow has been used to fund our growth CapEx of GBP 119 million and dividend payments totaling GBP 116 million.

Turning to capital investment. Capital allocation discipline is one of our core pillars and never more so in this type of market. We invest for the long term and continue with our maintenance and product improvement to ensure we provide Premier Inn's consistent quality and invested GBP 78 million in the half. You will hear later how we will put more of this capital to work, enhancing and optimizing our hotels.

We have invested GBP 71 million to build and extend hotels in the U.K. Although we invest through the cycle, we have built a softer market into our new hotel appraisals. This naturally is likely to moderate our pipeline in the U.K. in the near term, that you can see at the bottom of this slide was slightly down on last year. This moderation is optimizing the timing of our investments and ensuring we are in a good position for when the market improves.

In Germany, we've invested GBP 48 million so far this year as we continue to build out the committed pipeline. As it currently stands, we now have GBP 280 million in invested capital in Germany with more than GBP 500 million further capital committed for future openings, including our agreed acquisition, which, together with our open hotels, will take us to 20 hotels in 13 cities by the end of 2020.

We laid out our approach to capital structure at the Capital Market Day in February, a key aspect of which is to ensure we retain flexibility and firepower to fund opportunities as they arrive through access to low-cost marginal capital. You will see on the right of the slide our broad mix of flexible funding sources. On the left, you can see our lease adjusted net debt is just below GBP 1.5 billion. Our target leverage position remains at or below 3.5x, and we are currently at 2.3x. Our current leverage position is low to ensure we can accelerate in Germany. This includes the funding of the committed acquisition and conversion of the over 20 hotels in Germany, which, together with our other U.K. commitments, will push the metric to around 3x over the next year.

As a side note, for the purpose of calculating our leverage metrics, our credit rating agencies still view 8x the annual property rental charge as opposed to the IFRS calculation as the appropriate method of assessing our lease liability risks and our overall borrowing potential capacity.

Just looking at the market in a bit more detail. The chart on the left shows the year-on-year performance of the midscale and economy market over the last 12 months. You can see in the gray line that the London market has been volatile but overall a strong market, with the good last quarter benefiting with the weak pound and the lack of hotel supply. Conversely, the light blue line shows how the regional market has suffered and has followed the business confidence index, shown as the dotted line, which seems to dip every time the political uncertainty increases. This dropoff in business confidence forces companies to rein in on their discretionary spend, feedback we hear from all of our suppliers, which, in turn, as said earlier, impacts our short lead, high RevPAR midweek nights.

Turning to our outlook for the rest of the year. Our guidance is exactly as we laid out at the beginning of the year but with a weaker market backdrop and more market uncertainty which impacts the short-stay booker. Q3 has started off in a similar way to Q2, with London performing very well but with the regions in line with the way we saw in the first half.

Our view on costs and efficiency have not changed at all and is again as we set out in April. We still expect to see around GBP 70 million of inflationary investment cost increases this year plus around GBP 10 million of operational dis-synergies from the separation of Costa. We continue to make good progress on efficiencies and will offset around GBP 45 million of these costs with our efficiency program.

We expect start-up losses to still be around GBP 12 million in Germany in FY '20 as we progress with our German expansion. The key forecast variable, of course, is therefore the market, which, as we have laid out earlier this year, is worth about GBP 12 million to GBP 15 million worth of profit for every 1 percentage point in RevPAR movement.

Capital allocation principle is of utmost importance. We plan to open around 3,000 rooms in the U.K. that are weighted to the second half. We are speeding up in Germany with around 2,000 new rooms this year. A good proportion of these come with the Foremost acquisition on the last day of the year and which will be closed for refurbishment at different stages through the first quarter of next year. Together with the German acquisition and the U.K. maintenance capital, we expect to spend around GBP 600 million to GBP 700 million this year.

Although the near term may not be the easiest to navigate, we have seen these tough cycles a number of times. With our brand and balance sheet and our ability to drive efficiencies, we will retain our unique competitive advantages and are in such a stronger position than the vast majority of our competitors, especially the large declining independent sector that will enable us to exploit the ongoing opportunities in the U.K. and Germany over the long term.

I'll now hand back to Alison, who'll provide a little bit more detail on strategic updates.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [3]

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Thanks, Nicholas. I'd now like to focus on our long-term strategy for Premier Inn, starting with a reminder of the structural opportunities that we see both in the U.K. and in Germany. I'll then highlight the strengths of our model and how we're well placed to withstand the short-term market weakness and how that allows us to focus on the long-term potential of the business as we have done through previous cycles.

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

We also have an exciting opportunity to invest in Germany. The German market is large, around 30% larger than the U.K., and has been growing at a faster rate at around 4%. Furthermore, the market is even more fragmented and even more domestic travel orientated than the U.K. Around 75% of the market is small independent hotels, and around 80% of travel in Germany is domestic travel. The total budget branded sector in Germany is only around 8% of the total market, and as a comparison, that's 27% in the U.K.

Of course, our overriding purpose as a business is to delight our millions of guests with exceptional service and value for money. We're able to do this consistently 365 nights every year in over 800 hotels by focusing on the 6 elements on this slide. You've seen these elements in previous presentations, and so I'm not going to dwell on them, although they do remain key to our success. And they deliver a unique customer offer that gives us a strong competitive advantage relative to our peers.

Scale is fundamentally important. Delivering a high-quality and consistent experience to customers whilst charging as little as GBP 19 per night as well as generating a strong return for shareholders would not be possible without the economic advantages that our scale provides. I'll also point out that our vertically integrated model provides us flexibility with our hotel network as we continue to evolve our approach for enhanced segmentation and greater estate optimization.

We use a number of different metrics and independent surveys to make sure we remain the preferred hotel brand in the U.K. This is important as we aim to maintain our brand strength over the next 20 years, retaining our loyal customers who want to keep coming back to Premier Inn. And as you can see from the left-hand side of the slide, we're the first choice destination and considered more often than any of our competitors in the market.

The right-hand side helps illustrate why we're first choice. Our value for money score is significantly higher than any other brand, and the gap has been widening. The white space between us and the competitor set is a fantastic demonstration of how we maximize the balance between quality and value for money for customers, which creates a wide barrier to ensure that our customers want to stay with us time and again.

Premier Inn is well known for its network strength across the U.K. with over 76,000 rooms across more than 800 hotels, which is over 30,000 more rooms than the next largest competitor. Our network plan, coupled with a flexible approach to access land through either freehold or leasehold acquisition, continues to secure hotels of optimum size in the best possible locations.

As we have end-to-end control of property acquisition management, we also have the flexibility in terms of how we manage our estate and our pipeline. A few examples are highlighted on the left-hand side of this slide and include the ability to dial up or down extensions to react to local changes or market dynamics as well as, more broadly, how we think about how and when we build out our pipeline of hotels. This is especially important in more uncertain environments and is a vital competitive advantage for the long term.

Along with managing our pipeline, we have also increased our focus on our current estate to better understand how we optimize our network in every single catchment as we continue to develop the portfolio. We call this our perfect portfolio planning. It creates a blueprint for every catchment and how we will migrate from today's network placement to an ideal one over the next few years.

Our existing estate is the output of many years and many forms of growth. So for every catchment across the U.K., we are now looking not only at the size of the opportunity for Premier Inn but also how those rooms should be allocated, how many hotels, in what specific location within the catchment and with what food and beverage offer. There are many opportunities for us to achieve a more optimum performance within catchments by extending hotels, building new sites and, in some cases, exiting hotels even if the number of rooms sometimes remains roughly the same within a catchment.

Preston, a city in the north of England, is a good example of what we can achieve in many catchments in the U.K. By extending 2 sites in higher-demand areas and exiting 2 smaller hotels, we can maintain our number of rooms in this catchment, position ourselves in the best locations for our guests and create larger hotels which are more efficient to run. Overall, this will improve our network placement, increase our returns, release capital for reinvestment and will, in this case, allow us to maintain our catchment capacity.

As well as optimizing the location of our estate, we're also working to ensure that our rooms continue to offer guests a great experience with more choice every time they stay. Over the summer, we refurbished 38 rooms in 2 of our London hotels to trial our new Premier Plus room design, giving customers more comfort, more convenience and more connectivity. We focused on what we think our customers would really value from an upgraded experience. Included in that are improved workspaces, a luxury shower and toiletries, a dedicated hotel floor, an espresso coffee machine and a few more added extras. But importantly, we focused on the specific capital spend we believe will generate the best returns from these new room types.

Our initial trial results have shown very strong demand for this room type from both business and leisure guests with high satisfaction scores following the stay. We're therefore rolling out the trial to over 500 rooms towards the end of this year and have an ambition of a further 2,000 rooms over the next year or so. So far, we've tested a daily rate uplift of between GBP 10 and GBP 20, which we believe would have a substantial impact on our rate mix and delivers a very strong return on the incremental capital.

As well as offering our customers more choice within the main Premier Inn estate, we continue to develop our 2 alternative concepts, hub and ZIP, which provide greater catchment access and greater customer reach. Many of you will now be familiar with the hub hotel concept, which is a compact, high-spec design. This has given us access to high land value catchments such as London and Edinburgh and still achieve returns in line with the main Premier Inn estate.

We now have 11 hub hotels open, including a recently opened hub not too far away from here on St Swithins Lane. All of our hub hotels achieve strong occupancy rates and customer scores. Due to this format's success, we've started to look at the potential to expand hub into other metropolitan areas such as Bath and Manchester. Our extensive customer research tells us that our customers would welcome this concept more broadly across the U.K. And we believe hub can be delivered at good value for money in a number of key cities whilst remaining -- whilst retaining good site-level returns.

ZIP is a significantly different offer to our traditional Premier Inn format. The premise is good quality, small, very simple rooms targeting a large segment of the market which we believe is currently underserved. Namely the extra-value-seeking customers who tell us that they don't stay in a Premier Inn and are dissatisfied with their current options. Those options include staying in under-invested independents, sleeping in their vans or simply driving very long distances to get home.

We believe we can deliver a similarly good return on capital whilst offering prices as low as GBP 19 per room per night by targeting lower land value areas and engineering the room construction and operating costs to be significantly lower. The first ZIP by Premier Inn trial opened in Cardiff in February this year. And we are seeing occupancy building in line with our expectations, especially strong occupancy on Saturday nights as well as very positive customer feedback.

Turning now to our progress in Germany. We remain excited about the long-term opportunity in our second targeted, structurally sound domestic market, and we're increasingly confident of replicating our U.K. success. This year, we opened a new hotel in Munich in September. And the hotel we opened in Hamburg just over 6 months ago is already showing very encouraging signs of early trading and customer feedback. And you can see that in the rapid ramp-up in occupancy in Hamburg to over 70% since opening. We've also grown our organic pipeline to 18 hotels and announced our second acquisition of a group of 3 hotels, adding to the 19 hotels we'll acquire from the Foremost Hospitality acquisition.

Our success in the German market is based on our ability to replicate our strength in the U.K. that has made us the #1 budget branded hotel. We'll use the same flexible property approach to gain superior site access. And we can also utilize our buying scale to ensure we deliver high-quality experience at the same market-leading value for money. Crucially, we believe we can achieve the same hotel economics that we command in the U.K. On the right-hand side of the slide, we've laid out an indicative guide to a German Premier Inn's unit economics, which will achieve more mature returns of between 10% and 14%, with slightly higher capital costs compensated for by higher hotel profitability.

Next year will be a transformational year for Premier Inn in Germany, with the transition of the 13 hotels from Foremost acquisition alongside the continued organic expansion, which will us deliver us 20 hotels across 13 cities by the end of the calendar year. Once we acquire the hotels, we need to close and refurbish them into our Premier Inn brand. The hotels have been segmented into refurbishment types depending on their current convertibility, with a full rebrand taking slightly longer than a medium or a light rebrand. However, all of the hotels that we're acquiring are in great locations and good condition and should be easy to convert to high-quality Premier Inn products during the course of the year.

One of the cornerstones of our proposition both in the U.K. and in Germany is our approach to distribution. Our integrated trading engine is integral to how we deliver the highest net RevPAR possible as opposed to a focus on gross RevPAR, which is the focus, of course, of the weekly market data. The table on the left-hand side highlights the different ways that we drive RevPAR. We prefer the channels at the top of the table, which have the lowest acquisition costs and therefore achieve the highest net RevPAR.

As well as maintaining a more direct relationship with our customers, our distribution strategy enhances our financial performance by supporting a superior margin structure to our peers, enabling us to maintain our consistent brand standards by reinvesting back into the product. Crucially, we now achieve 98% of our distribution without paying third-party commission.

We continually review our approach to distribution, which has become increasingly important in a weaker market backdrop. While we continue to drive direct bookings as a priority, supplementing these with careful use of third-party avenues, we have also looked at short-term levers to optimize our approach in more challenging environments. This has included a greater focus on our high-value B2B customer proposition, a more detailed look at our pricing decisions to prioritize occupancy at a local level. Critically, over time, our distribution strategy ensures that we keep our costs low and our customers close and, therefore, our prices low, adding to our brand appeal and supporting our strategy of ongoing network growth.

It's been a few years since we announced the launch of Whitbread's first efficiency program in 2016, and we overachieved in the delivery of our initial targets. Since then, the program has been integral to helping us offset increasingly inflationary pressures within the U.K. business, with GBP 50 million to GBP 60 million of savings forecast in this financial year. The bulk of the savings have been achieved in the continuing part of the business with an annual run rate of around GBP 40 million to GBP 50 million.

The savings have come from the end-to-end review of our entire GBP 1.6 billion cost base with detailed cost and product specification reviews as well as the implementation of new team structures. The right-hand side of the chart highlights some of the initiatives we've delivered during the first half of the year, including the opening of our new sourcing and supply chain office in Shanghai, which will deliver many more savings through sourcing and product range improvements in the future.

Our ambition with respect to the level of cost savings we can achieve is still high. We believe that there's a further GBP 120 million of OpEx and GBP 100 million of CapEx savings to target over the next 3 years, as we outlined in our Capital Markets Day, and this would be another huge achievement for us. Our new areas of focus to contribute to this headline number include a wide range of initiatives from across the whole cost base.

As well as the ongoing efficiency program, we've also made good progress on separating Costa from Whitbread. Since the transaction completed in January, we've now separated our shared services team, supplier contracts and reorganized our head office to increase the pace of decision-making and delivery for the new focused hotel business. We've also returned a substantial amount of surplus capital to shareholders through an initial buyback of around GBP 500 million, followed by a fully subscribed tender offer of GBP 2 billion completed in July.

The final phase we'll deliver over the rest of this year is the separation of the remainder of our IT support services, with the exception of HR and payroll, which we'll complete during 2020. As you can see from the work completed, our teams have had a very busy but very productive year and are on plan to complete the separation around a year ahead of schedule, which will allow us then to focus completely on running the hotel business rather than on separation activities.

As well as being focused on remaining a growing and profitable business, we've also committed to being a responsible one. Our Force for Good program is based on what's important to our teams, our communities and to the environment. This year, we opened our second training facility for young adults with special educational needs at Hereward College. And we continue to run our successful apprenticeship program with a focus on broad career progression in the hospitality sector.

We've raised more than GBP 15 million to date for Great Ormond Street Hospital and also support communities in which we operate. We've always been committed to treating the environment with respect. And this year, we focused on a range of activities from training our cotton farmers to farm sustainably, to powering our hotels more sustainably as well as reducing the use of plastic by replacing 10 million plastic straws across the estate.

I'd like to conclude by reminding you of our strategic priorities in the context of both the short-term market conditions and the long-term opportunities that we have to grow this business. Our immediate focus is to optimize our approach to yield optimization to manage the weakness that we're seeing in the short lead business bookings outside of London. As well as improving our competitive pricing position, we're focused on how we distribute our rooms and better merchandise them to our customers.

We will continue to grow and to optimize our core U.K. market by segmenting the estate and working towards a perfect portfolio at catchment level. We all see the potential to extend hub and ZIP, adding to our growth ambitions and have just started to explore how more premium room types could add to the appeal and improve the returns of the current estate.

Internationally, our current open and committed pipeline in Germany contains 43 hotels. But our ambition is to have significantly more than this by accelerating our organic growth, supplemented by selective bolt-on acquisitions, like the two we've completed so far. We've made tremendous progress in developing the capabilities required to support our long-term growth ambition, and we continue to generate further savings through the cost efficiency program. This has become increasingly important as cost structures in our industry remain challenging, and we aim to offset a significant amount of the structural inflation impacting the sector.

Despite the short-term impact of political and economic uncertainty in the U.K., the disciplined execution of our proven strategy, our strong balance sheet and the strength of Premier Inn's business model means we remain very confident about the long-term growth and the structural opportunity. And consequently our ability to create long-term shareholder value through growth in earnings, combined with a strong return on capital.

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

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Questions and Answers

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Alison Brittain, Whitbread PLC - Chief Executive & Director [1]

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Well, Vicki's hand did actually technically go up first. Sorry, Jamie, you were right behind her.

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Victoria Jane Lee Stern, Barclays Bank PLC, Research Division - MD & Equity Analyst [2]

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It's Vicki Stern from Barclays. Yes, 3 questions. Firstly, just around independents. Are you still seeing them exit the market at around about 1% a year? I guess, on the one hand, you've got sort of -- there's more pressure on them than anyone right now so that could be accelerating that. But you've also got [IO] coming in, potentially providing you a bit of a lifeline. So perhaps you could talk around some of that.

In terms of net openings outlook, you talked about 3,000 gross openings this year. What does that sort of translate into in terms of net? And now with the commentary around signings discipline, how should we think really about that net openings number the next few years?

And then just finally, on the underperformance against Travelodge, you touched on the fact, obviously your mix is a little bit less skewed to London. Could you just sort of give us a sense as to how much of that underperformance is coming from mix? How much is SuperRoom's sort of business penetration on their side and sort of against the market? How should we think about that circa 2.5% underperformance on the net RevPAR going forward?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [3]

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You set a record there, Vicki, with four questions. Do you want to start on the independents?

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

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Yes, I mean just -- the independents, I guess, is around about 1% a year. You're right. I'm sure as some new disruptors come into the market, you might kind of slow that down a bit. But I guess also you've got the other pressures going the other way. The market is weaker for them and tougher and they've got all the inflation and the price of the OTAs as well.

So I think you may -- there's a good chance it does moderate a little bit from the 1%. But I still think it will be declining close to that overall over time. You asked about kind of gross to net, gross is 3,000. And we're close to be -- we'll be kind of churning out of about 400 rooms this year. So the net will be about 2,600.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [5]

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Churn of 400.

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

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And that's not a bad guide for next year as well. But we'll give more detail on that...

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Alison Brittain, Whitbread PLC - Chief Executive & Director [7]

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I mean we've got a good pipeline. We have flexibility with our extension program. And we've been -- as you might imagine, we regularly go through an exercise of reviewing everything that's in the pipeline and everything that's in the extension pipeline and making sure that on current performance levels, current market performance levels, if you flow through those models into the [RevPAR], would they still meet what is quite high hurdles.

And well, in this year, we've taken a decision, for example, to slow down 1,000-or-so extensions because they're on the books. We have planning permission for them. We can do them when -- and they're quick to do. There's no need to do them in advance of the market coming back.

With the broader pipeline, of course, you do need to make sure you don't have a mind-the-gap moment. And you do need your pipeline to carry on being in growth, particularly if you've done the catchment analysis that says you know exactly where you want to place a new hotel in a catchment in order to potentially to maybe close 1 or 2 smaller hotels, which are less economically viable than they used to be. The inflationary headwinds make smaller hotel economics more challenging and bigger hotel economics more profitable and more returns enhancing. So actually as part of our work, we will want to maintain a strong pipeline. We have a strong pipeline, and we plan to maintain that as we go forward.

And Travelodge, yes, there is a structural mix issue. We are a more regionally focused, less London-focused, we are more business-focused, less leisure-focused than they are. I suspect they, therefore, have benefited some of that -- somewhat from the mix. But also I think they, in their own presentations, call out the impact of their Premier Plus equivalent SuperRoom-type strategy over the last year, which has probably allowed them to push rate higher in selected hotels for selected rooms and be lower, compensating lower for less invested rooms, where they have allowed to put capital into to review the room.

So I mean they start from a lower base, so they're still pushing up from a lower RevPAR, so they get the opportunity to grow a bit harder. And that's probably about it. From an overall market perspective, we are in London ahead of the market and in line with the market, Travelodge being the outlier, which is about 20% of the market. Go behind and then pass the baton over here.

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

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Jamie Rollo from Morgan Stanley. Three questions again, please. First, the sort of commentary up until now has really been that you wouldn't curtail expansion or cut CapEx in a downturn. But they seem to be happening. Your maintenance CapEx is quite a bit lower as well. So what sort of changed to cause that?

Secondly, on Germany, and the guidance of a GBP 12 million loss for this year, how should we think about 2021? You've got a lot of partial contribution from Foremost. Is that still breakeven, small profit? And if you can, think about the year after, so we look at those returns coming through, that will be helpful as well.

And then finally, on leverage, on sort of cash net debt, not very much and still won't be very much after Foremost. So what is the headroom for deals? I mean the revolver seems enormous compared to what you've drawn down with all the cash on the balance sheet. Are you thinking about something quite material?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [9]

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Okay. Should we -- we'll start with CapEx. We're not planning to reduce investment in quite the stark way that the question implies, for sure. But we are thinking quite hard in the current market environment around optimization. We've got 800 hotels today. And we do have a maintenance budget that goes with that. But when we're upgrading those hotels, it's enormously capital-efficient if our upgrade rooms, if a different segmentation approach is appealing to customers to use the refurb budget and to apply capital also to do upgraded rooms. So it's essentially the Premier Plus rooms, which will give us a higher return overall.

So -- and we're quite -- we have been astonished by the response to the rooms in what is admittedly a small trial of 2 hotels in London. The 500 that we'll open between now and the year-end, they're in a very wide set of towns, cities and small places across the U.K. and will give us a real sense of whether that segmentation can be applied across a much broader cross-section of hotels. Based on the experience we've had in the first 2 trials, which has been universally positive against every catchment type of customer and every night of stay, we would anticipate that that will be a good strategy for us. And that's where we should be making some capital investment over the course of the next 12 and 18 months because it would be very high-returning investments.

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

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I mean just the maintenance capital is the same as the guidance we gave in April. So we haven't -- we're not curtailing that. It's the U.K. which has moderated. And that's really around two things. There's one around we're just doing less extensions this year, which is in our flexibility, which is a good, good capital discipline in this market. And the second thing is we are seeing actually freeholds in this market. We're finding more leaseholds coming through. So the leasehold mix is slightly higher than we had originally as well.

But as we said, we've gone -- twice a year, we go through all of our capital that we spend and we readjust our appraisals. And in this market, it's just a bit harder to find sites that are above hurdle at that level. But I would guess that's good because it saves our firepower for a better day.

Just in terms of Germany, losses at GBP 12 million this year. The thing about next year is we take the Foremost hotels literally on the last day of this year. And then the first kind of 4 months of the year, we spend refurbishing them. So a lot of them are closed for that period and we've got the cost of doing that. We'd expect to be making a smaller loss next year, kind of small single digits but then getting into the profit the year after that overall.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [11]

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We'll -- [we're going] to think about how we give you a sense of the operating profit at sort of unit level because actually I think the year after, we'll be seeing a material contribution from 20 trading hotels. And as that pipeline opens, the operating contribution becomes much more significant over time. And we think being able to see through the cost of building the pipeline and building the business into what the operating line looks like will be helpful. So we'll think about how we present that as we go forward.

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

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Yes. And then you asked about leverage as well. So yes, we're down at 2.3x. But with the Foremost and the capital we've committed, we get up to around about 3x, which for every 0.1 of leverage is about GBP 100 million of capital that you've got at the moment in terms of it. I think we've -- there are some large acquisitions out there. They're incredibly expensive at the moment. So I think we're kind of -- right now, we're focused on some of the more smaller ones rolling up the market [right now].

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Alison Brittain, Whitbread PLC - Chief Executive & Director [13]

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Okay. Last question from this side and then we must move the microphone to the right-hand side of the room.

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

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Alex?

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [15]

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This is Alex Brignall from Redburn. Three questions, please. On Travelodge, a lot of the catch-up has sort of been occupancy. And they're now broadly at parity. So are you comfortable that the (inaudible) sort of price gap that you're getting is going to be -- maybe be consistent and therefore the drag that you get from the occupancy catching up might sort of decline a little bit?

On CapEx, just for this year, you've gone to the kind of higher end of the range, I guess, is the kind of logic behind that, the GBP 600 million to GBP 700 million, it was GBP 500 million to GBP 700 million. If you could just explain that very briefly. And then on inflation, we kind of know it exactly for this year. Could you give us a little bit of a guide of where that might get to next year and therefore what we need on the RevPAR to kind of cover that?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [16]

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We're not expecting -- and just covering that while Nicholas thinks about the answer to your questions. We're not expecting cost inflation to mitigate, particularly on people costs, where we would expect, I think, has already been sort of forecast a higher national living wage. And indeed, with a smaller labor pool across the U.K., potentially a higher wage rate inflation anyway.

And it's not just when you put the wage inflation into the lower band. It runs through the business up through the higher bands because otherwise you end up with team leaders being paid less than team members and -- so it does flow up and ratchet up through the business.

So some of the other -- I mean the thing about the inflationary pressures is they come and go. So as some of them start to tail off, others materialize. So depending on what happens with our exit from the European Union will depend on what our suppliers' increased costs look like as inputs to us. Equally, we've got offsetting efficiency programs to look at that. So we're not -- I would just say we wouldn't be planning to see structural cost inflation lower in the next year than we've seen it previously in the previous 2 years.

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

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And we've still got the stranded costs from Costa as well next year as well. Just in terms of CapEx, what you see is maintenance capital is exactly where we said it would be. U.K. CapEx is actually a bit lower. It's German capital that is a bit higher. And that's about the timing of the Foremost acquisition being in the last day of the year, so nearly kind of 2/3 of the capital plus the refurbishment spend goes out in that last day. So that's what it is.

Your question about Travelodge and just about -- I think it was more about are we comfortable where we are on price? I guess there's a danger of answering that with averages, I think, because I think you've got to look at hotel-hotel by catchment-by-catchment, I think, overall. I think what we're -- I'm not going to -- Travelodge have had some room where they can move up underneath us right away. Since 2015, we've seen them, they're moving up. That is getting closer. But there is still a gap. So I do think they've still got some room that they could go for.

I think when we look at our own pricing curves, I think there's a mixture of kind of opportunities we have. There are some hotels where actually we think we could price down and get to drive the occupancy up further out. And I think there are some hotels actually where we can price up longer term out and actually drop the prices in the short term actually. And it really depends catchment-to-catchment overall.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [18]

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But we have invested a lot of time, as you might imagine, in (inaudible) in short-term initiatives and understanding a more granular, localized, unit-by-unit pricing and to get the balance right. And also to be able to differentiate between the investor (inaudible) and investor to stay combo, the local catchment and the local competition. Okay, so...

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Richard J. Clarke, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [19]

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Richard Clarke from Bernstein. Three questions, if I may. Just firstly, on the 12,900 rooms you have in the pipeline in the U.K., what is the actual flexibility on that? So how many of those have broken ground? How many leases have been signed? How much flexibility do you have to delay or even cancel those going forward?

Secondly, the GBP 100 million CapEx cost savings. You've given us an update on the operating cost savings. Where are we through that? How will we see that in the numbers and when? And then lastly, you've improved your direct booking to 98%. There's various industry participants that say direct booking is not free. So what are you seeing in terms of SEO and other advertising spend? Are those trending up to make up for that higher direct booking percentage?

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

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Yes.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [21]

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Okay.

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

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So just on the 2,900, those are signed. Those are committed. We have a whole lot of other sites which where we're looking at and are in negotiation or we've agreed them but actually haven't signed as well. So it's those -- but those ones are mainly agreed.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [23]

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They deliver over a 3- or 4-year period, however. Of the freeholds, we have choices about when we put -- dig spades in the ground and when we don't. But in the near term, if we've got the foundations built, the likelihood is we're going to top them out and open them. So the ones that are coming in the next sort of 12 months are freeholds we would complete.

We then rely on the developers completing on their schedule of development to complete for the leasehold sites. That's how that sort of pipeline flows its way through. And we can stop. If we wanted to slow capital spend on freeholds, we literally can either ring-fence the site and close it down for a future period or sell it because it's a freehold. It gives us more flexibility.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [24]

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Yes. We've got about 10% to 15% of these extensions and 10% to 15% of those are freehold and the rest of them are leasehold. So that's the kind of flexibility you've got overall.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [25]

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On CapEx, the -- I mean we've done -- we have been doing a lot of work on CapEx in terms of -- I mean, hence, having the Shanghai office, actually in terms of having prefabricated build and wiring activity going on offshore and then as we bring things onshore. But we've taken a look at the individual components of all of our room stock and aligned it all so that we have one purchasing and buying process. And we have brought costs down in the CapEx spend as a result of the way in which we then go ahead and negotiate with our suppliers. That's the sort of activity that's going on in CapEx, along with redoing negotiations with contractors, et cetera, who spend our CapEx for us in maintenance or in build.

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

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A lot of the effort at the moment is making sure we get those efficiencies into Germany as well by buying the U.K. and Germany things together as well.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [27]

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Right. Direct booking is not free, that's absolutely the case. And we work hard to -- you saw the slide that we have on sort of net and gross overall to understand what channels for us are the best channels that drive the best outcome for us and at the most optimum acquisition costs. And we know it's not free.

We often get asked why we don't just -- particularly, if you've got a market where it's more constrained demand, why don't you just open the channels to the OTAs because in the short term, you could ostensibly fill up your hotel. There's a two- or three-point myth in that. One of them is that you automatically fill your hotels, which you wouldn't because actually if you're going with an OTA, they will fill the night you will already fill. We are already full in Covent Garden on a Tuesday night. We couldn't be any more full if we opened up to Booking.com. And they would just simply sell rooms that we would have sold to our own customers. And we still won't be full in Rotherham on Sunday night. And opening to Booking.com won't make us full in Rotherham on a Sunday night, so to that extent.

The other thing is, of course, you lose control of the customer, so the customer learns that if they go to the OTA and your stock is either not owned by the OTA, which is the worst thing, or sold out by the OTA, they will be directed to another hotel, not to another Premier Inn nearby, but to another hotel. And you stop having a direct relationship with the customer, where they come to your website and look at your room stock and make decisions. And when you have a network as large as we have, we know for OTAs, we actively drive traffic to an OTA, which is an actual competitor of ours.

And well, of course, the most heinous is when people have our stock and they can also bid on our terms, which makes our direct marketing more expensive because we've got OTAs bidding on our terms because we've given them stock that which they're then allowed them to use to bid on terms. So actually, the -- just to be clear that the -- we know that direct bookings are not free, but we also know that OTAs are much more expensive than a straightforward 15% commission. That is the cheap bit of giving your customers to the OTA, not the expensive bit.

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Richard J. Clarke, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [28]

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And just a follow-up on the CapEx question. The actual GBP 100 million number you've suggested, has any of that actually been realized this year? Or is any of it going to be realized next year?

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [29]

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I think when we announced it, we said it's a longer-term program, purely because your -- most of the things you're building have been committed a year ago. So it's probably got a year to an 18-month lag. We'll see some of it come through, but it's not...

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [30]

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It's Jarrod Castle from UBS. Three as well. Any thoughts in terms of recycling some of the freehold in a more challenging market? Obviously, not selling off the full 61%, but you tend to sell some of the hotels through sale and leaseback.

Secondly, any comments on how you see competitors reacting in the U.K. in terms of their supply behavior and their plans for future growth? And then just in terms of the Premier Inn Plus, what percent of a hotel would you see as offering that product? Or indeed, would you actually think about doing 100% of a hotel with a Premier Inn product, for instance, in London?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [31]

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Okay. Just -- I'll start with sale and leaseback and then you'll do the -- well, I forgot what the middle one was. You ought to do that one and then I've got the Premier Plus at the end. Sale and leaseback, well, we keep a really open mind all the time about our source of funding and our model and we think on a more regular basis than you would expect about what we should be doing and what we shouldn't. Just to give you a sense of where we are right now, you saw the slide that Nicholas put up, we have virtually no debt because we have leaseholds on the balance sheet, which should give you the leverage of 2.3, which is much lower than the place where we want to be. But as a result of the sale of Costa, we are cash-rich, not cash-poor.

And therefore -- and debt borrowing is an awful lot cheaper than -- at the moment than sale and leaseback would be. And that would simply sort of add to our rental costs with a yield of about 5%, 6%, maybe even 7% over time. So there may well be times when we will want to use that vehicle for lots of reasons. It may be that we want to recycle capital from the U.K. to accelerate German growth or do an acquisition or whatever. And we're very open-minded about that. We plan and manage the business in groupings of portfolios that we understand the property portfolio at all times so that we can take action, should we wish to. But right at this moment in time, we don't need the money that we would raise from a sale and leaseback and we would just simply be adding to the overhead of the business in rent over the next coming year, which doesn't seem a sensible plan right now.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [32]

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So I think at this point of the market, it gives you more resilience having more freehold as well. And then as we just mentioned in our present example, actually to really kind of recycling the bottom end of it, the kind of the smaller hotels into more efficient hotels as well is a great way of getting more efficient business.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [33]

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And I don't know what the second question was.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [34]

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The second one was about competition. I think it was how do we see them reacting to space.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [35]

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Yes. And maybe both U.K. and Germany, how you see that.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [36]

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Yes. And in the U.K. this year, we've seen quite a bit of space open, both in the regions and in London. And I think you're going to keep that going for the next few months. Going into next year, I think you'll see in the regions that, that starts to moderate. We're kind of slightly anti-cyclical. People put the capital down in the good times 2 years ago and then they open up in the -- when it gets a bit tough 2 years later, which is what you're seeing right now. But I think if you look at the kind of PwC and kind of the STR forecast the next year, you're starting to see in the regions, it's moderate. I think it will start -- continue to be quite good in London because the market's quite strong overall.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [37]

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And just to add to that, it is why maintaining both capital discipline and making sure we're opening the right sites and the right catchment at the right returns is important and particularly important for our investors. But equally so is maintaining growth through the cycle. These things have happened the same way every single time. People -- the good times are around, so people throw down capacity. The bad times arrival, the down part of the cycle arrives, they then have to finish. They have to build out, build up, put the top on, open the hotel. And they're opening in a more constrained environment. So they don't put any more capital down.

Hotels take 3 years to build. So you then get this sort of lag effect, where as you come out of the down cycle and into the up cycle, then there's a very constrained supply, which actually helps you -- helps boost you coming out of the cycle. But that only works if you invest through. But we are being very disciplined about where -- we prefer virgin catchments to catchments where we might cannibalize in this environment. We have London because we've got low market share, et cetera. And we're being very tight on the returns hurdles and the inputs into the model that we put in to make sure that we're disciplined. But we do expect to maintain a pipeline and our supply growth then as we go through the cycle.

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

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And in Germany, actually no real change actually. We're seeing the major brands, the international brands still struggling to open space because they want to do a franchise model over there. And there just isn't a property vehicle to do the franchise. So we're seeing that being fairly slow. The local brands, the kind of you're seeing Motel One is actually right now focused more outside of Germany, it's opened kind of 3 or 4 hotels a year in Germany. And B&B again, actually they are focusing on Germany, so they're doing quite well. But that's the kind of a slight price point below us.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [39]

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And it is a hot market in Germany. So again, maintaining some discipline about what you're prepared to pay in what's a hot market is quite important to make sure we aren't buying at the top end of the cycle and then we could have bought if we -- to save firepower to a later day.

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

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What you're seeing is the small independent changing at quite high multiples at the moment. So that's why you're seeing quite a hot market there.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [41]

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On the Premium Plus rooms, I would encourage nobody to model 76,000 rooms with GBP 20 uplift and a great return on capital because I don't think that's how this will play out. And we haven't quite got the evidence for this yet because we've done our first 2 hotels and 38 rooms, 500 and then a further 2,000 is sort of our aspiration over the course of the next 18 months. What we're looking at the moment and therefore what we expect is that we would see us potentially segment better our estate. And the -- certainly, at the moment, what we've estimated is sort of 10% to 15% of rooms in a hotel are the right sort of percentage of that hotel to have an upgrade room.

And as we want to organize it as a floor, so it has an appeal of quietness and selectiveness and is not family-orientated, because there aren't any family rooms in the initial trial, then you have to do that sort of site-by-site. But broadly speaking, about 15% of the rooms is about where we've been figuring. And within a catchment in a city that's got sort of 8 or 10 Premier Inns, you certainly wouldn't expect to premiumize the lot. You would expect a selection of them, potentially the higher-rate, higher-filled hotels, the business-orientated hotels, which fill in the midweek to 100% capacity, they would be the sweet spot for the higher premium rooms. So yes, don't model the lot.

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Timothy William Barrett, Numis Securities Limited, Research Division - Leisure Analyst [42]

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Tim Barrett from Numis. Can I just go back to the cost question or the cost comments earlier? And are you factoring in a reduction in the age of the national living wage as has been speculated?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [43]

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We already pay below the age.

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Timothy William Barrett, Numis Securities Limited, Research Division - Leisure Analyst [44]

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So you pay everyone at the [NOW]. Okay, great. And then second question on disposals, you talked about churn. And what kind of cash are you likely to raise on those? And are they generally smaller properties next to pub restaurants, sort of first generation? So could this be part of shrinking the pub restaurant estate?

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

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So just -- I mean just on the cost, what you're going to be aware of is if the Conservative Party has announced GBP 10.50 national living wage, slightly higher increase in rate that what's previously announced, so that's the area you've got to look at.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [46]

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And that applies to all of us.

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

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And again, it's the whole sector as well. So the second question was about the -- yes, we'll talk about what the opportunities are in terms of cash at the end of the year. But you're right, the smaller hotels, they're the kind of 30-, 40-bedroom hotels. And there's an opportunity to move those to the -- and therefore be able to extend nearby hotels, which are 60-, 80-bedroom hotels.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [48]

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Or reposition the entire site and rebuild on an entire site rather than just using what is there. So yes, the optimization is literally catchment-by-catchment, unit-by-unit. And there are different answers in different catchments. But we'll aim to talk more about that at the full year results. We'll give a bit more detail on what that strategy is panning out to look like.

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Timothy William Barrett, Numis Securities Limited, Research Division - Leisure Analyst [49]

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Have you got a number for pub restaurant disposals?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [50]

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No.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [51]

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No.

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Ivor Jones, Peel Hunt LLP, Research Division - Analyst [52]

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Ivor Jones from Peel Hunt. In relation to ZIP, you talked about what Premier Plus might look like with success. What would success look like for ZIP? And do your comments about prudence on CapEx imply less prototyping of ZIP and less testing of ZIP?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [53]

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Yes. We've got one more site already secured being ZIP-ed as it were. And we are actively looking at opportunities to trial more. So we're not constrained in our thinking from that perspective. At the moment, the initial trial has gone well. Certainly, customer feedback has been strong, occupancy has grown and matured well. We're still working on the finer points of the economic and operating model to make sure that the best prices really can get maintained at that level. But it's not -- they're not the easiest sites to find because we are looking for sites that are in low-cost environments, but where we think we can still get the right clients to the hotel. So they can't be sort of in the middle of some rural area, where there's no traffic or anything. So they're not the easiest sites, but we are looking, actively looking for sites for them.

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Ivor Jones, Peel Hunt LLP, Research Division - Analyst [54]

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So you wouldn't know if you're going to roll out a lot of them until the next financial...

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Alison Brittain, Whitbread PLC - Chief Executive & Director [55]

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No. If you remember at this stage, when we wouldn't have had the first hub or the first or second hub, we wouldn't have known we were going to roll that out because we wouldn't have had all of the data we need to make the decision.

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Ivor Jones, Peel Hunt LLP, Research Division - Analyst [56]

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And just in relation to capital allocation policy, we're at a pivotal point potentially for sterling and it could move either way. Do you start thinking in sterling? And so if sterling fell to parity to the euro, might you have a different presentation about allocating capital in Germany relative to the U.K.?

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

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We always -- we look at it both ways. We're quite well hedged at the moment in terms of where we are with euros as well there because we've got quite a large bond that's hedged out there in euros at the moment. So at the moment, we're all right.

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Ivor Jones, Peel Hunt LLP, Research Division - Analyst [58]

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So the next phase of Germany is pretty likely to go ahead, regardless where sterling goes in the next month or so?

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Alison Brittain, Whitbread PLC - Chief Executive & Director [59]

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Yes.

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Rachel S. Fox, Goodbody Stockbrokers, Research Division - Analyst [60]

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Rachel Fox from Goodbody. You've mentioned the leisure costs were declining in confidence. And that previously seemed to be holding up okay. Just on that, can you already see that declining confidence coming through in forward bookings? Okay, that follows on my next question, was going to ask in terms of the impact on rate then on the leisure bookings. I presume that won't be as pronounced as the...

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Alison Brittain, Whitbread PLC - Chief Executive & Director [61]

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So this is sort of strange phenomena at the minute. So we're seeing -- we've seen -- everybody has seen the business confidence drop, and you see the correlation with business confidence with business bookings. And regionally, so London, the whole market being buoyed by inbound, we're domestic, so we don't get the inbound. But the whole -- as the market is buoyed by it, then obviously then we have more domestic business in London. So we're performing very well there.

We -- short lead bookings in the regions are a particular issue, which often means your forward booking position is strong. It's when you go into the last 7 to 10 days, the booking position falls away as the short book -- the short lead bookers don't materialize. We haven't seen the same in leisure. Leisure, the leisure side of the business has held up pretty well. And we've only just started to see confidence start to fall from a consumer perspective. So it may follow the same trend if that fall continues. But at the moment, it hasn't.

Do we have any last questions? No? Thank you, everybody.

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Nicholas Theodore Cadbury, Whitbread PLC - Group Finance Director & Executive Director [62]

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Thank you.

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Alison Brittain, Whitbread PLC - Chief Executive & Director [63]

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Thank you very much for being with us this morning.