Whitbread plc (WTBCF) Q4 2022 Earnings Call Transcript

Whitbread plc (OTCPK:WTBCF) Q4 2022 Earnings Conference Call April 25, 2023 4:15 AM ET

Company Participants

Dominic Paul - Chief Executive Officer

Hemant Patel - Chief Financial Officer

Conference Call Participants

Vicki Stern - Barclays

Jamie Rollo - Morgan Stanley

Leo Carrington - Citi

Alex Brignall - Redburn

Tim Barrett - Numis

Jaina Mistry - Jefferies

Jarrod Castle - UBS

Andre Juillard - Deutsche Bank

Joe Thomas - HSBC

Operator

Good morning or good afternoon, all, and welcome to the Whitbread FY '23 Preliminary Results Announcement and Live Q&A Session. My name is Adam, and I'll be your operator for today. [Operator Instructions]

I will now hand over to CEO, Dominic Paul, to begin. So, Dominic, please go ahead when you are ready.

Dominic Paul

Thank you, Adam. Good morning, everyone. Thank you very much for joining my first call as the Chief Executive of Whitbread for our preliminary results announcement, alongside Hemant Patel, our Group CFO.

I just wanted to begin by reiterating how excited I am to be back at Whitbread. The business is in great shape. It's trading strongly as you can see by today's results.

Having spent significant time out in our hotels and restaurants with the teams, both here in the U.K., but also in Germany, I've been really struck by the passion and the dedication that underpins our ability to deliver consistent quality guest experience whilst continuing to offer great value. This is what differentiates us from our peers and is at the core of our U.K. model, a model that we are now on course to replicate in Germany.

I do hope you had a chance to read our release this morning and maybe also watch our results webcast. I'm just going to pull out a few of the key highlights from our announcement, and then I'm going to open the call for Q&A, where Hemant and I will be happy to answer your questions.

I guess the first thing for me to say is these are a great set of results. They are the product of our differentiated operating model, working in tandem with our business strategy. My predecessor Alison, who many of you know, and our entire team executed brilliantly through the pandemic, and we've emerged strongly as a result.

In the U.K., we continue to outperform the market and delivered significant revenue growth, strong cash flow and we've increased our U.K. returns. There's been a structural shift in the U.K. hotel market with a material reduction in U.K. supply just as demand has recovered. And whilst that certainly provided a helpful backdrop, it was actually the combination of our own initiatives and our clearly differentiated business model that has delivered such an impressive operational and financial performance.

And in Germany, we continue to make good progress. We've now got 51 hotels opened and 7,000 rooms in the pipeline. Now, we're not yet operating at our full potential, but the performance of our 18 established hotels gives us real confidence that we're on track to reach our target rate of return of 10% to 14%, and our already committed capital of around £1 billion.

We're confident in the full year outlook, and that confidence is underpinned by a number of important factors. Firstly, we're already delivering great results. We're achieving record level of occupancy and strong RevPAR growth in the U.K. And in Germany, despite our brands still being relatively unknown, we're growing rapidly, led by our more established hotels that are trading line with the market. Secondly, current trading has been very strong, with positive momentum continuing across a number of forward lead indicators. And thirdly, we continue to see significant opportunities to invest both in the U.K. and in Germany that will drive attractive long-term returns for our shareholders.

Given our positive trading performance, our strong balance sheet and our confidence in the outlook, we're recommending an increase to the final dividend and have announced an initial £300 million share buyback that will be completed over the next few months.

Now just one small point of admin before we open up the call. We've got a number of people on the line. So, to ensure everyone gets the chance to ask their questions, we are going to ask you to please try to keep it to two questions each.

With that, I'm now going to hand back to Adam, the operator, so we can open up the call for questions. Over to you, Adam.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question today comes from Vicki Stern from Barclays. Vicki, please go ahead. Your line is open.

Vicki Stern

Yeah, good morning. First one, just wanted to come back on the organic room growth targets for both U.K. and Germany. They're just looking a little bit lighter than we might have expected looking into next year. Just wondering why that is, any particular reason driving that in either market? Is that your choice to go slower? Or, are there any sort of market factors that are worth calling out?

And then, secondly, Dominic, just keen to hear your perspective on F&B. Obviously, it's good to see that the F&B performance is improving slightly. But just your broader views there on the logic in retaining the full ownership of F&B? Is there a different approach that could be considered for you to think about now?

Dominic Paul

Okay. So, let me take both of those questions, Vicki. So, good to hear from you again. On the pipeline, I mean, I think there are probably a couple of points to reemphasize. One, actually, we feel really confident about the long-term runway of growth. I think you know a lot of work was done on the network plan over the last 12 to 18 months with this, and that plan kicked out. There is strong potential for 125,000 rooms in the U.K. And I think we feel really good about long-term growth potential in Germany.

That said, obviously, the hotel industry was impacted by the pandemic, and that did impact the short-term pipeline. And what we're doing currently is we're respooling up that pipeline. So, we feel good about how that pipeline is developing. The room growth next year is going to be slightly lower than we've seen in previous years, but we have good confidence there in the medium-term pipeline.

And actually, what we're beginning to see, and it's somewhat linked to the structural shift that we highlighted in the presentation with this reduction in the supply, we're actually seeing the benefit of our covenant and our current performance. Actually, we're in pole position for a number of the key sites that are coming up. So, we're getting access to some really interesting sites moving forward. So, long term, we feel really good about the runway of growth, and we're seeing that pipeline spool up, so both in U.K. and in Germany.

And then, the second part of your question was about food and beverage. I think there are a couple of points worth reiterating. The first thing is that, actually, food and beverage is important for our customers. Remember, restaurants are either in the hotel or pretty much right next door to the hotel. Food and beverage is an important part of our offering, particularly breakfast. That is an important part of our offering and we've got a clear competitive edge when we look versus our competitors.

That said, is there going to be an ongoing opportunity to optimize and improve our performance in that area? Yes, there will be. And yes, we will be focused on that.

Does that answer your question, Vicki?

Vicki Stern

I'm sorry. Just to clarify -- yeah, thank you. And just to clarify, so when you say ongoing opportunity to improve, is that from an operational perspective or you mean sort of more strategically in terms of what's the right full ownership model?

Dominic Paul

I think -- I mean, definitely, you've seen from the numbers that we saw that we put out today in the first seven weeks, it's 10% like-for-like. So, we are getting a tailwind from the fact that, actually, the hotels are doing really well. And I spoke that reiterates the point that food and beverage is important for our guests. We're shareholder returns focused. We'll look at constantly -- we'll constantly look at how do we continue to improve those shareholder returns over time, both within the hotel space, but also our food and beverage space. And I think you'd expect us to be doing that.

Vicki Stern

Great. Thanks very much.

Dominic Paul

Thanks, Vicki.

Operator

The next question comes from Jamie Rollo from Morgan Stanley. Jamie, your line is open. Please go ahead.

Dominic Paul

Hi, Jamie.

Jamie Rollo

Hi, Dominic. Good morning, everyone. Thanks for taking my questions. So, the first one, just on the buyback. You described as initial in the release, there's still clearly plenty of upside to 3.7 times investment-grade ceiling. So, I was really wondering could we expect another buyback at H1?

And then, secondly, just on Germany, you given a slightly updated numbers on costs and rent metrics. And you've given us, I think a sort of £5 million of PBT in the year for the 18 established hotels, which is about £300,000 per hotel, and that's about half the level given in the prior target. I appreciate that was a few years ago, pre-COVID. I was really wondering on sort of profit per hotel or profit per room basis, where are we now versus the sort of pre-COVID targets, please? Thank you.

Dominic Paul

Okay. Thanks, Jamie. What I'll do is I'll take the first part of the question. I'll probably touch briefly on Germany, and then I'll hand over to Hemant as well. So, I think in terms -- and I'm sure he's got a view on both of those subjects as well.

In terms of the capital allocation and the share buyback, I mean, Hemant outlined the capital allocation framework last year. I think it's an excellent framework. There's a clear hierarchy starting from the fact that we want to remain investment grade. We'll look at investment -- organic investments where we invest our own capital. We'll then look at inorganic investments where we feel we can drive long-term shareholder returns, and then we'll look at shareholder returns, the dividend and share buybacks. We've applied that framework, which we've announced today, and that's resulted in the £100 million dividend and the £300 million share buyback.

It is a framework. So, by definition, we will continue to apply. We're not making commitments as to what that is moving forward, because we've got that framework, it's very clear, and we will continue to apply it. We'll update on where we are at the interim, but we think this is a good example of our sensibly applying the capital allocation framework that we've got.

The second part of your question was then about Germany. Just one thing I'll just mention on that before I hand over to Hemant. I mean, I spent quite a lot of time in Germany, both actually before I officially joined the business and then since I've joined, I visited a lot of our hotels. And I think you've been over there, Jamie. We've got fantastic hotels there. We believe in the structural opportunity in the German market. Germany was behind the U.K. in terms of coming out of COVID. So, a lot of those hotels have been closed for quite a significant period of time. And a lot of our hotels have actually, we opened them and then couldn't trade them because they opened in COVID. So, it is actually quite hard to compare to pre-COVID because there's definitely a spooling-up situation that we've got in Germany as it comes back out of COVID. But I think what we've done today is reiterate our long-term confidence in the business.

Let me hand over to Hemant, who can be a bit more specific.

Hemant Patel

Yes. So, yes, just reiterating what Dominic said, these 18 hotels that we are discussing as scheduled, they are our most mature hotels where the hotels have been opened the longest continually from pre-COVID. Now that doesn't mean that they are mature though yet. So, most of these hotels -- if you remember, as Dominic mentioned, the end of COVID restrictions were happening at this kind of time last year over the next few months, in fact, in Germany. So, most of these hotels still haven't traded a full 12 months, completely unrestricted circumstances.

So, they're not mature. And if you remember, the maturity of our hotels aging between kind of 2 to 4 years. Most of these hotels, they haven't actually traded that long continuously. So, we're still maturing. So, the pre-COVID guidance we gave in terms of getting to the profitability targets for hotels still applies. We haven't updated it. There will be updates in terms of costs, in terms of the top-line as well. But in general, they still apply. It doesn't mean that we are there now with these hotels. And as mentioned, we are still very committed to getting to those longer-term 10% to 14% return levels. We still believe the business overall will get to a breakeven run rate in 2024 as a milestone towards getting to that longer-term level of returns.

Jamie Rollo

Thank you. And so, just on the balance sheet, this is not a new question, but just on the difference between the upside from the 2.7 times to the 3.7 times, where are you happy to settle? That's quite a big gap, [£100 million] (ph) of upside. Is there a sort of figure you can give us so we can work out what the sort of excess cash might be?

Hemant Patel

I think, probably the answer is no, there's not a figure that we can give you in that. It's the headroom we've got against that. It's not a target, but it is the ceiling that we want to work within over the kind of medium to long term. So, yeah, clearly, there is headroom against that 3.7 times at the moment. The framework -- capital allocation framework really gives you the indication how we'll be thinking about that. So, once we've understood the capital needs of our different priorities as Dominic highlighted, we'll look, therefore, at the outlook we have going forward, the level of potential cash we might want to retain for inorganic opportunities that may or may not come up and then make a decision based on that as to whether there is excess funds or capital to return to shareholders. So that's what we'll be thinking about it. So, we'll work within the framework and under that kind of that -- of the ceiling of 3.7 times.

Jamie Rollo

Thank you very much.

Dominic Paul

Thanks, Jamie. Thanks for setting the precedent of a second question...

Operator

The next question comes from Leo Carrington from Citi. Leo, please go ahead. Your line is open.

Leo Carrington

Thank you. Good morning. First question, if you could give more detail on the recent acquisition in Germany? Just in terms of how the opportunity arises if something to say there, as it's being the first in a while. Do you get the impression there could be a pipeline of further acquisitions opening up now given the environment in Germany? And for this acquisition, just noticed the property in Austria, will you keep that? Could it be part of the new planned expansion, or is it just on the German border makes sense to keep?

And then, second question, tying into about the statements from the presentation on hoping to at least maintain U.K. profit in FY '24. Can you just sort of tie this into your demand outlook? Does RevPAR need to progress at a similar level to how the year started to support this ambition? Any sort of additional color would be very helpful. Thank you.

Dominic Paul

Okay. Thanks, Leo. Appreciate the question. So, let me take the first question and the second part of the second question, and then I'll hand over to Hemant. So, just touching on the recent acquisition that we did in Germany, so six hotels, 900 hotel rooms. We think it's a really nice portfolio of hotels. We stay very close to the market in Germany. As you know, we've got a mix of organic hotels that we've opened ourselves generally on greenfield sites, but we've also acquired a number of hotels as well. So, we're very well connected into the German market as opportunities arise. These was one of the opportunities. It was complementary from a location point of view. They're good properties and we think strengthen our position in Germany.

And to your question as to will more opportunities like that come up, possibly. As I said, we stay very, very close to the market. There has been a structural decline in the independent sector in Germany, not as deep as we've seen in the U.K., but there has been a decline. And we think that hotels will continue to come to the market. And if you look at everything that comes up, we've got very clear parameters you can imagine. We've got to feel confident that we can drive the correct long-term returns and from an operating model point of view that property works for us. But if they tick those boxes, then we're definitely interested in opportunities as they come up, and this is one of those.

So, six hotels, 900 rooms. It did happen to have a freehold hotel in Vienna. That came with the portfolio. Freehold property in the Central District of Vienna, we think is a good long-term bet and a good addition to our balance sheet. It was actually also an interesting test and trial for us to be in a market close to Germany. We're not signaling a radical change from our strategy of focusing on Germany. The portfolio happens to have one in Vienna, but we think we'll be able to make that work in long term. That's a nice addition to our portfolio.

Then kind of there was the second -- your second question was about effectively the demand outlook and the impact on profit. Let me take the first part that, and I'll hand over to Hemant. I think you've seen in the numbers that we announced today, we actually feel good about the demand environment. We've just outlined very strong numbers for the first seven weeks, building on the momentum from the previous year. And I think there were few reasons for that.

One is we've got a beautifully balanced business, roughly 50-50 between leisure and business. We continue to see leisure customers prioritizing experiences. And therefore, leisure spend has continued to be strong and London is particularly strong. But also, business travel is definitely back, and we've seen more and more business people out and about, and of course, we're getting benefit from that. And we have really improved our business offering, which is helping us to over-index in that market.

And then that when you couple it, with actually a decline in the -- structural decline in the hotel market means that supply has gone down and demand is at the same level or actually higher, then obviously, it gives us some confidence about the demand outlook and then the impact on our business. So that's why there is a positive tone in our release today.

Let me then hand over to Hemant for the second part of that question.

Hemant Patel

Yeah, Leo, hi. So, yeah, I mean, you know we don't give specific guidance in terms of the top-line, in terms of U.K. accommodation. So, it's clearly what we will talk to you about is how we're doing versus the market and then, obviously, the regularly published STR data will give you a good understanding of how we might be trading, and that seems to work pretty well. What we did say was that we felt that the 7% to 8% cost inflation that we expected to see in the U.K., and we still expect to see in the U.K., that along with our efficiency program, along with the estate growth we have, the U.K. accommodation like-for-like sales on top of that should at least offset that level of cost inflation.

Just to make sure that -- just kind of like make sure that people understood that versus some of the kind of forecasts that we've seen out there that we're assuming that we would be negative to flat very low growth in terms of U.K. like-for-likes. Now, clearly, we started the year very well. The first seven weeks of the year, we started at 17% year-on-year in terms of U.K. accommodation sales, which is about 15% like-for-likes. So that won't continue. In that, we are annualizing against the softest, the easiest comparatives for last year this time of the year. But clearly, as Dominic mentioned, that gives us a lot of confidence in terms of the trading outlook as it stands at the moment.

So, all we're really saying at this stage is that we think that like-for-like growth in the U.K. will be enough to at least at least offset the level of inflation that we're seeing and the U.K. business would at least maintain its profitability year-on-year. Clearly, our mission would be to improve on that and grow on that. The outlook we're seeing at the moment gives us some confidence in our ability to do so.

Leo Carrington

Okay, very clear. Thank you very much.

Dominic Paul

Thanks, Leo.

Operator

The next question comes from Alex Brignall from Redburn. Alex, please go ahead. Your line is open.

Alex Brignall

Good morning. Thanks so much for taking the questions...

Dominic Paul

Hi, Alex.

Alex Brignall

The first one is -- hi, thanks. The first one is on the German acquisition. I wonder if you might give us any kind of commentary on price paid on really any metric you choose, but expectations on EBITDA or maybe what you think you can do to the profitability of the rooms that you've bought?

And then, the second one is really interesting point you raised on the pipeline growth and your position in terms of new sites coming up. I wonder if -- obviously your -- obviously very particularly U.K., but it seems a specific challenge in the U.S. as well that individual franchisee borrowers are struggling to get financing and therefore the franchises are seeing kind of less, which obviously is beneficial to your position. I wonder if there's any other information that you or just kind of small snippets that you might share with us on that subject? Thank you very much.

Dominic Paul

Yes, thanks, Alex. Let me take your second question first and then I'll hand you over to Hemant for your question about the German acquisition, which by the way, we won't be able to say very much about it, but I'll hand you over to Hemant anyway.

The pipeline question is really interesting. I mean remember, and we've reiterated this today, we're shareholder return focused. As a business, we're returned focus. So, when we look at new sites, we are looking at that site through the lens of customer demand and returns generated from that side. So, therefore, the operational -- how we set that operation up and the cost involved in the hotel are a very important part of that.

All that said, there is less demand for properties at the moment. We are definitely seeing -- we've seen this structural decline in the independent sector. We do believe some of the franchise operators, it's slightly more challenging for them at the moment. They have a slightly different cost structure. Remember our cost structure is really advanced by things like our direct model in the U.K. And that does give us access actually to -- that reduces the demand as we look at site. And we've seen some of the other commercial property providers who might look at buying sites traditionally fall away a little bit with some of the uncertainty.

So, we're very mindful that we only want to pay the right pricing, a very clear idea on that. That said, there is also clear that the amount of demand for these sites has fallen away somewhat and Withbread with its covenant and long-term prospects, we're a very attractive purchaser or at least lessor of these sites. So that does give us confidence moving forward that: one, we'll be able to go after this attractive runway of growth; and two, we'll get access to some really quite properties and some really quite exciting locations.

Let me then hand over to Hemant for the second part of the question.

Hemant Patel

Yes. So, Alex, I mean what you will see as a note in the account in terms of acquisition is a bit more detail in terms of the purchase price that we paid and that's £26 million plus a deferred consideration of £2.5 million. I know there's a bit more detail there in terms of the IFRS accounting for it. I think if you want to -- but then to understand the impact of that, obviously, we have given -- we've updated our German guidance in terms of other ongoing cost per room. And then clearly you can model the RevPAR impact of those new rooms, that would be no different to how you model any organic RevPAR impacted growth in Germany.

Alex Brignall

Okay. And I guess we could probably add the £10 million of refurbishment cost onto that £28 million? I haven't got to that page. The accounts you are referring to, the £10 million is in there?

Hemant Patel

The £10 million of refurbishment costs are one-off P&L costs and it's mostly about disruption as we close those hotels, lose revenue while we are converting them.

Alex Brignall

Okay. Got it.

Hemant Patel

So that's just a one-off that you don't need to model for the longer term, it's just this year thing.

Alex Brignall

Fab, okay. Lost earnings from closure rather than the actual cost there. That's fantastic. Thanks so much.

Dominic Paul

Thanks, Alex.

Operator

The next question comes from Tim Barrett from Numis. Tim, please go ahead. Your line is open.

Tim Barrett

Hi, good morning, both of you. I had a couple of questions...

Dominic Paul

Hi, Tim.

Tim Barrett

Hi there. A couple of questions about the balance sheet and asset. It feels like churn is picking up a bit, £60 million of disposals in the years has gone. And is it a fair observation that that could increase? Which leads me to ask, you haven't referenced the £4.9 billion to £5.8 billion 2019 revaluation. I know it's a long time ago. Is there a scope for refreshing that? And how your disposal is looking versus that kind of benchmark? Thanks very much.

Dominic Paul

Thanks, Tim. I'll hand you over to Hemant, actually. I guess, the only the kind of macro point I'd make in terms of our property strategy is it gives us a lot of flexibility. I think it's obviously one of the underpins of our business. It also gives us some flexibility in terms of sales and leasebacks when we think it's the right time to do it.

But let me hand you over to Hemant.

Hemant Patel

Hi, Tim. So, yes, you're right. It was the kind of end of 2018, the beginning of 2019 when we last did a full revaluation of our property portfolio. When we did that, as you mentioned, the valuation came out in the range of between £4.9 billion to £5.8 billion, effectively was done on a careful sale and leaseback basis for each site with an effective yield of 4.5% to 5% that was assumed for the portfolio. I think since then, it's a little difficult, because obviously, since then, we've had COVID and then further kind of economic disruption particularly to the -- with interest rates moving. And we haven't got a huge amount -- huge number of evidence points to revalue the properties as it stands at the moment.

What I would say is that, that 4.5% to 5% yield in those years pre-COVID, although we didn't have a huge number of transactions, generally we're beating that level of 4.5% to 5%. So, we were confident that, that valuation at least held, based on what we're seeing. Clearly, we've seen some very recent disruption over the last kind of like six months with interest rates moving significantly and therefore having an impact clearly on property investments as well.

Having said that, we don't -- although we've had a load of evidence, we don't see anything that would change our view that it's still a reasonable range for our valuation of our property, estate plus some additions since then as well. The bits of evidence we see with -- for instance, £60 million of disposals would indicate we're there or there about. But just reiterate, we obviously haven't had many since the big hike in interest rates that we saw in the autumn last year.

Tim Barrett

Okay. And is it a reasonable observation that you are churning more? Based on some of your comments, there might be scope to keep doing that in certain markets.

Hemant Patel

I mean one of the things that Dominic mentioned, one of the advantages of having majority freehold estate that it does allow us to optimize our estate much more than other businesses that have got different model would be able to do. And obviously, we've got this room target of 125,000 rooms, so we're continually thinking about adding rooms overall, but optimizing the number of rooms we have in a particular catchment and where they might be.

So, there will always be a level of churn that is involved. As we gradually add rooms, there will always be a level of churn where we are disposing of sites we don't need in a catchment because we're able to find other rooms in our new hotels or extend other hotels in that catchment. So, I wouldn't read too much into it. I just think it will be an ongoing feature of our business and it will ebb and flow depending on our ability to optimize in a particular catchment at a particular time.

Tim Barrett

Got it. Thank you.

Dominic Paul

Thanks, Tim.

Operator

The next question comes from Jaina Mistry from Jefferies. Jaina, please go ahead. Your line is open.

Jaina Mistry

Hi, thanks very much for taking my questions, and Dominic, it's a pleasure to hear from you. My first question is on pricing. And I think in -- on the last conference call, you mentioned the U.K. like-for-like was around 3% to 4% to cover inflation. Now given the STR data so far has been strong and given actually that you took less pricing than peers last year, do you think that you can price ahead of inflation this year?

And then, my second question is around buybacks. You mentioned it's an initial buyback in H1. Should we take that to mean that there's more scope for bolt-ons or M&A in the second half of the year in the U.K. or Germany? And then, assuming that you're applying the [ERR] (ph) framework, what level of returns do you have with for an ongoing buyback?

Dominic Paul

Thanks, Janet. Appreciate your questions. So, I think let me take the first question and then then part of the second question and I'll hand you over to Hemant. I think in terms of the pricing question, so you're right on what you said. We have -- we've taken quite substantial market share overall. That has been driven in large part by higher occupancy levels. And actually, I think we've optimized, and I've been super impressed by the work the price and the yield management team have done and do. I think we've done a really good job of optimizing the inflection point between occupancy and pricing.

And I think what underpins our brand overall is a value perspective, and I think we've continued to offer. So, whilst our room rates have gone up, we've continued to offer really compelling value. And I think that's one of the things that's driving our long-term growth aspiration so that we can profitably grow.

I think then kind of within that, we talked about the structural decline in supply earlier. And then some of the demand signs looking really good. So leisure demand holding up and business demand picking up. All three of those things give us a level of confidence about demand and pricing moving forward. And what we've said is effectively, we would need see like-for-like at 3% to 4% level to cover the inflationary pressures that we're facing. But we've also just said that in the first seven weeks of trading, we've seen very strong numbers.

So, as Hemant said, it's unlike to see those numbers continuing for the whole year. But we do have a level of optimism about the hotel demand environment, particularly how Premier Inn performs within that for the remainder of the year.

I think then in terms of the buyback question, I might just reiterate what I said earlier to Vicki really, which is we've got a framework and I like the framework because it's really quite clear on what our hierarchy is. And we start off with saying, we have investment grade. We'll look at organic investments, investment in our own business when we're confident of the return in organic opportunities and then we look at shareholder return.

I wouldn't read too much into how we've spoken about the framework there other than to say it's a framework, we're committed to that framework, and we'll continue to apply it. We always as a business want to allow flexibility if opportunities come up to invest both in our business and in organic opportunities, and that's how we've applied the framework. That's why we've announced what we have done today and we'll continue to apply that framework and we'll update you in the interims.

Do we think there'll continue to be opportunities for us to invest in our business to drive long-term returns? Yes, we do. We think that's one of the things that's underpinning the strong performance we've got in the business, but we're committed to the framework moving forward.

Hemant Patel

Yeah. I think your question on ERR framework in relation to buybacks, yeah, so, I mean, we still see attractive returns and we still expect to use attractive returns from buybacks, and we'll make sure we continue to use those as part of our capital allocation framework as we discussed. But I think there's anything else I can say on that at this stage.

Jaina Mistry

Okay. So I mean U.K. peers have spoken about being happy with an 8% ERR. Is that in line with your thinking?

Hemant Patel

Like I said, we haven't talked about that. So, what we will do as we apply the -- so we haven't talked about that externally. And I'm not going to talk about that now. But what I will say is that as we apply the capital allocation framework, clearly we're going to think about our different ways of creating shareholder value whether it's to, as Dominic mentioned already, investing in rooms for long term, whether it's investing back and giving back to shareholders via dividends or through buybacks that we'll make sure we optimize that mix for the best long-term return for shareholders.

Jaina Mistry

Brilliant. Thank you very much.

Dominic Paul

Thanks, Jaina.

Operator

The next question comes from Jarrod Castle from UBS. Jarrod, your line is open. Please go ahead.

Jarrod Castle

Great. Good morning, everyone, and welcome back, Dominic.

Dominic Paul

Thanks, Jarrod.

Jarrod Castle

Hi. Just coming back to food and bev, you've given a sensitivity to change in sales. In the past, you've never split out the profitability of food and bev. I don't know if it's a consideration to do that going forward, and if you can say any commentary on current ability that would be interesting.

And then, secondly, you spoke about bigger upgauging like in Peterborough of hotel rooms. You've obviously got two very small brands, Hub and ZIP. Do they still -- are they still part of kind of expansion plans, or should they even be part of the group? Thanks.

Dominic Paul

Thanks, Jarrod. So, let me take both parts of those questions. So firstly, on the food and beverage, as you say, we don't spit out the profitability. We do talk about the sales. We don't spit out the profitability. We do think of it as a core part of the customer offer. And as I said earlier, the breakfast is particularly important to our guests. We're not planning on splitting out the profitability moving forward. I mean, there are a lot of our sites are joint sites, it's actually quite hard to do that and to split out the profitability because in some of our sites, for example, labor is shared between hotels and the restaurants. But as I said earlier, we will continue to look at how we optimize and improve that performance of food and beverage moving forward.

In terms of your comment about Peterborough and Hub and ZIP, ZIP is one hotel in Wales, which is actually a really interesting experiment, which is hostel focused. We don't have big expansion plans for ZIP. It's operating okay, but we don't see in the short term it turning the dime materially on the business.

Hub actually is really quiet -- it's an exciting concept. We've had Hub for quite a few years now. It's a -- I don't know if you stayed in a Hub or not, but it's a super clever concept. So it's generally for city centers. It works where real estate prices are very high and you can get a higher number of rooms into the space, but the rooms therefore need to be smaller. So, it couldn't be branded as Premier Inn. We have to create a new brand and that brand is Hub. And it's very modern. They're small rooms. They're almost like cabins of rooms, but they're very, very comfortable. I'm staying at one tonight for example in Clerkenwell in the city. It's £200 a night. It's got a good food and beverage offer with a very limited number of menu items. So, it doesn't cost us much to deliver that food and beverage offer. It gets very high customer satisfaction. It enables us to price very competitively in the market.

And that's an interesting hotel, the Clerkenwell one. We've been open for 11 weeks in that hotel. We opened it ahead of schedule. So, we haven't -- virtually no bookings when we opened it, because we opened it eight weeks early. Within 10 days, the hotel was pretty much full. And that's the power of the distribution system that we've got as Premier Inn. A number of the new hotels that we're opening in London, including the Strand I will be a Hub. So, we're actually -- the Hub brand is going to get bigger and bigger. And we're actually excited about it and we think it's got great potential.

Jarrod Castle

Great. Thanks.

Dominic Paul

Yeah, Jarrod, thank you.

Jarrod Castle

Thanks a lot.

Operator

[Operator Instructions] The next question comes from Andre Juillard from Deutsche Bank. Andre, your line is open. Please go ahead.

Andre Juillard

Good morning. Most of my questions were already answered. But I just had the remaining one on Germany. When do you expect Germany to be profitable? You maintain '24 or you postpone a little bit this [indiscernible]?

Dominic Paul

Hi, Andre. [indiscernible]. I think Hemant covered this a bit earlier. So yes, we're still committed to hitting the breakeven point at 2024. But that makes it sound like it's almost the end of our milestones, far from it. We're focused on long-term returns of 10% to 14% in Germany. We think there're real structural -- there are structural reasons why we believe we can replicate the U.K. model Germany. So, we're excited about Germany. That said there's still a lot more that we need to do in Germany, where we've just reopened a lot of the hotel after COVID. We're spooling up the commercial engine in Germany rapidly. There's more work that we need to do, but we're on a path there.

And actually what we can see is we've got the opportunity to build a scale business in Germany with strong long-term returns. One of the checkpoints of that is going to be hitting breakeven and we're focused on doing that in 2024. But that is a checkpoint to a longer-term business. We've invested £1 billion in Germany, so we've made a big commitment. We think there's a lot of shareholder value be created in Germany. And we believe we can build a really strong long-term business there and that's what we're focused on doing.

Andre Juillard

Okay. Thank you. And if I may, if you had to compare the U.K. market with the German one, have you seen the same kind of evolution of the market with some independent closing in Germany, or is it not really comparable?

Dominic Paul

No, it's similar actually, Andre. A little -- there's been fewer closures in Germany of independents. But the independent hotel sector in Germany is still down about 5% versus pre-pandemic, which is quite material. The reason it's not more is there's actually more government support in Germany during COVID.

That said, we believe a number of independent hotels in Germany are going to continue to struggle as they face inflationary cost pressures in Germany and if they're independent trading hotels harder for them to drive the revenue line. So we think that that independent sector will probably continue to decline, which gives us the opportunity.

The other element of Germany that I find particularly interesting is the branded budget hotel market in Germany is relatively very small. It's smaller than the U.K. and it's very fragmented, which again we see a long-term opportunity for us. We think there's an opportunity to build a scale budget mid-scale operator in Germany.

Andre Juillard

And if I may a follow-up on that side. Do you see any aggressive strategy from your main competitors? I'm thinking about Motel One, B&B, Accor, do you see them being really aggressive, or do you have the feeling that you are the most aggressive one at the moment in the market?

Dominic Paul

Well, we are the one that's opening the most hotel rooms and you can see that in one of the slides in the presentation. I mean, we are opening materially more rooms than the competitive set, which means that we are scaling faster than anyone else in the German market.

From a commercial point of view, they're all commercially run rational organizations. And they behave in the market, they run good businesses and they're growing, but they're not growing as fast as we are. So, we are scaling faster than anybody else in the German market. And I'll just reiterate it, it's very fragmented. So, whilst Motel One and B&B are the two of the larger operators, there's still a very small percentage of the total hotel market in Germany. And that fragmentation is a long-term opportunity.

Andre Juillard

Okay. Thank you very much.

Dominic Paul

Thank you, Andre.

Operator

[Operator Instructions] And the next question comes from Joe Thomas from HSBC. Joe, your line is open. Please go ahead.

Dominic Paul

Hi, Joe.

Joe Thomas

Good morning, Dominic. Good morning, Hemant. Just a couple of slightly bigger picture questions from me, if that's okay. First one is one of the questions I get asked the most about is elasticity demand in this sector. Of course, prices have gone up a fair bit for customers. Customers are showing no sign of slowing. But I just wonder how much headroom you think you might have on pricing? Of course, appreciate that you've raised pricing by less than your competitors, but any thoughts on how much more leeway we've got would be helpful.

And then secondly, Dominic, just -- of course this is your first sort of formal address to the city as Chief Executive and the businesses, as you've alluded, has been run very well over the last few years. And I just wondered, in terms of emphasis from yourself, what you think your priorities are, and where differences of emphasis might be? Thank you.

Dominic Paul

Okay. Thanks, Joe. Well let me take the first question first, which was about elasticity of demand. I mean, I think it's really interesting when you look at our room rates. So the first thing to say is we are in the value space. And I think that's the right space to be in climate that we're in now. Clearly, consumers are facing some pressure with inflation and the cost of living crisis. And therefore, I think you either want to be at the absolute luxury end or you want to be in the value space. And we are firmly in the value space. So that is definitely -- that is the right space I think for us to be and that's an important part of our proposition. I think it's one of the items that has let us to have this successful growth.

The second thing I'll point out, if you look at our room rate growth, if you look at the numbers that we've just outlined for full year 2023 versus full year 2020, our actual room rate is only up £10 between 2020 and 2023, which is actually underlines the fact that: a, we're great value; and b, there is opportunity for us to continue to drive that room rate and we think hold on to the strong occupancy that we've got.

The other point that I'd make is back to talking about the balance that we've got as a business, which is it's beautifully balanced between leisure and business. And there is a somewhat different elasticity of demand generally between leisure and business. That said, I think we've seen that elasticity drop a little bit in leisure since the pandemic because people are focusing on experiences and people want their summer holidays. And that's why I think we've seen leisure demand hold up.

And then, the second part of it is business travel, which is business travel is back. Business people are back out and about. We've all seen that in London, the cities and in the regions, and we're well placed to take advantage of that. So that gives us some level effectively of hedge as we go through the year. So, if there was a bit of a softening in leisure demand, I think you've got the opportunity to continue to go after the business demand.

So, I think this balance in the business and the strong market position we've got and the structural decline in the hotel market are three really important points here that effectively somewhat change the dynamics of elasticity.

The second point -- question that you asked me was about Whitbread. I mean, the first thing I'd do is I'd reiterate what I said at the beginning, which is it's great to be back at Whitbread. It's a wonderful company. Alison and the team has done a great job. We've come out of the pandemic really strongly. The core strategy that we've got is the right strategy. And I think you can see that in the results today. So, focusing on continue to successfully and profitably grow our U.K. business; really replicating that model in Germany and growing in Germany; and optimizing our food and beverage offering whilst landing the core infrastructure projects that we're focused on at the moment. They're the priority areas that I've got.

So, it is evolution, not revolution. That said, we're focused on accelerating at pace. We're focused on really building the energy as we come out of the pandemic and our performance currently is helping to support that. So, it feels great to be back at Whitbread. We've got the right strategy. It's how do we make sure we execute that strategy at pace to continue to perform so well.

Joe Thomas

Great. Thank you very much.

Dominic Paul

Thanks, Joe.

I think that sounds like that was probably the last question. So, I'll wrap up now. I'd like to you all for your time today. I know you had a lot of information to go through in a very short period of time. So, thank you all for doing that. Thank you for finding the time today to be on the call. It's great to talk to you all. A great set of questions.

And from Hemant and myself, thank you very much.

Hemant Patel

Thank you.

Dominic Paul

Thanks, everybody.

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your line.