Thank you very much for joining the call today for the Q1 trading update. I am joined by Hemant Patel, our Group CFO. Hopefully, you've had a chance to review the Q1 release this morning. I'll start with a brief overview for those who haven't seen it, before opening up the call for Q&A, where Hemant and I will be happy to answer your questions. During this Q1 , which ran to the first of June, we continued to trade strongly in the U.K. and have again delivered a fantastic set of results, with RevPAR up +16% versus last year and +40% versus full year 2020. We also maintained a healthy GBP 6 RevPAR premium versus the rest of the midscale economy and economy market.
Food and Beverage sales in the quarter were 10% ahead of last year, reflecting a number of the commercial initiatives we put in place in the H2 of last year. Turning to Germany, we continue to make good progress and have 56 hotels now open, with a further 32 in the committed pipeline. Our trading in the quarter was robust, with total estate RevPAR of EUR 55. Our cohort of 18 more established hotels are continuing to perform in line with the wider market, achieving a RevPAR of EUR 63. Given the strength of our trading performance in the UK and Germany, and a healthy forward booked position, we remain confident about our performance in the H1 and the outlook for the full year.
Looking further ahead, it's clear that the structural reduction in supply is going to continue for a number of years, and this will give us a significant tailwind as we strengthen Premier Inn's position in the UK, unlock our position in Germany, and maximize long-term returns for our shareholders. With that summary, I'll now hand back over to Lauren to host the Q&A. As you may know, we've got our AGM today, and so in order to have an efficient call this morning, and given it's only a quarter-one trading update, could I initially ask you to limit your questions to two per person? That would be super helpful. Back over to you, Lauren.
Thank you, Dominic. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure that your phone is unmuted locally. As a reminder, that is star followed by 1 to ask the question. Our first question comes from Jamie Rollo from Morgan Stanley. Jamie, please go ahead.
Thanks. Good morning, everyone. The first question is really just, if you could add any more flavor on the, that sort of positive forward-looking commentary there. I know visibility is normally not great, but anything else you could say for Q2, and also, what's sort of feeling for whether this very strong U.K. performance can be sustained? The other question is on Germany, for the mature hotels, your RevPAR sort of getting closer to its pre-COVID targets. Any sort of, any change in the sort of PBT guidance this year, do you think? Is there some upside risk there? How are you sort of feeling now about that market, breaking even? Could that be a bit sooner? Thank you.
Thank you, Jamie. I'm gonna ask Hemant to cover the forward booked side of the question and maybe part of the question on Germany. He'll hand back to me, and I'll just talk a little bit about the structural situation we're seeing in the U.K. in particular.
Thanks, thanks, Dominic. Just in terms of the forward book position, we've got pretty good visibility into quarter two. What we will say is that our occupancy within our forward book position is at a similar level to last year. If you remember last year, quarter two for us, we were very full. We had high occupancies, so we expect to be full again. I think what's different is that the average room revenues are much higher. You, you'll have seen the, you know, obviously, it's market and our own numbers, a lot of the growth in accommodation sales has come through pricing, that looks set to continue over this next quarter. We've got quite a lot of confidence that this next quarter will continue the current strong trading momentum.
Clearly, we haven't got as much visibility into the H2 of the year. We feel very well placed to manage any kind of macroeconomic changes with the strength of our brand. In Germany, I think, or I'd say, before I kind of hand back to Dominic, is that, you know, we're really happy with the trading that we've had. The 18 most established sites are trading in line with the market. The market has come back, started to come back more strongly in Germany, so that's really encouraging because they are not mature sites. They're still kind of partway through their maturity, so it's an encouraging position to be in at this stage. Overall guidance for the year for Germany hasn't changed. It's GBP 30 million-GBP 40 million loss in Germany...
Euros, loss in Germany, of which EUR 10 million is the refurbishment costs of the 6 sites that we bought at the end of last year. That hasn't changed. We're still within that range. Really happy with the trading performance at this stage, so.
I just building on that, Jamie. I mean, it's, and I guess linked to what we talked about at the year-end results. I mean, I think we're seeing strong momentum in both markets, which is fantastic to see. I think that's underpinned by a few things. One, our brand strength in the U.K., as you know, is exceptionally strong, and our mix between business and leisure is really helping us here, as we've seen the business market come back strongly and actually continue strong demand from the leisure market. This balance between business and leisure gives us a really strong and stable position.
Then there's another further underpin in the U.K. in particular, to some degree in Germany, but in the U.K. in particular, which is a supply side reduction, which is, at the year end, we talked about it probably being not until 2026 that we'd see supply back to pre-COVID levels. Actually, increasingly, we think that might actually take longer than that. We've seen a significant reduction in supply in the U.K. market, and that, coupled with our brand strength, is giving us really strong momentum as we go through the year.
Thank you very much.
Thank you.
Thank you. Our next question comes from Vicki Stern at Barclays. Vicki, please go ahead.
Morning, everyone. Just firstly, on the pub restaurants business, obviously, there's been quite a lot of speculation in the press recently, you know, coming about a sale of a portion of that business. Just curious if you can comment on whether you are considering divesting some of those assets, and just more broadly, how would you think about the best use of cash were there to be some additional funds from that or from anything else? Then one on costs. Obviously, we're all assuming that the 7%-8% cost inflation for this year, just starting to try to think about the moving parts into next year. I guess obviously labor, which is the biggest element for you, is gonna remain pretty tight.
Other areas like utilities, if you could just remind us how hedged you are at this stage for next year, and, you know, if you would agree that if current spot rates continue, whether there could be potentially some tailwind coming on that side? And actually just sort of covering off this year's chat in the press again about labor shortages, so just to check there's no sort of hotspot pay type, increase being considered as well? Thanks.
Thanks, Vicki. Good to hear from you. Let me cover the food and beverage question, and I'll probably just touch on the labor shortage question. We did put some commentary about the inflationary position, but I'll hand over to Hemant to add a little bit more detail around that. I mean, from a food and beverage perspective, we're not gonna comment on the press speculation that's been out there, and we're not gonna say any more than we did at the year-end in that. What I will do is reiterate a couple of things. One, we have got multiple different ways that we deliver food and beverage to our customers.
We've got our Solus offering, which is our restaurant within the physical space of the hotel, and that's about half of our estate, so just over 400 in the UK. We've got branded restaurants, which are generally buildings adjacent to our hotels, Beefeater to Brewers Fayre, for example, and that's about 450. Then we have a subset of hotels that have got breakfast rooms where we deliver breakfast for our guests. What we've said before and I'll reiterate today, is food and beverage is important for our guests, particularly breakfast. If we look at our brand positioning, once a customer has chosen Premier Inn, generally due to location and price, of which we know both of those areas, we are exceptionally strong in the marketplace.
There are three key things that differentiate our product. The first thing is the warm and friendly team. The second thing is a fantastic night's sleep, great acoustics in the room, best mattress in the hotel business. The third thing is a great breakfast. The breakfast is an important part of the offering. What we're looking at doing is how do we optimize the delivery of that food and beverage for our guests? We're looking at everything through two lenses. One, a returns lens. Any changes that we do make will be through a returns lens because we think that change will actually return, increase returns over time. The second thing is whilst protecting the guest experience. That's what we're working through at the moment.
Nothing specific to add other than, I guess, reinforcing those two points. We'll take a returns-led approach, but we'll also look at protecting the guest experience, because I think that's been one of the underpins of our successful performance. The other point I'll just touch on before I hand over to Hemant, is the labor shortages situation. We're not really seeing hotspots, actually. In fact, the labor market has loosened up, particularly compared to 18 months ago. We've done a lot of work in both our recruitment, but also our retention. We're seeing our retention continue to improve. We're a market leader employer. We can offer progression. We've got paid progression, but we can also offer career progression. That's really supporting, that's really supporting our recruitment.
No specific labor hotspots, and a significantly better position than 18 months ago. I'll hand over to you. I'll hand over to Hemant.
Yes, so Vicki, in terms of the cost for this year, yeah, we're not changing guidance at all. 7%-8% is what we talked about at the full year. We obviously have seen some changes in the inflationary environment. Inflation has been a lot more persistent, I think most expected. When we forecast our inflation numbers for the year, we gave a range, and that's the reason we gave a range. We're still happy that from what we can see at this stage, that range still makes sense for us. It's likely that into next year... I mean, we're not giving specific guidance on next year's cost. All I'll say is we have talked about being 20% hedged on utilities for next year.
You know, if all things continue, if things continue as they are, it's likely we'll start to see some upside kinda coming through. It very, very much depends on those prices. Interestingly, the fixed element of utility production, there's still quite a lot of inflation there. Commodity side of it has obviously improved over time, so we need to take that into account. We would expect, you know, as the spot price remains where it is, that things would improve slowly because we'll unwind the hedges we had from last year, this year, and then we'd end up in a slightly better position at that stage.
Other cost factors, I mean, generally, you know, over the longer term, inflation levels have been something like, you know, between 3% and 5% for hotel businesses. You know, we would hope that we'd be coming back to those kind of levels in the future, but again, we don't know at this stage. We'll give some more detailed guidance. As we get closer to the year, we'll be able to give you something a bit more accurate at that stage.
Very helpful. Thanks very much.
Vicki, just as a quick follow-up, I realize I didn't actually answer your question about the shareholder returns, and we've got a really clear capital allocation policy and framework now, which Hemant Patel unveiled about, I guess, just under a year ago. We'll always be guided by that capital allocation framework. Investment in our core business, investment in M&A, if we see opportunities, both with the returns lens, taking a returns lens, and then look at shareholder returns, dividends or share buybacks, for example, with the underpin of the leverage ratio. I think the beauty of having a clear capital allocation framework is we'll continue to use that framework, having a very clear focus on shareholder returns overall.
Thank you.
Great. Thank you.
Thank you.
Our next question comes from Jarrod Castle from UBS. Jarrod, please go ahead.
Great. Good morning, everyone, to you too, of course. Just wanna come back to Germany, I mean, you had a pipeline of 37 hotels. You developed 5. The pipeline's come down to 32. I just wanna get some color on, you know, how long it takes to identify new sites and, you know, when do they kind of form part of the pipeline? How that's currently looking in Germany?
Just kind of UK sites and development, you know, no expectation that the range would change as you've given, but, you know, are you seeing more opportunities to make bolt-on acquisitions, you know, as the interest rate environment goes up, as inflation goes up, you know, can we think of the portfolio being bolstered by this as the year progresses? Thanks.
Thanks, Jarrod. I'll take that, and Hemant can build if necessary. I guess a couple of overarching points. One, we've done a lot of detailed work on the potential for our business in the UK. We feel really good about the long-term potential of 125,000 rooms, and we also feel very good about the long-term potential for growth in Germany. That's, I guess, the first point I'd make. The second point I'd make is when we look at new sites, we will always take a returns-led focus, so we won't do growth for growth's sake. We'll do growth based on the expected returns. The third thing I'd say is, I think we're seeing some really interesting things in the market at the moment.
I talked earlier about the reduction in supply, which we've seen very markedly in the UK, and less markedly, but there has still been a reduction in supply in Germany. The tight financial markets that we're in at the moment, with rising interest rates, means that our competitors have generally got very anemic pipelines and are struggling to rebuild those pipelines because it's actually quite hard to raise money at the moment. We're in a very privileged position. We have a very strong balance sheet, and we've got a great covenant. We're seeing every opportunity that comes into the market in both the UK and Germany. We also have the opportunity in the UK over time to rebuild our extensions program, for example, to add rooms as well.
We actually feel that the current market tightness, which we think is gonna continue for quite a while, will give us opportunities to grow faster than our key competitors. We'll also always take that returns-led approach. From a hotel cycle point of view, we think this is a really interesting inflection point in the hotel cycle for us.
Great.
Okay, thank you.
Thank you. Our next question comes from Jaina Mistry, from Jefferies. Jaina, please go ahead.
Morning. Thank you for taking my questions. I'll speak to you as well. If I piece everything together, you know, it sounds like U.K. trading is still very strong for Q2, maybe into H2. Established cohort in Germany is performing in line with the market. If I look at consensus, which is on PBT of GBP 444 million, are you happy with where consensus is today, or do you see upside from there? If so, what are the drivers here? Second question around Germany, can you talk a bit about profitability for the established hotels in Germany in Q1? Thank you.
I'll take those questions. Jaina, hi. Yeah, so in terms of consensus, I think the main moving part, you're right, as you say, GBP 4 million at the moment is the published consensus for EBT for the year. The main moving part I think there is U.K. accommodation sales. We haven't changed our guidance in terms of costs, as mentioned earlier on, still 7%-8%. We've not changed our guidance in terms of the range of loss in Germany. We're still happy with that. That stands based on current trading and our forecasts. And the consensus numbers for food and beverage, about 4.5%.
Yeah, I'm not sure that that will change, particularly despite the fact that we've been trading ahead of that, about 10% ahead in the Q1 , because we've got tougher comparatives through the rest of the year. Overall, though, for UK accommodation sales, that 444 number assumes a 7% growth in accommodation sales for the full year, versus obviously the 18% we've done in the Q1 , and the confidence we've got coming into the Q2 as well. We expect that to drive, it's likely that that will drive support costs upwards, but we don't know. We don't guide specifically on sales going forward, we allow.
the published market data and our performance against the market, you know, which will be well known, you know, to manage views of our profitability, you know, on an ongoing basis. We don't specifically give that specific guidance. I think one thing I will say is that, as an underlying point, you know, we've got a strong position this year. Our margins have improved because of the high level of accommodation sales. The current consensus at the moment is assuming actually a dilution in UK bottom line profit margins, so PBT margin %, which we don't believe, versus pre-COVID, we don't believe that that would be the case.
That's the only kind of like, you know, you know, underlying point I'd make, that we believe we will be able to beat that number. Specifically, we don't know what half 2 looks like at this stage. We've got some indications, and bookings do look good, but clearly we're not very well booked at this stage. We're relatively shortly for half 2. What I will say, though, just to make that point again, that I made earlier on, that actually, because the strength of the brand and things Dominic's talked about in terms of how well positioned we are, we think that whatever happens to demand overall, we're still going to be in a very strong position to take advantage of that.
We haven't given any, just your second question, we haven't given any specific guidance on Germany profitability. I think what you can take from that, we know that the 18 most established hotels were profitable through last year. They've grown in line with the market, and their RevPAR is at EUR 63 for the quarter. I think you can, you know, extrapolate from that they will be, their profitability will have improved. We are still forecasting and expecting to get to a break-even run rate through calendar year 2024, so through next year at some point, based on, you know, with the current estate that we have, before any further additions that, you know, that might involve some resurfacing or some conversion costs.
We're still very much expecting to get to the longer term target of 10%-14% return on capital for Germany. We're still comfortable that's achievable.
Just so I've understood that right, did you say that the 18 established hotels were profitable as well in Q1 this year?
Well, we haven't, I mean, well, I guess, well, yes, they were. They were profitable last year.
Okay.
They'll be profitable in Q1 as well, because they've grown since then, as you'd expect.
Thank you.
Thanks, Jaina.
Thank you. Our next question comes from Tim Barrett, from Numis. Tim, please go ahead.
Hi, good morning, both of you.
Hi, Tim.
The first question would just be, totally take on board that you have a short lead time in the industry for bookings, but in terms of what you're doing with your pricing ladders, and your pricing strategy, is there any reason to think that rates shouldn't be up in the H2 ? I guess as a follow-up question, on optimizing pub restaurants, it's absolutely clear that you're looking at a returns lens. As a new management team, newest management team, are you more willing to disaggregate returns between pub restaurants and lodging, in a joint site than perhaps previously? Thank you.
Why don't so Hemant take the first part of the question, and I can take the second part of the question.
I mean, I think, as I mentioned earlier on, in terms of the book position that we can see, we're at a similar level to occupancy that we had last year, but rates are at a significantly higher level than last year. That applies to all of our foot forward, but position, you know, what we can see in H2 , we're at a higher rate. I suppose the moving parts really here, are underlined, I kind of like the base position here is about that supply reduction.
We think that the supply reduction, as Dominic mentioned, you know, it's been significant, and the numbers we published was quite significant, with something like, you know, 9%-10% of independents not coming out to the market, versus pre-COVID, roughly 4%-5% of the market overall. That was our analysis at the beginning of last year. You know, it's quite possible that's moved on further. Therefore, that supply situation, which again, as Dominic mentioned, it would be at least 2026 before we'll get back to pre-COVID levels, and potentially longer. That will underline whatever happens, and that's a more significant factor in many ways than any potential demand shock.
Also, highlight, you know, back to what happened after GFC, where we lost about 6% of RevPAR for a year. We were back up again more than that by the year afterwards. It's a relatively small reduction in RevPAR that we saw there. When we think about what might happen in the H2 of the year, we don't know. If we were to see, worst case, a demand hit in the market, and it was as bad as what happened on GFC, it would still be a relatively small percentage compared to, if you think about the cumulative growth we've seen pre, from pre-COVID, where last year we grew 37% in terms of revenues overall, you know, versus pre-COVID for U.K. accommodation sales.
You know, probably during this quarter, we've seen another 18%. Can't quite add it up like that, but it does indicate that actually we've got a lot of growth that might be impacted going forward. My view would therefore be that, you know, it's likely we're going to continue to see pricing growth in the market, particularly if demand continues as it is, then we'll see that going forward. We don't know what will happen, obviously, it does depend on demand, but again, we're very well positioned to manage that potential trip in demand. I'll hand back to Dominic.
Yeah, Tim, for the second part of the question about disaggregating results, we have no plans to do that. I think we probably did that many years ago, but we're not planning on going back to disaggregating it.
No, sorry, Dominic, I just meant in terms of when you're optimizing the F&B business.
I see. Well, we ourselves, of course, you can imagine.
[Crosstalks]
We look at it on a side-by-side basis in a lot of detail. we optimize effectively two things. We look at optimizing the trading, and actually, you've seen that the trading has been encouraging, and that's from various pricing and menu changes and menu additions that we've done. Then we are and will look at optimizing the actual format per hotel. Taking the view that the most important thing is, one, protecting the guest experience, and two, ensuring that we maximize shareholder returns over the medium term.
Okay.
Thanks.
Thanks, both.
Thank you.
Thank you. Our next question comes from André Juillard with Deutsche Bank. André, please go ahead.
Good morning. Thank you for taking my question. Just a short one about the leverage and your balance sheet. If we look at the expectations we can have for this year, you have almost no debt. Do you have, or do you communicate anything on your targeted leverage, considering that you repeated several times this morning that you wanted to continue some return to shareholders and to optimize the performance of the shareholders? How could you guide us and help us to to have a better visibility on that? Thanks.
André, just to clarify, you know, our capitalization framework, which is what I'm going to refer you back to, we're not necessarily saying we are going to continue shareholder returns. We said, you know, that actually is part of our allocation framework, and we will apply that framework on a regular basis. The way I'd be thinking about this, you're right, at the end of last year, we were in a net cash position. If you were to extrapolate on trading, you'd expect us to be in a kind of similar position through this year, despite the shareholder return we've already made the dividend we've paid as well, because trading is very strong. Our leverage target, you know, we're well within that.
It's, you know, it's set at 3.7x funds from operations against capitalized net debt, at least just net debt, rather. Yeah, we're well within that, and at the end of last year, we were something, you know, we had a headroom, something like GBP 800 million-GBP 900 million against that leverage threshold. It's not our target. It's always a, it's a range within which we want to work that will allow us to remain investment grade. Yeah, we're nowhere near that, as said. You know, the best possible use of our capital is new room growth.
Whether that's organic new room growth, whether it's acquisitions, yeah, we'll continue to look for those opportunities because we know that's what we would really like to invest in. We'll continue to invest in the fabric of our estate as well. It's really important that we refurbish our estate and that we maintain our IT infrastructure as well. These are good uses of our capital, because that underpins our overall profitability, our future growth, and therefore returns. You know, we will then think about, you know, maintaining our dividend policy.
Before we think about whether any other capital returns are appropriate to shareholders, very much based on the situation that we find ourselves in, our visibility of the future position at that point as well. I can't really say much more than that. We'll apply that capital allocation framework again, as I say, on a regular basis. If shareholder returns, future shareholder returns are appropriate, then, you know, we would execute those. I think, yeah, just the underpin to all of this is, remember, we're looking to, you know, make maximum returns for our shareholders, and if we can do that through new room growth, that's what we'd do.
Okay, very clear. Thank you.
Thanks, André.
Thank you. We have no further questions. I'll now hand back over to Dominic Paul for closing remarks.
Thank you, Lauren. I guess, yeah, just a very brief closing remark from me. I mean, these are another set, another fantastic set of results. RevPAR up 16% versus last year and 40% versus full year 2020. It's clear we've got momentum, and we feel that we're very well placed for the coming years. If some of you have got questions that you didn't ask, that you think of later, Peter Reynolds, our Director of IR, is around today. So please feel free to reach out to him. In the meantime, we really appreciate your time today. Thank you for your interest. Look forward to speaking to you all soon. Thank you.