Premier Inn market share gains in the UK and building a national network in Germany

FY21 operational highlights

·    Whitbread's FY21 performance reflected the significant COVID-19 restrictions that were in place for the majority of the year in both the UK and Germany

·    As a result, total sales were down 71.4% year-on-year reflecting the impact of these restrictions and the closure of our hotels and restaurants for substantial periods of the year

·    In the UK, we have significantly outperformed the midscale and economy hotel market since reopening in August, with customer scores also remaining very strong throughout this period, despite the significant disruption

·    In Germany, the market and our hotels operated at low levels of occupancy due to the pandemic. Despite this, we were able to materially accelerate the growth of our hotel network during the year, with a total open and committed pipeline now standing at 72 hotels, providing a very strong platform from which to increase our brand presence

React, Protect and Restore

·    Our response to the COVID-19 crisis was rapid and robust, ensuring the safety of our guests and our staff, and protecting our balance sheet

·    At the outset of the crisis, protective actions included pausing discretionary P&L spend, stopping non-essential capex and suspension of the dividend, and utilising UK and German Government support schemes

·    Subsequently, both central office and hotel and restaurant headcounts were reduced, ensuring our labour model can respond more effectively to changes in demand

·    The successful completion of a £1bn Rights Issue in June 2020, strengthened the balance sheet and enhanced our financial flexibility

·    £550m Green Bonds issued in February 2021 provided further financial flexibility, while also underlining the Group's sustainability credentials and long-established Force for Good programme

Investing to win in FY22

·    Expecting to invest over £350m of capital in this financial year

·    Commercial initiatives, including the first major above-the-line Premier Inn marketing campaign for three years, are set to help both leisure and business demand recovery

·    Continued disciplined investment in room refurbishments will ensure our hotels remain well-invested

·    Opening 2-3,000 of our pipeline rooms in the UK and c.2,000 rooms in Germany

·    Roll-out of 'Premier Plus' rooms recommenced, delivering superior returns

·    Continued expansion of our pipeline in Germany; two organic hotels already added to our pipeline in FY22

·    Next phase of efficiency programme launched, targeting an additional £100m of cost savings by FY24

Operational update

·    In the UK, currently over 92% of our hotels are open, and we are ready to welcome leisure guests back to our hotels from 17 May, alongside the full reopening of all of our restaurants

·    Strong demand is expected for 'staycations' in UK tourist destinations throughout the summer, with business and event-led leisure demand starting to gradually recover thereafter

·    Currently 18 of our 30 operational hotels are open in Germany, with six of the temporarily closed hotels being refurbished and rebranded to Premier Inn. Despite the very recent tightening of Government restrictions, our significantly enlarged estate puts us in a strong position to win market share when demand returns

·    Now targeting net-zero carbon emissions by 2040, a decade faster than originally targeted

Driving long-term value

·    In the UK, we will continue to grow and innovate, by leveraging the powerful competitive advantages of our brand, market-leading direct distribution, our best-in-class operating model and our broad customer reach, while capitalising on the enhanced structural opportunities that will exist post COVID-19

·    In Germany, we have a compelling opportunity to replicate our UK success story, and our aim is for Premier Inn to be the number one budget hotel operator. We will continue to invest in growing our pipeline and believe we have a long-term line-of-sight to over 60,000 rooms through both organic and inorganic investment

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

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

·    Whitbread's brands, business model and balance sheet provides a strong platform for future growth and investment, which together with our ongoing efficiency programme enables us to drive attractive returns in the long-term

Alison Brittain, Whitbread Chief Executive Officer, commented:

"The last financial year was one of the most challenging in our 279 year history, as we operated under significant COVID restrictions which had many implications for our businesses, our customers and our people. Our business model enabled us to respond rapidly to the changing restrictions and to quickly adapt our operations as required, prioritising the health and safety of our colleagues and our customers. This response was possible due to the efforts of our colleagues in our hotels, restaurants and support centre, who continue to work tirelessly to maintain our very high operating standards, customer service and health and safety. I am extremely proud of, and grateful for,  their incredible hard work and commitment in this most difficult year.

Our ability to navigate through this period, with the advantages of our unique operating model, the strength of the Premier Inn brand, and our market-leading direct distribution model, has enabled us to continue to deliver strong market share gains in the UK. Our exposure to the faster recovering budget sector, our resilient customer mix, and the enhanced structural opportunities that the COVID crisis has created, positions us well to continue this outperformance.

The vaccination programme in the UK means we can look forward to the planned relaxation of Government restrictions as we move into Summer, with the first major milestone being the return of leisure guests to our hotels, and the full reopening of restaurants from 17 May. We expect a significant bounce in leisure demand in our tourist locations during the summer, followed by a gradual recovery in business and event-driven leisure demand.

We hold a uniquely advantaged position in the UK market as the largest operator with the strongest brand, and we will continue to invest in our estate to enhance our customer proposition. Our investment in marketing includes the first major above-the-line Premier Inn marketing campaign for three years, branded 'Rest Easy". In Germany, we remain confident of the opportunity to replicate our model in the UK and have materially grown our estate from six hotels at the start of the year to 30 operational hotels currently, and a total open and committed pipeline of 72 hotels, representing a nation-wide footprint with a presence in most major towns and cities.

We continue to take actions to ensure that we exit the crisis as a leaner, stronger and more resilient business, including commencing the next three-year phase of our efficiency programme that will target £100m of cost savings. Combined with our financial flexibility and strong balance sheet, this gives us the ability and the confidence to invest with discipline and focus on strong long-term returns. We are well-placed to enhance our market leadership position even further in the UK, and accelerate our growth in Germany, capitalising on the enhanced structural growth opportunities that will exist and driving long-term value for all our stakeholders."

Financial highlights

1: Includes £0.5m of revenue relating to the Costa disposal transitional service agreement (FY20: £9.4m)

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

·    The Group's FY21 financial performance reflected the closure of the vast majority of the business in the first half of the financial year, followed by a second half that, after operating throughout August and September with occupancy levels of over 50% in the UK, saw market demand fall significantly from November onwards, as increasingly severe COVID-19 restrictions were implemented

·    As a result, FY21 statutory revenue was down 71.5%, with UK statutory revenue down 71.8%. Germany statutory revenue was behind 2.5% year-on-year, with the material growth in the size of the estate mostly offset by the impact of COVID restrictions

·    The significant decline in revenue resulted in an adjusted loss before tax of £635.1m. Statutory loss before tax of £1,007.4m includes a non-cash impairment charge of £348.0m relating to goodwill in Germany, property, plant and equipment and right-of-use assets, as a result of impairment reviews triggered by the COVID-19 situation and its impact on current and future growth rates. The financial results benefited from c.£270m COVID related Government support schemes, including the UK Job Retention Scheme and from the UK business rates relief

·    The business retains a strong balance sheet and liquidity position, enhanced by the successful £1bn Rights Issue completed in June 2020, and the £550m Green bond issuance in February 2021. At the end of the financial year, the business had access to £1,256.0m of cash and cash equivalents, and an undrawn Revolving Credit Facility of £950.0m

For more information please contact:

Investor queries | Whitbread | investorrelations@whitbread.com 

Media queries | Tulchan Communications, Sunni Chauhan / Jessica Reid | +44 (0) 20 7353 4200

A webcast for investors and analysts will be made available at 8:15am on 27 April 2021 and will be followed by a live Q&A teleconference at 9:15am. Details of both can be found on Whitbread's website (www.whitbread.co.uk/investors).

^†Alternative performance measures

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

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

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

CEO Overview | Well-placed to drive long-term value

React, Protect and Restore: Positioning the business for a successful recovery

The start of the financial year saw the COVID-19 situation develop rapidly, culminating in our restaurants closing to customers on 21 March 2020, closely followed by the implementation of the first UK national Iockdown on 23 March 2020. All our hotels were closed, with the exception of 39 hotels that were kept open to provide accommodation for NHS staff and other key workers during this period.

Given the material impact of the lockdown restrictions on revenues, we focused on immediate actions to reduce cash outflows to help protect our liquidity. These actions included the elimination of all discretionary P&L spend and the postponement of previously announced incremental investments. We placed over 27,000 of our employees on temporary furlough, and reduced capital expenditure to only essential hotel maintenance, core IT spend and the rebranding and refurbishing of the acquired Foremost hotels. Voluntary temporary pay cuts were taken by the Board and senior management team, and dividend payments were suspended. We utilised UK Government support schemes during the year including the business rates holiday and the Job Retention Scheme, and equivalent schemes and grants in Germany, with a total benefit to the Group of around £270m.

As the year progressed, we took further action to ensure our cost base reflected the significantly lower levels of demand, and has greater  flexibility to adjust to demand changes. This included reducing our head office headcount by 13% and implementing changes to our hotel and restaurants labour model.  

Throughout the year we have endeavoured to act responsibly in this time of crisis. The safety of our colleagues and guests is of paramount importance, and during the first UK lockdown, when we operated 39 hotels for key workers, we implemented rigorous hygiene protocols to minimise the risk of COVID transmission. These measures included social distancing signage and protective screens, use of PPE, and enhanced cleaning standards. Learnings from operating in this environment enabled us to implement our estate-wide 'CleanProtect' and 'Generous Serving of Safety" programmes upon reopening our hotels and restaurants at the start of July 2020. During the first lockdown we also provided full cash refunds to our customers for all cancelled bookings, and we subsequently launched a new range of booking conditions providing guests with greater flexibility to amend and cancel bookings, which have proved very popular.

Our hotel and restaurant teams have been fundamental in enabling us to navigate this very difficult period, and we are extremely mindful of the fact that this has been an incredibly challenging year for them. Where possible, we have taken action to support our teams and try to make things easier. Examples include paying the additional 20% of salaries on top of the Government furlough credit during the first lockdown and adhering to national minimum wage increases made for our hourly paid staff. We have also launched a wide-ranging employee support programme, keeping mental health and wellbeing front of mind. This programme is centred around a clear wellbeing communication plan, with regular content including case studies, healthy recipes and meditation tips, 24/7 support lines and 'Wellbeing Wednesday' all aimed at continually supporting the mental and physical wellbeing for our employees across the business.

In addition to making rooms available to NHS staff and other key workers, we also supported the community and national effort by passing fleet delivery capacity to supermarkets and donating over 500,000 meals to charities. Our fundraising programme for our charity partner Great Ormand Street Hospital has also continued despite the challenges posed by COVID restrictions, raising almost £900k during the year and taking us very close to our overall £20m fundraising target.

FY21: Growing market share in the UK and accelerating  growth in Germany

Government restrictions have evolved throughout the year, from the initial lockdowns where our businesses were closed, through to the reopening in the summer months and operating under social distancing restrictions, followed by the increasingly severe restrictions that came into place from October onwards, that eventually led to lockdowns in November and again from January in the UK. The fast changing nature of these restrictions, and the regional approach in both the UK and Germany made for an exceptionally challenging operating environment, and it is testament to the hard work and resilience of our teams that we were able to rapidly adapt our operations and customer offerings in response to these changes.  

Following the UK Government advice that hospitality venues could reopen from 4 July 2020, we were able to reopen our UK hotel and restaurant estate quickly and safely in July and into August. Our business model enables revenue to contribute to fixed costs at very low levels of occupancy, meaning we were in a good position to open up the majority of our estate, and by the end of August, 98% of our UK hotels were open, achieving 51% occupancy in August, along with the majority of our restaurants.

Occupancy levels recovered to above 50% in September and October, driven by relatively strong leisure demand in tourist locations and trades business demand recovering from a very low base. The implementation of a national lockdown in England in November, tiered restrictions in December, and the subsequent tougher UK-wide lockdown that followed from Christmas to beyond the end of the financial year, saw occupancy levels reduce to 23% in January and 29% in February, in what are traditionally lower occupancy months. Throughout the period from August onwards, Premier Inn has outperformed the Midscale and Economy market each month by at least 4.8pp¹. We have seen relatively strong levels of trades business demand, and high levels of leisure demand in tourist locations when leisure travel has been permitted.

The Government restrictions have had a greater impact on the operations of our restaurants, with the national lockdowns forcing temporary closures at the start of the financial year, and restrictions in the highest tiers from November onwards again resulting in temporary closures. Trading in the period from July 2020 to December 2020, when on average 70% of our restaurants were open, was helped by the national "Eat Out to Help Out Scheme" in August, however demand remained subdued and capacity reduced in each restaurant due to social distancing restrictions. For the full year, total food and beverage sales were down 74.4%, which included periods of full closure across the three national lockdowns. All of our restaurants were closed under the third national UK lockdown that commenced in January 2021. Subsequently 114 restaurants have reopened in April 2021 to serve customers primarily outdoors, with the full restaurant estate expected to reopen in-line with Government guidance from 17 May 2021.

In Germany, the pattern of COVID restrictions largely mirrored the UK, albeit in a more complex framework of national and federal restrictions. Customer demand and occupancy levels were higher in tourist locations, and lower in locations with a greater business skew. Whilst the COVID-19 restrictions have had a material impact on total sales, it has also provided an opportunity to accelerate the expansion of our estate in Germany. We entered the financial year with just six operational hotels, and ended it with 30 operational hotels, with a presence in most major towns and cities, with our total and committed pipeline now standing at 72 hotels. During the first lockdown at the start of the financial year, we were able to refurbish and rebrand 13 of the acquired Foremost hotels, reopening them in May 2020. In December, the Group also completed the acquisition of 13 hotels from the Centro Group, of which six were operational, and seven pipeline, demonstrating the enhanced structural opportunities that exist for Whitbread in Germany. We have subsequently taken advantage of the ongoing restrictions and resultant subdued demand, to temporarily close the six acquired operational hotels, and accelerate their refurbishment and rebranding to Premier Inn. Total sales in Germany were  2.5% behind year-on-year for the full estate, with the material growth in the size of the estate offset by the impact of COVID restrictions. The German market is particularly challenging at this point in time with occupancy levels below 15%, with tight restrictions re-introduced this month and the slow roll-out of the vaccine and the associated political upheaval giving greater uncertainty on the pace of recovery. However, the scale of our growing network, combined with the accelerated refurbishment and rebranding programmes, and the pressure on the independent sector, provide a strong platform for growth in Germany as restrictions begin to be lifted and the market recovers.

Overall, full year statutory revenues were down 71.5% year-on-year reflecting the impact of COVID restrictions on the business throughout the year. The significant decline in revenue resulted in an adjusted loss before tax of £635.1m. Statutory loss before tax of £1,007.4m includes a non-cash impairment charge of £348.0m relating to goodwill on German acquisitions, property, plant and equipment and right-of-use assets, as a result of the ongoing COVID-19 situation and its impact on current and future growth rates. The quantum of the impairment charge is primarily driven by the reduction in anticipated cashflows in the UK and Germany as the market recovers, and market volatility resulting in an increase in the discount rate that is based on the Weighted Average Cost of Capital (WACC) used in the impairment calculation.

The cash outflow for the year, before shareholder receipts and debt issuance and repayments was £704.6m, driven by the significant decline in revenue, despite the extensive mitigating actions taken by the business. Our balance sheet and liquidity position, however, remains strong, enhanced by the successful £1bn Rights Issue completed in June 2020, and the £550m Green Bond issuance in February 2021. At the end of the financial year, the business had access to £1,256.0m cash and cash equivalents and an undrawn Revolving Credit Facility of £950.0m. Part of the Green Bond proceeds provided liquidity to repay £200m of private placement debt early in March 2021. Our balance sheet, supported by our freehold properties, gives Whitbread financial flexibility and is a real competitive advantage, enabling us to carefully invest in our strategy in a market where others will be constrained.

Investing to win in FY22

92% of our hotels in the UK are currently open to guests staying for essential business travel, while all of our restaurants, with the exception of some of our estate in Scotland, remain closed for indoor dining. The expectation is that overnight stays for leisure travel will be permitted from 17 May 2021, along with the full reopening of restaurants.

We anticipate strong leisure demand during the summer in coastal and other tourist locations, which represent around 15% of our hotel estate. Whilst this "leisure bounce" is expected to be significant, a full recovery in leisure demand will require the return of unrestricted events, including sporting events, weddings, and all other leisure activities. Trades business demand has remained resilient throughout the crisis, albeit still some way below pre COVID levels, and we expect to see a gradual recovery. Our expectation is that office-based business demand doesn't start to recover until offices reopen in earnest, while domestic demand, both leisure and business, is expected to recover significantly quicker than international demand.

We will continue to invest in our commercial plan in the UK to ensure that we harness the pent-up demand for domestic leisure travel during the summer, alongside the slower ongoing recovery of business demand. At the forefront of our response, is a major integrated marketing campaign, 'Rest Easy' featuring the voice of Sir Lenny Henry, who has become synonymous with the Premier Inn Brand. This campaign launched on 16 April, and will help deliver front-of-mind consideration with existing and new customers, through a digital marketing campaign that utilises the depth of our direct customer database. A new premierinn.co.uk website is driving higher conversion rates, while an improved 'business booker' proposition and increased use of Travel Management Companies will help drive business demand and broaden our reach to business customers who were previously unable to book with Premier Inn. We will also continue to invest in our room refurbishments, ensuring that our hotel estate remains well-invested, as well as recommencing the roll-out of 'Premier Plus" rooms, after the programme was paused in FY21.

We continue to take actions to ensure that we exit the crisis as a leaner, stronger and more resilient business, and the next phase of our long-standing efficiency programme will target an additional £100m of cost savings by FY24. 

In Germany, we are executing our strategy to drive long-term value through the acceleration of our expansion, and investment to build a platform of scale, both organically and through the acquisition of assets at good prices. This, combined with the ongoing impact of the COVID-19 restrictions, which we expect to delay the sales maturity of our operating hotels by 12-18 months, will suppress short-term performance, meaning that losses will increase in FY22 and continue into FY23. Currently 18 of our 30 operational hotels are open to essential business travel. The actions we have taken to grow the estate in Germany since the start of the pandemic mean we are very well-placed when restrictions are relaxed and market demand recovers.

FY22 Guidance

Driving long-term value

A clear strategy to create value

The impact of COVID-19 will be material on our sector, especially on the large independent sector and on new branded supply growth. Despite this, Whitbread's long-term strategy for value creation in the UK and internationally remains unchanged, with an operating model that is structurally and competitively advantaged.

Whitbread's strategic priorities remain consistent with its proven plan to create sustainable shareholder value over the long-term. Whitbread expects to achieve long-term growth in earnings and dividends, combined with strong return on capital through disciplined execution in three key areas:

·      Grow market share in the UK: by continuing to grow and innovate Premier Inn, by leveraging the competitive advantages of our operating model and capitalising on the enhanced structural opportunities that are expected to exist post COVID-19

·      Grow at scale in Germany: by replicating Premier Inn's UK success story 

·      Enhance the capabilities to support long-term growth: by ensuring we have financial flexibility, a cost-base that appropriately reflects demand levels, and acting responsibly through our Force for Good programme

Whitbread's vertically integrated model, which combines the ownership of property, hotel operations, brand, and inventory distribution has enabled Premier Inn to grow at a significantly faster pace than competitors, deliver a consistently superior customer experience and generate a strong return on capital for shareholders over the last 15 years. The business believes this operating model is the optimal approach to access the growth opportunity in the budget hotel sector.

1)   Grow market share in the UK: Premier Inn is best-placed to capitalise on the recovery opportunity and reinforce its market-leading position

Compelling structural growth opportunities

The UK hotel market is characterised by long-term migration from independent to budget branded hotels. Between 2010 and 2019² independent hotels' market share fell 9 percentage points in the UK, while Premier Inn's market share of total rooms in the market grew from 6% to 11%. Despite this decline, the independent sector still represents 48% of the UK market. The COVID crisis is expected to accelerate the decline in independents' share of the market, as demand significantly weakens and structural cost pressures persist. We are already seeing clear signs of distress in both the independent sector and the budget branded sector, and we expect to see competitors begin to exit the market as the impact of the Government's financial support schemes begin to lessen. Premier Inn is well-placed to capitalise on the expected contraction in competitor supply and to take market share.

Budget branded sector is structurally advantaged

The budget branded hotel sector is the highest growth segment in the hotel market and has proved more resilient in previous downturns. Budget branded demand (total rooms booked) has grown faster than the rest of the sector in every year from 2009 to 2019² including material outperformance between 2009 and 2011. The midscale and economy segment is also outperforming in the current COVID-19 crisis, with total sales change around 13.7pp³  ahead of the rest of the market from the start of August 2020 to the end of February 2021.

Broad customer reach

Premier Inn's UK customer base is very broad with a roughly even split of business and leisure customers. Around half of our business customers are manual professions i.e. those workers who need to be physically present to perform their jobs, while our office-based guests tend to be travelling for business-to-business reasons. In a post COVID-19 world, it is highly likely that the need for these guests to travel will remain. Premier Inn also under indexes on Group business bookings (e.g. conferences) and is therefore less exposed to those areas of business travel that may see a structural shift to virtual meetings.

Our leisure guests travel for a very wide range of reasons, from those that are event-driven (e.g. weddings, sporting events, theatre breaks) to weekends away with friends, visiting friends and family, to short weekend breaks with the family and through to those taking longer holidays in our tourist destinations. The strong leisure demand evidenced during the summer of 2020 demonstrates that people's propensity to travel for domestic leisure, when allowed, remains high.

Our geographic spread, with over 80% of our rooms sold in the UK regions, combined with our domestic focus (90% of guests are based in the UK) means that we are exposed to the areas that are, and will, recover quickest.

Strong brand

Premier Inn is consistently rated as the strongest hotel brand in the UK. Unlike the majority of other large-scale hotel operators, who operate franchise models, ownership of the Premier Inn brand enables the provision of a consistently high-quality customer offering across the entire Premier Inn hotel network, which drives market-leading brand and customer scores. In the most recent YouGov hotel brand index survey⁴, Premier Inn was voted number one for customer satisfaction, impression, value and likelihood-to-recommend. The strength of the brand makes Premier Inn the first choice for more travellers.

Direct distribution

Premier Inn's direct digital distribution model, with only 1% of bookings delivered through third party online travel agents (OTAs),  is industry-leading and ensures that Premier Inn's gross RevPAR is similar to net RevPAR achieved after cost of sales, unlike independents or most other brands, which pay high commission rates to third parties. Direct distribution also provides complete ownership of the customer relationship driving significantly lower acquisition and retention costs.

Best-in-class operating model

Premier Inn's unique operating model provides a clear competitive advantage, enabling the delivery of a winning customer proposition that will have a strong appeal to customers in both the current and post pandemic environments. The key components of the model that drive our competitive advantage, combined with our leading brand and direct distribution, are:

Scale advantage: Our vertically integrated model provides increased control of network planning and property development aspects of our hotel operations. This means we can efficiently access locations where we see opportunities to expand, which has enabled Premier Inn to almost double its number of rooms in the UK since 2010 to become the UK's largest hotel network. We therefore have more hotels in locations where our customers want to stay, and we are able to drive economies of scale to keep unit costs low and by rationalising management overheads.

Operational control: Ownership of all aspects of our hotel operations ensures greater control over the customer experience, resulting in a high quality offering delivered on a relentlessly consistent basis throughout the estate. The offering is also continually evolving through innovative new products such as hub and Premier Plus. The operating model delivers best-in-class operational performance, as evidenced by high staff retention levels and the very high customer satisfaction scores the business regularly achieves.

All of our hotels have a bar and restaurant, either within the hotel or next door. Our restaurant brands include Beefeater, Brewers Fayre, Whitbread Inns and Bar+Block, while our in-hotel restaurants are branded Thyme. Our restaurant offering, including the promise of a good value cooked breakfast, form a core part of our overall customer proposition, helping drive higher RevPAR in our hotels.

Property flexibility: A willingness to be flexible with respect to freehold or leasehold acquisitions ensures new sites are in the best locations and have the optimal size and format. Ownership of around 60% of the hotel estate gives Premier Inn control over the initial development of the hotel, and subsequently how it is maintained, extended, or re-developed. Further opportunities remain to optimise the network by individual asset, as well as more broadly through catchment optimisation creating a more optimal portfolio of assets. Whitbread's asset-backed balance sheet also supports a strong financial covenant, which means that in competitive bid situations for new leasehold developments, Premier Inn is often the preferred tenant and can secure more favourable lease and rental terms. Our freehold ownership reduces earnings volatility in the current downturn and provides Whitbread with a flexible source of funding in the event of further cash requirements  for investments or to further protect our liquidity.

These components combine to deliver a winning customer proposition, providing the customer with more choice, value for money, outstanding product quality, excellent customer service and consistently high hygiene standards. Going forward, this offering positions us very well to take market share, as customers are likely to seek value, quality, and the familiarity of their most trusted brands.

2)   Grow at scale in Germany: A compelling opportunity to replicate Premier Inn's UK success

Premier Inn's aim is to be the number one budget hotel operator in Germany, by leveraging the strengths and capabilities of the UK business. We believe all of the six UK success factors detailed previously are either already present in Germany, or, in the case of "strong brand" and "direct distribution model" there is a compelling opportunity for Premier Inn to develop those characteristics as the business grows in scale. Our current open and committed pipeline of 13,300 rooms in Germany equates to around 1% share of the market in 2019 (compared to c.11% in the UK). We continue to grow our German pipeline and believe we have a long-term line of sight to over  60,000 rooms, which would equate to around 6% market share, still only around half of that achieved in the UK. This growth will be achieved through both organic and inorganic investment.

The German operating model will replicate that used so successfully in the UK, built on operational control and a flexible approach to property, driving a winning customer proposition that appeals to both business and leisure customers. Direct distribution is already well over 90% in our German business, and, when open, our organic hotels have received very high customer satisfaction scores.

The German hotel market has many attractive characteristics that play to the strengths of our business model. The market is a third larger than the UK and even more fragmented, with almost three-quarters of the market still consisting of small independent operators, which are experiencing a structural decline to the benefit of branded hotels. Despite this, the branded budget hotel sector still only represented 10% of the total market in 2019, compared to 29% in the UK, as franchise operators have historically struggled to expand with limited property financing options available. Consequently, Premier Inn's vertically integrated model and willingness to invest capital in expansion provides a clear advantage in the budget market, supported by replicating the leading quality and value credentials from the UK.

As in the UK, the impact of COVID-19 is highly likely to accelerate the decline of independents and other budget branded operators, presenting greater opportunities to invest in or acquire assets that will deliver strong returns in the long-term.  The acquisition of 13 hotels from the Centro Group in December 2020 is evidence of the stress in the market, with the total investment for the deal amounting to c.£40m, mainly driven by the investment required to refurbish and rebrand the hotels to Premier Inn. The hotels were selected according to our Premier Inn property criteria and are a good fit with the existing estate, with all occupying prominent locations across Tier 1 and Tier 2 cities and towns.

Whilst COVID-19 restrictions have significantly restricted our ability to operate our hotels throughout the year, we have used this period to materially accelerate the growth of our hotel estate in Germany. During the year we grew our operational estate from six hotels to 30 hotels by the end of the year. The total open and committed pipeline in Germany now stands at 13,300 rooms across 72 hotels, including the acquisition of 19 hotels from the Foremost Group and 13 hotels from the Centro Group.

We also took advantage of these restrictions and the resultant subdued demand to refurbish and rebrand our acquired hotels, a process that was completed in May for the hotels acquired from the Foremost Group, and commenced in January for those hotels acquired from the Centro Group.

Our significantly enlarged estate now provides us with a very strong platform from which to grow our brand presence when the German hotel market reopens and demand returns. We have a presence in most major towns and cities, meaning the Premier Inn brand can be seen across Germany. As the estate continues to grow, we can turn our focus to brand-building, with nationwide marketing campaigns and new B2B corporate relationships supplementing effective localised brand campaigns. The quality of the hotel and room offering, which is driving very high customer scores, is also a key component in driving brand awareness.

To date we have committed close to £870m of capital to the German market. Given the scale and characteristics of this market, and despite the significant impact COVID-19 has had on the sector, we remain focused on continuing our expansion in Germany and delivering on our ambition to be the number one budget hotel operator in that market.

3)   Enhancing the capabilities to support long-term growth:

Lean and agile cost model

Whitbread has a long track record of delivering material cost efficiencies, with £235m of savings delivered between FY17 and FY20. Since the start of the pandemic, Whitbread's approach to generating efficiencies adapted in response to the low demand environment. Our initial priority was to secure cash savings through the cancellation or deferral of non-discretionary spend to help improve the liquidity position of the business. We also reduced our head office headcount by c13% during the year. As we entered the "Restore" phase of our strategy, our focus shifted to ensure that the business model has the flexibility to respond to changes in demand, and that our overall cost-base reflects the current demand environment. As part of this plan, we reduced headcount in our hotels and restaurants, achieved through a combination of voluntary redundancies and not replacing leavers, combined with reductions in minimum contracted hours.

We also continue to drive efficiencies through developing our international sourcing capability, investing in our  technology platforms to enable both marketing and labour scheduling effectiveness, and optimising the UK estate. These actions will underpin our evolving efficiency programme, the next phase of which is expected to deliver around £100m of cost efficiencies over the next three years.

Around 9% of Premier Inn's rooms are in hotels smaller than 60 rooms. The opportunity remains for hotel catchment areas to be optimised, by managing existing demand in certain locations through a smaller number of extended or new, larger hotels, driving a more cost-efficient estate. Three smaller hotels were disposed in FY21, however the opportunity for a larger programme of optimisation will exist when the post-COVID supply and demand environment is clearer.

Financial flexibility

Whitbread's balance sheet and liquidity position was further enhanced by the £1bn Rights Issue successfully completed in June 2020, and the £550m Green Bond issuance in February 2021. Our Revolving Credit Facility was extended until September 2023 with covenant waivers in place until March 2023. Covenant waivers were also agreed with our private placement lenders and the Whitbread Pension Fund meaning that the existing covenants are next tested in March 2022 and replaced by temporary covenants until that date. These actions, together with the backing of Whitbread's freehold properties, give us the financial flexibility to protect our liquidity and pursue our strategy of both organic and inorganic growth when the time is right.

This financial flexibility also enables the Group to continue to invest in the Premier Inn proposition when others will be constrained. We continue to invest in our IT platforms, helping further enhance our digital capability, including a new CRM platform that will be introduced in the coming years. Product innovation has been a key part of Premier Inn's success in recent years, and we will be recommencing the rollout of our Premier Plus rooms in FY22, after a temporary pause in FY21. These upgraded rooms are targeted especially at business customers and provide an even more comfortable stay at great value for money. The initial roll out of 500 rooms in FY20 was successful, delivering good returns in that year, and a total of over 2,000 Premier Plus rooms are expected by the end of this year.

A Force for Good

Whitbread's sustainability programme, Force for Good, ensures that being a responsible business is integrated throughout the way Whitbread operates and is crucial to our long-term success. It is an ambitious programme, integrated business-wide with the overarching objective to enable everyone to live and work well. This has been an incredibly difficult year for everyone, and keeping our Force for Good commitments and ambition central to our response to the global pandemic has been very important to us.

During the first UK lockdown at the start of the financial year, we kept 39 hotels open to provide essential support to front-line workers, we topped up the pay for all of our team members who were furloughed and we're really proud of how our teams have responded to the challenges we all faced, both individually and as an organisation.

Despite the challenges of COVID-19, we did not stand still on our targets and objectives, and in fact, took the opportunity to stretch some of them and reinforce others. In 2018, Whitbread set a science-based target to reduce carbon emissions intensity by 50% by 2025 and 84% by 2040. We have already achieved a reduction of 39.8%, but this year, we wanted to go one step further and have since updated our carbon target to aim for net-zero carbon emissions by 2040. We know this is a huge task, but it is one that is vitally important for our business and the battle against global climate change. Our carbon strategy was externally recognised this year as we improved our Carbon Disclosure Project (CDP) Climate Change score from a B to an A-, which was a great result putting us in the leadership category, granted to those seen to be implementing best practices on sustainability.

We also took this year to focus on driving forward our target to cut food waste in half by 2030, having set up a partnership to ensure any surplus food at our distribution centres does not go to waste. This has enabled us to donate over half a million meals to charity partners in 2020 to support those in need. Our target to eliminate unnecessary single use plastics by 2025 is not going to be easy, as many of our supplies are delivered to us in plastic packaging, but we have begun this journey and will be working closely with all of our suppliers to achieve this target. We also continued to fundraise for Great Ormond Street Hospital despite site closures, hitting a total of £18million since our partnership began in 2012.

Diversity and Inclusion was another area of focus for our strategy this year and we will publish eight commitments to drive meaningful progress in this space in the FY21 Annual Report and Accounts. We are also committed to respecting the human rights of workers across our entire value chain and throughout the year have continued to work with our suppliers to measure, manage and mitigate the most material risks they face. We have also begun work to report against the Taskforce for Climate-related Financial Disclosures (TCFD) which we look forward to publishing next year.

We were proud to publish our first ESG report this year and in February we issued £550m in Green Bonds, a testament to industry-leading work we are already doing to be a more sustainable business, and a demonstration of how our sustainability strategy is integrated across our wider business functions. Our Green Bonds will enable us to use our scale and size to make an increasingly positive difference, whilst ensuring our available debt remains broadly the same. The proceeds from the bonds will help us build our hotels to high environmental standards and continue to ensure our supply chains are sustainable and ethical.

Notes:

1: STR data, full inventory basis, dates 31 July 2020 to 25 February 2021, M&E market excludes Premier Inn

2 The impact of COVID-19 means that 2020 is not a representative year, and is therefore excluded from the date range

3: STR data, M&E includes Premier Inn, 'Rest of market' is total market excluding M&E

4: YouGov BrandIndex. Scores measured as at 3 March 2020 based on a nationally representative 12-week moving average

Business Review | FY21 performance reflects the closure of our business for a large part of the year

Premier Inn UK¹

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

2: Includes government support - see notes 4 and 8 of the accompanying financial statements for further details

Premier Inn UK statutory revenue was down 71.8% year-on-year reflecting the significant COVID-19 restrictions that were in place for the majority of the year. Total accommodation sales were down 70.4% and total food and beverage sales were down 74.4%.

Our hotel and restaurants were temporarily closed, in-line with Government guidance, from the end of March until the start of July, with the exception of 39 hotels which were kept open to provide accommodation for NHS staff and other key workers. During this first lockdown period, total revenue was down 99%. From 4 July, hotels in the UK were permitted to accept non-key worker guests, and restaurants were allowed to reopen. Our operating model, whereby revenues contribute to fixed costs at low levels of occupancy, as well as our learnings from the 39 hotels kept open during the first lockdown, ensured we were able to reopen quickly and ahead of the market.

Post reopening, occupancy levels steadily grew through the summer, reaching 51% in August and 58% in September. Demand was strong in seaside and tourist areas, with occupancy levels of almost 80% during August and September in those locations. During this period, restaurant sales were boosted by the Government's Eat Out to Help Out Scheme which contributed towards the price of meals on every Monday, Tuesday and Wednesday throughout August. During October, the UK Government began to reimpose restrictions, with the initial introduction of a tiered system followed by a second lockdown in England from 5 November to 2 December that prohibited all leisure and non-essential travel. The impact of these restrictions saw occupancy levels fall from 52% in October to 35% in November. December saw increased tiered restrictions followed by a third UK lockdown that commenced at the beginning of January, resulting in our hotels again only being permitted to accommodate essential business stays, and all our restaurants being closed. Despite these restrictions, resilient trades business demand resulted in around 80% of our hotel estate remaining open, with occupancy levels of 23% in January and 29% in February, in what are traditionally lower occupancy months.

Throughout the period from August 2020 to February 2021, Premier Inn total UK accommodation sales growth was consistently ahead of the Midscale and Economy market, driving very strong market share gains, and demonstrating the strengths of our brand, direct distribution model and our winning customer proposition. Customer scores have also remained very strong during the year, despite the operational disruption.

UK outperformance vs M&E market

1: STR data, full inventory basis, 31 July 2020 to 25 February 2021, M&E excludes Premier Inn

2: STR data, revenue share of total UK market, 31 July 2020 to 25 February 2021

Other income increased to £142.5m from £13.6m, reflecting the £138.3m benefit from the UK Job Retention Scheme. Operating costs reduced by 32.2% to £861.7m, in-line with guidance, and driven by a  reduction in revenue related variable costs (primarily food and beverage costs of sales), the £117.8m benefit of the Government's business rates holiday, and the impact of cost initiatives including the postponement and cancellation of all non-essential costs. IFRS 16 depreciation was £109.9m and IFRS 16 interest was £117.1m with cash rent paid of £173.0m including the impact of a c.£25m deferral of 50% of the December quarterly rent.

During the year, five new hotels were opened and eight hotels permanently closed, of which three were sold, bringing the estate total to 817. The committed pipeline of 12,256 rooms underpins our opportunity to take market share in the UK in the medium to long-term as competitor supply contracts.

Adjusted loss before tax in the UK was £532.8m reflecting the significant decline in statutory revenues as a result of the COVID-19 restrictions that have been in place during the financial year.

Premier Inn Germany

1: Includes Government support - see notes 4 and 8 of the accompanying financial statements for further details

Total statutory revenue in Germany was down 2.5%, with the impact of COVID-restrictions offsetting the material growth in the size of the hotel estate. Germany has been subject to similar restrictions as the UK, albeit in a more complex framework of national and federal restrictions, with limited business travel and no leisure travel permitted for large parts of the year.  

We entered FY21 with six operational hotels, that were trading well, ahead of the enforced lockdown at the end of March. During the lockdown period, we took the opportunity to refurbish and rebrand 13 of the Foremost hotels that were acquired in February 2020, meaning that when permitted by the German Government in May, we were able to reopen a total of 19 hotels. Following this reopening, performance in Germany was stronger in tourist-led locations such as Hamburg and Freiburg and weaker in those locations with a traditionally higher business mix. The increased size of the open estate helped drive total sales growth in September of 58%. However, as in the UK, increasingly onerous restrictions were implemented from October and through to the end of the financial year, resulting in very low occupancy levels across the market, and occupancy in Premier Inn reducing to 9.9% in Q4. In December we completed the acquisition of 13 hotels from the Centro Group, and have subsequently taken advantage of the low demand environment to accelerate their refurbishment and rebranding to Premier Inn.

Operating costs increased by £20.0m to £43.9m due to the investment in the business and the increased estate size, and IFRS 16 depreciation costs increased by £15.6m to £16.4m, reflecting the fact that all new opened properties are leasehold. Combined with other depreciation and amortisation costs of £5.4m, and IFRS 16 interest costs of £6.1m, the adjusted loss before tax for the period increased by £31.3m to £44.9m. Cash rent paid for the year was £21.9m.

We materially accelerated our German hotel pipeline during the year, and the total open and committed estate now stands at 72 hotels, of which 30 are operational, and over 13,000 rooms. Going forward we will continue to assess both organic and inorganic opportunities to exploit the enhanced structural opportunities that exist in Germany.

Central and other costs

Central operating costs of £26.2m were £0.9m lower than last year driven by cost savings delivered in response to the COVID-19 situation. Net finance costs increased by 90.9% to £25.2m, primarily due to the prior year charge being net of interest received on the proceeds from the Costa disposal that was held as cash on deposit for part of the period.

Financial review

·    The Group's FY21 financial performance reflected the closure of the vast majority of the business in the first half of the financial year, followed by a second half that, after operating throughout August and September with occupancy levels of over 50% in the UK, saw market demand fall significantly from November onwards, as increasingly severe COVID-19 Government restrictions were implemented in both the UK and Germany

·    Consequently, total statutory revenue was 71.5% behind the prior year

·    The significant decline in revenue resulted in an adjusted loss before tax of £635.1m. Statutory loss before tax of £1,007.4m includes a non-cash impairment charge of £348.0m relating to goodwill on acquisitions in Germany, property, plant and equipment and right-of-use assets, as a result of impairment reviews triggered by the COVID-19 situation and its impact on current and future growth rates. The financial results benefited from c.£270m COVID related Government support schemes, including the UK Job Retention Scheme and from the UK business rates relief

·    Operating cash outflow was £488.5m

·    The business retains a strong balance sheet and liquidity position, enhanced by the successful £1bn Rights Issue completed in June 2020, and the £550m issuance of Green Bonds in February 2021. At the end of the year, the business had access to £1,256.0m cash and cash equivalents, and to an undrawn Revolving Credit Facility of £950.0m. Net debt of £46.5m compared to net debt of £322.9m at the end of the previous year. The Green Bond proceeds also provided liquidity to repay £200m of private placement debt early in March 2021.

Financial highlights

Statutory Revenue

Statutory revenues were down 71.5% year-on-year reflecting the impact on the business of the COVID-19 restrictions that resulted in the closure of our hotels and restaurants for significant periods during the year, and when reopened, resulted in significantly reduced market demand.

Adjusted EBITDAR

Other income of £154.0m includes £138.3m of benefit recognised in respect of the UK Job Retention scheme. Operating costs of £937.8m were 29.1% lower than last year driven by the reduction in revenue-related variable costs, primarily food and beverage costs of sale, combined with the postponement or deferral of all non-essential spend, and the £117.8m benefit of the UK Government's business rates holiday and other various COVID related government grants in the UK and Germany. As a result of the impact of the COVID-19 restrictions on our business throughout the year, Adjusted EBITDAR was a loss of £194.9m.

Adjusted operating loss                                           

The leasehold estate grew by 4 sites in the UK and by 21 sites in Germany. This resulted in a £22.3m or 21.4% increase in IFRS 16 depreciation charges to £126.3m. Other depreciation and amortisation charges increased by £9.1m to £173.9m, driven by new hotel openings. The adjusted operating loss of £486.7m compared to a profit of £486.8m in the prior year.

Net finance costs

Net finance costs (excluding IFRS 16) were £25.2m (FY20: £13.2m). This was £12.0m higher than the prior year due to the prior year charge being net of interest received on the cash balance held from the proceeds from the sale of the Costa business. IFRS 16 lease interest of £123.2m was £7.9m above last year primarily driven by the opening of 21 leasehold sites in Germany.

Adjusting items

Total adjusting items before tax were £372.3m, including a non-cash charge, primarily as a result of COVID-19, of £348.0m in respect of impairments of goodwill on German acquisitions, property, plant & equipment and right-of-use assets. In the Group's FY20 full year annual report and accounts, the Group stated in note 34 (Events after the balance sheet date) that the assumptions used at the year end were no longer appropriate and that the impacts of COVID-19 would result in further indicators of impairment across the Whitbread business.

Subsequently, and in respect of the ongoing COVID-19 situation, impairment reviews were conducted as part of the H1 FY21 and full year FY21 reporting process, resulting in charges of £238.8m relating to goodwill arising upon acquisition of the Foremost Hospitality Hiex GmbH and £109.2m relating to property, plant and equipment, right-of-use assets and other intangibles. The quantum of the impairment charges is primarily driven by:

·      A reduction in anticipated cashflows in the UK and Germany, as the market recovers

·      An increase in the discount rate that is based on the Weighted Average Cost of Capital (WACC) of a typical market participant. The discount rate has increased since the end of FY20, reflecting market volatility in the spot risk-free rate and equity risk premium inputs used in the Group's WACC calculation

·      Sites where the Group has decided not to proceed with the project

Further adjusting item charges driven by the COVID-19 pandemic include an impairment review on our UK joint venture ("Pure") resulting in a non-cash charge of £8.2m, the completion of a colleague restructure programme  incurring £12.1m of costs to achieve, and the decision not to proceed with a call option on a proposed acquisition in Germany, resulting in a charge of £12.4m.

Other adjusting items include a £21.2m charge incurred in respect of the early repayment of the 2017 US private placement notes following the successful issuance of  Green Bonds in February 2021. A credit of £16.7m was recognised in respect of the reimbursement of cladding remedial costs from property developers and the release of cladding remedial costs that are no longer expected to be incurred.

Taxation

A tax credit of £100.9m was recognised in the year primarily due to the losses incurred. The effective tax rate was negative 10.0% for the year compared to the statutory rate of 19.0%, with the difference primarily driven by £241m gross impairment charges not being tax deductible, the impact of the previously announced UK corporate tax rate change from 19% to 17% being annulled, Germany losses not being recognised for tax purposes, and a prior year adjustment relating to the true up of deferred tax on historic items. The adjusted tax credit for the year was £94.1m (FY20: £69.1m charge) representing an adjusted effective tax rate of negative 14.8 % (FY20: 19.3%). Further detail can be found in note 9.

Statutory loss after tax

Statutory loss for the year was £906.5m, compared to a profit of £217.9m last year, due to the significant decline in revenue driven by the COVID-19 crisis, and impairment charges recognised as a result of COVID-19, partly offset by the tax credit recorded in the year.

Earnings per share

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

Adjusted basic loss per share of 287.6p and statutory basic loss per share of 481.9p reflect the adjusted and statutory losses reported in the period.  

Earnings per share figures for the comparative period have been restated following the Rights Issue completed in June, in accordance with IAS 33 Earnings per Share. Full details are included in note 10 of the accompanying financial statements.

Dividend

Whitbread's dividend policy is to grow the dividend broadly in-line with earnings across the cycle. However, dividends will not be paid during the current Revolving Credit Facility covenant waiver period, which lasts until March 2023, as a condition agreed with Whitbread's lenders and pension trustees, or until the original covenant tests are passed. The Board hopes to return to paying dividends again following the normalisation of the Group's financial position and performance.

Cashflow

1: FY21 includes £1.4m cash receipt on Fox acquisition, £1.3m cash receipt on aborted acquisition and £3.8m payment of deferred and contingent consideration

Total net cash inflow for the year was an increase of £748.1m after accounting for the £981.0m net proceeds of the Rights Issue that completed in June 2020, the £546.8m Green Bonds net proceeds in February 2021, and the repayment of £75.1m of US private placement notes in August 2020. Net cash outflow before shareholder receipts and debt issuance and repayments for the period was £704.6m, reflecting the signficant decline in revenue as a result of COVID-19 restrictions and subsequant subdued market demand, and the continued investment in the business.

The £99.8m working capital outflow was primarily due to a £71.2m net movement on customer deposits reflecting the refunding of deposits at the start of the lockdown period, partially offset by the subsequent receipt of customer deposits for bookings received by the end the financial year. £14.0m of the movement was driven by outstanding amounts due from the Government in respect of the Job Retention Scheme, and £15.5m representing the reduction in the VAT creditor driven by the reduced revenue levels and reduced VAT rate.

Operating cash outflow was £488.5m, in-line with previous guidance. During FY21, the Group's operational cashflow breakeven, after Government support, was at levels of around 55% occupancy and a 20% year-on-year fall in price. These levels were surpassed, and the Group had positive operational cashflow in the period from late August 2020 through to October 2020.

A corporation tax rebate relating to FY20, combined with the anticipated lower profits in FY21 driving a reduction in FY21 corporation tax payments on accounts, resulted in a net tax cash inflow of £19.1m.

Maintenance capital expenditure of £69.9m and expansionary capital expenditure of £159.6m was in-line with guidance, with these reduced levels reflecting the decision to postpone or defer all non-essential spend. IFRS 16 interest and lease repayments increased by £14.8m to £202.2m driven by the higher number of leasehold properties entering the estate, particularly in Germany. Rent cash payments were £194.9m and reflect the impact of the deferral of c.£25m rent payments from the December quarter payment in the UK.

The £28.4m other inflow is driven by £14.0m timing of insurance proceeds, the reversal of non-cash charges of £12.4m representing the write off of a deposit paid in relation to an acquisition, £12.7m share-based payments including the employee sharesave scheme and long term incentive plan (LTIP) and £7.7m share of loss from joint ventures, offset by payments against provisions of £24.4m.

Debt funding facilities & liquidity

Whitbread entered the financial year with a strong balance sheet, low leverage and good liquidity. In response to the COVID-19 situation, the Group executed a £1bn Rights Issue in June 2020 to help protect its balance sheet, replace the expected cash outflow whilst Government restrictions were in place, and provide liquidity to invest in the business during the recovery. The Group further enhanced its financial position through a  £550m Green Bond issuance in February 2021, the proceeds of which provide funds to invest in Whitbread's ESG programme, with the cash also providing liquidity to repay the outstanding US Private Placement notes.  

During the year, the Group was confirmed as an eligible issuer under the UK Government's Covid Corporate Financing Facility (CCFF), with an issuer limit of £600.0m. The Group's strong liquidity position meant this facility was not required, and the Group's eligibility has subsequently expired. The business is also backed by a valuable freehold property estate.

The Group announced in May 2020 that an 18-month waiver for debt and interest related covenants had been accepted by lenders for the Revolving Credit Facility and the US private placement debt, meaning that existing covenants would next be tested in March 2022. Subsequent to this, Whitbread reached an agreement with its relationship banks in February 2021 to extend the final maturity date of its Revolving Credit Facility from September 2022 to September 2023, and to extend the covenant waiver period by 12 months, meaning the financial covenants will not now be tested until March 2023, at which point new covenant targets will be introduced, being:

·      March 2023: Net Debt² / EBITDA² < 5x, EBITDA² / Interest² >2.0x

·      August 2023: Net Debt² / EBITDA² < 4.5x EBITDA² / Interest² >2.0x

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

The additional requirements outlined in the original waivers announced on 21 May 2020, including an obligation to retain £400m liquidity headroom, no more than £2bn of net debt and to not declare or pay dividends, will remain for the duration of the extended waiver period to March 2023. However, these additional waiver period requirements can be removed if the Group demonstrates compliance with the original covenant tests, being Net Debt ² / EBITDA² < 3.5x and EBITDA² / Interest² >3.0x.

During the period, £75.1m of US private placement notes that matured in August 2020 were repaid, and the Group announced its intention to repay the 2021 and 2022 notes  (£25m and $93.5m respectively) on their scheduled maturity dates of 6 September 2021 and 22 January 2022. Following the successful issuance of £550.0m Green Bonds in February 2021, the £200m 2027 US private placement notes were repaid early on 26 March 2021 incurring £21.2m make-whole costs.

Following the Rights Issue and the debt financing, at the year end the Group had £1,256.0m of cash on deposit and was undrawn on the £950m Revolving Credit Facility. The Group's strong balance sheet, with access to over £2bn of  liquidity, and the potential to access funding through our freehold estate means the Group has financial flexibility, with good headroom to the temporary covenants.

Notes:

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

2: Pre IFRS 16

Capital investment 

1 Includes net cash flows on acquisitions of £1.1m in FY21

Total capital expenditure in the year was £230.6m, in-line with expectations, and reflecting the postponement or deferral of all non-essential capital expenditure. Maintenance and product improvement spend was limited to only the essential upkeep of our estate, health and safety and IT development. Hotel and restaurant refurbishments were deferred, alongside spend on hotel extensions and new hotels in the UK wherever possible. In Germany. the acquisition and refurbishment of 13 hotels from the Centro Group, which completed in December 2020, is expected to require c.£40m of capital expenditure of which £11.4m was incurred in FY21.

Property backed balance sheet 

1. Open + committed pipeline

The current UK estate is 61% freehold and 39% leasehold, a mix that will change to 55% freehold and 45% leasehold as the existing pipeline is delivered. The higher leasehold mix in Germany reflects the start-up nature of the business, where securing optimal site location, particularly in city centres, to help build brand strength, is key.

Ownership of around 60% of the hotel estate gives Premier Inn control over the initial development of the hotel, and subsequently how it is maintained, extended, or re-developed. Whitbread's asset-backed balance sheet supports a strong financial covenant, which means that in competitive bid situations for new leasehold developments, Premier Inn is often the preferred tenant and can secure more favourable lease and rental terms. Our freehold ownership reduces earnings volatility in the current downturn and provides Whitbread with a flexible source of funding in the event of further cash requirements for investments or to further protect our liquidity.

Return on Capital

Despite the losses we have incurred this year, we remain confident in our ability to deliver long-term sustainable returns on incremental investment:

·      We believe our ability to capitalise on the enhanced structural opportunities that are likely to exist, combined with the competitive advantage of our ownership and operating model, and ongoing initiatives including segmentation and site optimisation, will help offset the adverse impact of a weaker macro-economic environment on demand over the long-term

·      Sector-wide cost headwinds can be countered by the benefits of both organic and inorganic growth and an efficiency programme that will ensure the cost base of the business reflects demand.

These factors will enable the business to perform well in the UK and take market share, and to capitalise on the material growth opportunity in Germany. These strong fundamentals, combined with an appropriate capital structure, will enable Whitbread to drive long-term value.

Events after the Balance Sheet date

Following the year end there were a number of post balance sheet events:

·      The UK Government announced a number of support measures in its Budget on 3 March 2021. These included an extension of Business Rates Relief in England to 30 June 2021, a Restart Grant scheme for the hospitality and accommodation sector, an extension of reduced VAT rates, an extension of the Job Retention Scheme until September 2021, and an increase in the main rate of UK corporation tax to 25% with effect from 1 April 2023. Further details can be found in note 26

·      The removal of a turnover cap in relation to state aid in Germany was announced on 4 March 2021, meaning that the Group is now eligible for German Government aid, capped at £10.4m, which will be claimed and become recognisable in FY22

·      The Group's access to the Covid Corporate Financing Facility (CCFF) expired on 22 March 2021, the facility having remained undrawn

·      The £200m 2027 US private placement notes were repaid early on 26 March 2021, incurring £21.2m make-whole costs

Pension

The Group's defined benefit pension scheme, the Whitbread Group Pension Fund (the "Pension Fund"), had an IAS19 surplus of £188.0m at the end of the year (FY20: £190.3m), with the lower funding position primarily driven by asset performance being lower than the discount rate and an increase in the assumed rate of future inflation, which was partially offset by an increase in corporate bond yields resulting in an increase in the discount rate used to value liabilities, changes to mortality assumptions and both inflation and membership experience being more favourable than expected. Annual contributions of approximately £10m are paid to the Pension Fund through the Scottish Partnership arrangements.

The Pension Fund's triennial actuarial valuation as at 31 March 2020 is currently being carried out, with the results expected later this year. As identified in note 25, the Fund had a Technical Provisions deficit at the date of the last valuation on 31 March 2017.

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

Other information

Going concern

The directors have concluded that it is appropriate for the consolidated financial statements to be prepared on the going concern basis. Full details are set out in note 2 of the attached financial statements.

Risks and uncertainties

The directors have reconsidered the principal risks and uncertainties of the Group, summarised below:

·      Pandemic - impact of reoccurrence or variants of COVID-19 or any other pandemic on the business;

·      Worsening Economic Climate - a decline in GDP, consumer and business spending, a fall in RevPAR and inflation pressure impacting growth plans;

·      Cyber and Data Security - attacks resulting in operational disruption, reduced effectiveness of systems or a loss of data;

·      Structural shifts - uncertainty as to the permanent or long-term structural shift in working practices and reduction in international travel caused by COVID-19 pandemic;

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

·      Change delivery - the inability to execute the planned significant volume of change;

·      Leadership, succession and talent hot spots - a reduction in our talent pool especially in hot spots such as IT and digital areas, and low levels of diversity in the senior leadership team;

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

·      Health and safety - adverse publicity and brand damage due to death or serious injury as a result of company negligence or a significant incident resulting from food, fire or another safety failure;

·      Terrorism - impacts the safety and security of customers or staff, and the consequent impact on trading in key markets or locations.

The risk of wider macro-economic effects as a result of the UK leaving the EU, including foreign exchange and interest rate fluctuations, is considered under the Group's assessment of Economic Climate risk.

The collective area of environmental, social and governance (ESG) is considered an emerging risk for the Group. Our approach to identifying and managing this is embedded into the risk management framework and integrated through policies and risk control mechanisms.

American Depositary Receipts

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

Notes

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