Whitbread Regulatory News (WTB)

Outperforming the market in the UK and accelerating growth in Germany

H1 performance was in-line with expectations and reflects the closure of the vast majority of our businesses during the lockdown period from the end of March. We rapidly reopened our estate, with 97% of our UK hotels reopened by the end of July, and we have subsequently grown our market share. In Germany we have more than trebled our open hotel network to 21 hotels from the beginning of the year. Whitbread's balance sheet was enhanced by the successful £1bn Rights Issue completed in June, and provides a strong platform for the continued successful execution of our structural growth strategy in the UK and Germany, and we have today announced a transaction which will accelerate our growth in Germany with the addition of up to 15 hotels. Given the fast-changing nature of the COVID-19 environment in which we are operating, and increased levels of local and regional lockdowns, near-term visibility remains limited. However, as the situation evolves, Premier Inn remains well-placed to capitalise on the enhanced structural growth opportunities that will exist, driving attractive returns on investment in the long-term.

FY21 H1 operational highlights - outperforming and growing market share

· H1 total sales were significantly down year-on-year reflecting the closure of the vast majority of our hotels and restaurants for a large part of the period 

· When permitted, we reopened quickly and safely, with 97% of UK hotels open by the end of July

· Since reopening, UK accommodation sales performance has been ahead of the market, benefitting from the fast reopening, the strength of the Premier Inn brand and our leading customer proposition

· UK occupancy levels steadily improved on a weekly basis, averaging 51% in August, while UK Restaurant performance was boosted by the positive impact of the Eat Out to Help Out scheme. August UK total sales improved to 38.5% down year-on-year

· Customer scores remained very strong during the first half, despite the significant disruption

· In Germany, we grew our open hotel network from 6 to 19 hotels by the end of the half, and by a further 2 in October to take the total to 21 open hotels today

Ongoing decisive action to protect the business

· Our financial response to the COVID-19 crisis included significant reductions in discretionary spend and capital expenditure, suspension of the dividend, voluntary pay cuts for the Board and management team, and use of UK and German Government support packages

· Further actions taken include a restructure of head office and site level operations to ensure that we emerge from the crisis with a lower cost base, a more flexible operating model and a stronger more resilient business

· A £1bn Rights Issue was successfully completed in June, enhancing our financial flexibility

· We supported the community and national effort during lockdown by making rooms available to NHS staff and donating over 335,000 meals to charities

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 German pipeline and believe we have a long-term line-of-sight to over 60,000 rooms through both organic and inorganic investment

· We have also today announced the signing of up to a further 15 hotels in Germany that are currently operating under the Centro, Ninetynine and Fourside brands, of which 8 are open and 7 are pipeline. Subject to competition clearance, the open hotels are expected to join the Premier Inn estate in December 2020, and would take our open estate to 29 hotels and our total open and committed pipeline in Germany to 68 hotels

· Recent lockdown measures announced by the UK Government mean we will continue to manage our cash position carefully. However, our balance sheet, enhanced by the successful Rights Issue, provides a strong platform for future growth and investment to drive market share gains

Financial highlights

1: Includes £0.3m of revenue relating to the Costa disposal transitional service agreement (H1 FY20: £6.0m)

† 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 financial performance in H1 reflects the closure of the vast majority of our business for a large part of the period. Our hotels and restaurants were temporarily closed at the end of March, reopening in May in Germany, and from July and through into August in the UK. During the period of closure, total statutory revenue was 99% behind the prior year, driving overall H1 statutory revenue down 76.9% year-on-year

· The significant decline in revenue resulted in an adjusted loss before tax of £367.4m. Statutory loss before tax of £724.7m includes a non-cash impairment charge of £339.9m 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

· The business retains a strong balance sheet and liquidity position, enhanced by the successful £1bn Rights Issue completed in June. At the end of the first half, the business had access to £936.2m of cash and cash equivalents, an undrawn Revolving Credit Facility (RCF) of £950.0m, and up to £600.0m available under the Government's Covid Corporate Financing Facility (CCFF) scheme

Alison Brittain, Whitbread Chief Executive Officer, commented:

"Our performance following the reopening of our hotels and restaurants in the summer was encouraging and we continue to trade ahead of the market. Taking market share in the UK demonstrates the strength of our trusted Premier Inn brand and the benefits of our unique operating model.

Since March we have trebled our open hotel network in Germany to 21 hotels and today announced the acquisition of up to 15 more hotels. This takes our network of open and pipeline hotels to nearly 70 hotels, with broad geographic coverage across many major cities and towns. 

Throughout the crisis we have taken decisive action and we continue to focus on protecting our guests, our teams and our business in light of the impact of the recent increase in regional and national restrictions. We are also improving the flexibility of our cost model to respond to changes in demand. As a result, we enter this second-wave period in a position of strength, with our customer scores higher than they have ever been, our market share growing in the UK and extending a meaningful network of hotels in Germany, giving us the opportunity to achieve national brand awareness and operate at scale.

I am extremely proud of and grateful to our teams for their resilience and for the part they have played in enabling us to successfully navigate this difficult period. I would like to take this opportunity to thank them for their tremendous hard work and commitment. I would also like to thank our shareholders for their ongoing support as our successful £1bn Rights Issue ensures that our strong balance sheet continues to be a source of competitive advantage and positions the business for long-term growth. 

Whitbread's long-term strategy remains as relevant and compelling as ever. The impact of the COVID pandemic on the hotel sector will undoubtedly be significant and we are already seeing signs of distress and constraint in the competitive landscape. This is likely to accelerate the structural changes in the market with supply contraction and constrained investment amongst independent and budget branded operators in both the UK and Germany. 

We hold a uniquely advantaged position in the UK market as the largest player with the strongest brand. Our financial flexibility and resilience, combined with a strong balance sheet, give us the ability and the confidence to invest with discipline and focus on strong long-term returns. We will be well placed to enhance our market leadership position even further in the UK, and accelerate our growth in Germany, supporting our guests and teams and driving long-term value for all our stakeholders."

For more information please contact:

Investor queries | Whitbread | investorrelations@whitbread.com 

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

A webcast for investors and analysts will be made available at 8:00am on 27 October 2020 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

Protect and Restore: Ongoing decisive action that positions the business for a successful recovery

Whitbread entered FY21 in good shape, with a strong operational performance and excellent guest scores, with commercial initiatives helping drive a particularly strong end to the year, where we were trading ahead of the market. However, the start of the financial year was dominated by the impact of what was a rapidly evolving COVID-19 situation. In response, the business took rapid and decisive action to protect our teams, our guests and the business itself. Following Government guidance in the UK and Germany, our hotels and restaurants were temporarily closed at the end of March, with the exception of 39 hotels in the UK that remained open to provide accommodation for NHS staff and other front-line key workers during lockdown.

Given the material impact of these closures on our revenues, we took immediate action to reduce cash outflows. This included the elimination of all discretionary P&L spend, including our room refurbishment plans, marketing, non-essential training and staff recruitment, 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 also benefitted from the Government's decision to stop the payment of business rates for a 12-month period, which would have cost approximately £120m over the year.

Whilst we prioritised the protection of our cashflows, we also recognised the importance of acting responsibly in times of crisis and treating our stakeholders fairly. Examples of these actions included providing full cash refunds to our customers for all cancelled bookings, continuing to pay our suppliers, many of which are small or medium sized businesses, in a timely manner and paying the additional 20% of salaries on top of the Government furlough credit. We adhered to national minimum wage increases made for our hourly paid staff, while imposing a pay freeze for all other salaried staff. We also supported the community and national effort by making rooms available to NHS staff and other key workers at selected hotels, passing fleet delivery capacity to supermarkets and donating over 158 tonnes of food to charities following our restaurant closures.

Our teams have been fundamental in enabling us to navigate this very difficult period, and it was with great regret that, as part of our plans to ensure our business model has the flexibility to respond to changes in demand, we recently announced our intention to enter into a consultation process that could result in up to 6,000 redundancies in the UK. Decisions like these are extremely tough, but ultimately, we believe are in the best long-term interests of the business while demand remains subdued.

Liquidity and balance sheet

Whitbread entered the new financial year with balance sheet headroom, with a lease-adjusted net debt to FFO ratio of 2.6x, net debt of £322.9m, and substantial liquidity through its accessible cash of over £500.0m and access to an undrawn Revolving Credit Facility of £950.0m. Despite the mitigating actions identified above, the business faced into material cash outflows, and in response took decisive action to ensure the business emerges from the pandemic with a strong balance sheet and is in the best position possible. This included being confirmed as an eligible issuer under the UK Government's Covid Corporate Financing Facility (CCFF), with an issuer limit of £600m, and the successful £1bn Rights Issue that completed in June. These proceeds further strengthened our balance sheet and will help replace the cash outflow resulting from significantly reduced revenues, and return our balance sheet to a position of strength over time. With the extensions of local and regional lockdowns driving increased levels of uncertainty, we will have to continue to cautiously manage our cash flow. However, 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, especially in Germany. Our freehold property also reduces volatility in the current downturn and provides a flexible source of funding for investments and additional liquidity if required.

Rapid and safe reopening - Growing market share in the UK and accelerated growth in Germany

Following the updated UK Government advice that hospitality venues could reopen from 4 July, we were able to reopen our UK hotel and restaurant estate quickly and safely throughout July and into August. By the end of August, 98% of our UK hotels were open alongside all our restaurants. Our operating model, whereby revenues contribute to fixed costs at low occupancy levels, combined with the learnings from operating 39 hotels throughout lockdown, meant that we were able to move quickly and reopen ahead of the market.

Our strategy on reopening was to leverage our strong brand and direct distribution model, while also providing additional reassurance to our customers through a new enhanced cleaning and hygiene routine, allowing customers to "stay with confidence". New flexible booking conditions and rate classes, providing guests with a greater range of cancellation and amendment options, also enabled customers to "book with confidence".

During August, total UK accommodation sales percentage change was 4.3pp ahead of the M&E market1 representing a 3.5pp increase in Premier Inn's share of the total hotel market by revenue to 10.8%2. This outperformance accelerated in September to 6.0pp ahead of the M&E market3

Demand was strong in seaside and tourist locations, with occupancy levels of almost 80% during August in those locations. However, demand remained subdued across the rest of the hotel market, particularly in London and metropolitan areas. Across our entire UK estate, overall occupancy levels steadily improved on a weekly basis, averaging 51% in August, while UK Restaurant performance was boosted by the positive impact of the Eat Out to Help Out scheme. Total UK sales (accommodation and food and beverage) year-on-year change improved to down 38.5% in August, from down 82.0% in July.

In Germany, we were able to refurbish and rebrand 13 of the acquired Foremost hotels during the lockdown period, opening them to customers, alongside the reopening of our six existing hotels in May, trebling the number of open hotels to 19 by the end of the period, and 21 by the reporting date. Performance trends mirrored the UK, with strong demand and occupancy levels in tourist locations, while locations with a greater business skew remained at low occupancy levels. In August, total sales were over 300% ahead of last year, boosted by the acquired Foremost hotels, while occupancy recovered to 54%.

Overall financial performance in H1 reflects the closure of the vast majority of our business for a large part of the period driving overall statutory revenue down 76.9% year-on-year. As a result of the significant decline in revenue, adjusted loss before tax was £367.4m. Statutory loss before tax of £724.7m includes a non-cash impairment charge of £339.9m relating to goodwill on German acquisitions, property, plant and equipment and right-of-use assets, as a result of the ongoing COVID-19 situation. The quantum of the impairment charge is primarily driven by 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, and a reduction in anticipated cashflows in the UK and Germany, particularly over the next 12-24 month period.

Despite the significant mitigating actions, the decline in revenue as a result of the COVID-19 situation, resulted in a cash outflow before shareholder receipts and debt repayments in the first half of £461.7m. The business, however, retains a strong balance sheet and liquidity position, enhanced by the successful £1bn Rights Issue completed in June. At the end of the first half, the business had access to £936.2m cash and cash equivalents, to an undrawn RCF of £950.0m, and up to £600.0m available under the Government's CCFF scheme.

Driving long-term value

Whitbread's long-term strategy is highly relevant post COVID-19

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

· Enhancing 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.

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 deliver long-term sustainable returns on incremental investments and drive long-term value.

1) Grow our market share in the UK: Premier Inn is best-placed to capitalise on the recovery opportunity and reinforce our 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 2019 independent hotels' market share fell 9 percentage points in the UK, while Premier Inn's market share of rooms supply of the total market grew from 6% to 11%. Despite this decline, the independents sector still represents 48% of the UK market. Post COVID-19, the decline in independents' share of the market is expected to accelerate 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 2018 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 17pp4 ahead of the rest of the market from the start of August to the start of October.

Broad customer reach

Premier Inn's UK customer base is very broad with a roughly even split of business and leisure customers. Our business customers include a significant proportion of manual professions i.e. those workers who need to be physically present to perform their jobs, while our "white collar" workers 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 July and August 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 survey5, 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 97% direct distribution in FY20) 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 such as online travel agents. 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 strong 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 by leveraging our 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.

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 and 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 in Germany is to leverage the strengths and capabilities of the UK business to create the number one budget brand in the German hotel market. We believe all of the six UK success factors detailed previously are either already present in Germany, or, in the case of the "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 pipeline of just over 10,000 rooms in Germany equates to around 1% market share (compared to c.11% in the UK). At this early stage in the businesses' growth, we have an initial line-of-sight to around 60,000 rooms, which would equate to around 5% market share, still less than half that achieved in the UK.

The German hotel market has many attractive characteristics. 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 represents 9% of the market, compared to 28% 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 strong advantage in the budget market, supported by replicating the strong quality and value credentials from the UK.

As in the UK, the impact of COVID-19 will accelerate the decline of independents and other budget branded operators, and this environment will present greater opportunities to invest in or acquire assets that will deliver strong returns in the long-term.

There are already clear signs of competitor distress in the market, and this is evidenced by the announcement today of the signing of up to 15 hotels in Germany that are currently operating under the Centro, Ninetynine and Fourside brands, of which 8 are open and 7 are pipeline. The transaction involves the transfer of leases from the existing operator to Whitbread, and is subject to competition clearance by the German Federal Cartel Office, and other conditions that must be satisfied by the existing operator, which if all cleared, would see the hotels become part of the Premier Inn estate in December 2020. 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. The total investment for the deal is expected to be €40-50m, mainly driven by the investment required to refurbish and rebrand the hotels to Premier Inn which is anticipated to happen in the first half of 2021. In the meantime, the open hotels will continue to operate in the Premier Inn estate under their existing branding. The economics of this transaction demonstrate the enhanced structural opportunities that now exist in the German market, that Premier Inn is well-placed to take advantage of.

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 over 90% in our German business, and we have had a good start operationally in our organic hotels, driving very high customer satisfaction scores.

During the early-growth stages of the Premier Inn business in Germany, brand awareness campaigns have been focussed on the local and regional areas in which the hotels are located. Following the acquisition of 19 hotels from the Foremost Hotel Group in February, and the subsequent rebranding and refurbishing of 13 of those hotels, the open network, which now stands at 21 hotels, and are located in most major cities in Germany, provides a national network, and a basis from which the business can increase its scale. This, in-turn, helps drive brand awareness, and as the open network continues to grow, will make future nationwide marketing campaigns viable. The quality of the hotel and room offering, which is driving very high customer scores, is also a key component in driving brand awareness.

The open and committed pipeline in Germany now stands at over 10,000 rooms across 53 hotels, of which 19 hotels were open at the end of H1, increasing to 21 hotels open by mid-October. Successful competition clearance on the signing of up to 15 hotels currently operated by Centro Hotel Group will increase the Premier Inn Germany total open and committed pipeline to 68 hotels and over 12,000 rooms, of which 29 hotels will be open.

To date we have committed almost £800m 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 strong track-record of delivering material cost efficiencies, including £45.0m of cost savings delivered in FY20. Since the start of the pandemic, the business's approach to generating efficiencies has adapted to respond 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. As we move into the "Restore" phase of our strategy, our focus is now on ensuring 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 recently announced that we would enter into a consultation process that could result in up to 6,000 redundancies in the UK. We also continue to drive efficiencies through developing our international sourcing capability, leveraging technology to drive both marketing and labour scheduling effectiveness and optimising the UK estate.

Financial flexibility

Whitbread's balance sheet and liquidity position was further enhanced by the £1bn Rights Issue successfully completed in June 2020. Covenant waivers were agreed with our 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. This, together with Whitbread's freehold properties, gives us the financial flexibility to protect our liquidity and pursue our strategy of both organic and inorganic growth when the time is right.

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 a forward-looking strategy with an ambitious vision to "enable everyone to live and work well". We will "do business the right way" by supporting our teams, the environment, our communities, suppliers and our guests.

We benchmark our performance each year against how other companies are doing using the Dow Jones Sustainability Index. Whitbread's results for 2019 saw us placed second in our industry for the second year running, a long way above many of our key competitors in food service sectors. As well as being awarded a Lotus Award for the second year running for our Force for Good programme, we maintained a CDP Climate Change score of B, which was a great result as the sector average performance has reduced from B- to C. These are excellent results that highlight our commitment to become a more sustainable business.

Being a Force for Good is not a principle that we leave behind when we face challenges, it is a central part of our ethos. Through the COVID-19 crisis we have been contributing our skills, experience and facilities to support our own people and our communities across the country. During the national lockdown, whilst we shut our restaurants and the majority of our hotels for business, we focused our efforts on helping in the national effort by keeping hotels open that are located near hospitals for use by NHS staff and other front-line key workers. We also transferred our vehicle delivery capacity to supermarkets to help their supply chains, paid all of our suppliers in a timely manner and donated over 158 tonnes of food to charities, producing c.335,000 meals for those in need, following our restaurant closures.

After many years of focus and action on sustainability matters, we have recently created a renewed and ambitious approach. We have set more stretching goals to keep Whitbread at the forefront of sustainable business in the UK, including the removal of all unnecessary single use plastics by 2025 and a 50% reduction in food waste by 2030.

We continue to strive to create an environment where there are no barriers to entry and no limits to ambition. Our award-winning induction enables those without hospitality experience, but with the right behaviours, to quickly learn and adapt to our hotels and restaurants. Our apprenticeship offer has gone from strength to strength. In 2019, we saw a 90% increase in the number of apprentices, with 80% on track to achieve their apprenticeship in 2020.

We are delighted to be supporting another ground-breaking project at Great Ormond Street Hospital. We have been proud supporters of the hospital since 2012 and have seen first-hand the extraordinary difference being made to the lives of the young children and families receiving treatment there. This year our teams have raised more than £0.5m for our charity partner.

We buy 100% renewable electricity for all the hotels and restaurants we own in the UK, and over 20% of our properties have electricity-generating solar panels installed. We were delighted to win an Edie Energy Efficiency Project of the Year award for our battery powered hotel built last year in Edinburgh, which was built in a bid to improve energy efficiency, secure power supply and enable energy cost savings.

As part of our Force for Good programme, we are committed to respecting the human rights of workers across our supply chains. We will continue to strive to enable people to live and work well across our value chains, as well as recognise the importance of operating a sustainable and traceable supply chain.

Current trading and sensitivity

Premier Inn UK's occupancy increased from 51% in August to 58% in September and our total accommodation sales recovery year-on-year was c.6% ahead of the midscale and economy market in September. We continued to see good leisure bookings and a pick-up in business-to-business sales, albeit from a low base.

Since the Government announcement in early October instructing working from home where possible and the recent regional lockdowns, we have seen a slowdown in the market performance. Our performance has remained ahead of the market, but with the fast-changing nature of the COVID-19 environment, near-term visibility remains limited. Despite this, profit and cash sensitivities for this year remain broadly consistent with those articulated in May.

The business expects to benefit from the Government's Job Retention scheme in the second half to the value of around £15m - £20m, the benefit of which is partly offset by a c.£10m impact of the later than anticipated reduction in staff costs, resulting in a net £5m - £10m benefit.

Notes:

1: STR data, full inventory basis, dates 31/7/20 to 27/08/20 , M&E market excludes Premier Inn

2: STR data, revenue share of total UK market, dates 31/7/20 to 27/08/20

3: STR data, full inventory basis, dates 28/08/20 to 01/10/20 , M&E market excludes Premier Inn

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

5: YouGov BrandIndex. Scores measured on 26/8/20 on a 12-week moving average

Business Review | H1 performance reflects the closure of our business for a large part of the period

Premier Inn UK1

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

2: Includes government support - see note 6 of the accompanying financial statements for further details

Premier Inn UK statutory revenue was down 77.2% in the first half, reflecting the closure of the UK business for a large part of the period. Our hotels and restaurants were temporarily closed, in-line with Government instructions, from the end of March until the start of July, with the exception of 39 hotels that were kept open to provide accommodation for NHS staff and other key workers. During this 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 ownership business model, combined with our powerful brand and direct distribution model, enabled us to reopen quickly and ahead of our competitors. By the beginning of August, 97% of our hotels had reopened, alongside all of our restaurants.

Post reopening, occupancy levels steadily improved, with August occupancy levels averaging 51%. Demand was strong in seaside and tourist areas, with occupancy levels of almost 80% during August in those locations. However, demand remained subdued across the rest of the hotel market, particularly in London and other metropolitan areas. Around two thirds of our revenue in August came from leisure guests, and a third from business guests, with business demand skewed to those with manual professions. Premier Inn hotel sales growth in August was 4.3pp ahead of the Midscale and Economy market1, demonstrating the quality of our operations and the strong appeal of our winning customer proposition.

Total food and beverage sales were down 76.3% for the period. Performance was boosted in August by the impact of the Eat Out to Help Out scheme; the Government scheme that contributed towards the price of meals on every Monday, Tuesday and Wednesday throughout the month.

Operating costs reduced by 28.7% to £451.1m, in-line with guidance, and reflected a reduction in revenue-driven variable costs (primarily food and beverage costs of sales) and other cost initiatives announced at the start of the pandemic, including the postponement and cancellation of all non-essential costs.

During the first half, two new hotels were opened and five hotels permanently closed, bringing the estate total to 817. Our committed pipeline remains largely unchanged at 12,935 rooms. This new capacity underpins our opportunity to take market share in the UK in the medium to long-term as competitor supply contracts.

Adjusted loss before tax for the period was £313.1m, down 219.9% year-on-year reflecting the closure of the majority of sites during the period.

Notes:

1: STR data, full inventory basis, dates 31/7/20 to 27/08/20 , M&E market excludes Premier Inn

Premier Inn Germany

1: Includes Government support - see note 6 of the accompanying financial statements for further details

We entered FY21 with six operational hotels, following the opening of Munich City in Q4 FY20. These hotels were trading well with strong operational performance ahead of the enforced lockdown at the end of March. During the lockdown period, we were able to refurbish and rebrand 13 of the acquired Foremost hotels, meaning that when permitted by the German Government in May, we were able to reopen a total of 19 hotels. A further two hotels opened in October in Leipzig and Stuttgart. Post 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. Overall statutory revenue was 48.6% ahead of last year, with the impact of the increased estate size (19 hotels open by the end of the period, compared to three hotels in H1 FY20) more than offsetting the impact of the lockdown closures. Operating costs increased by £13.7m to £22.6m, also due to the increased estate size. IFRS 16 depreciation costs increased by £7.1m to £7.2m, reflecting the fact that all new opened properties are leasehold. Combined with other depreciation and amortisation costs of £1.9m, and IFRS 16 interest costs of £2.8m, the adjusted loss before tax for the period increased by £20.7m to £26.5m.

The total open and committed pipeline estate now stands at 53 hotels and over 10,000 rooms, an increase of one hotel from the start of the year; the small increase being as a result of the temporary pausing of our expansion actions during the lockdown period. We have subsequently announced the signing of up to 15 leases for hotels currently operated by Centro Hotel Group, that subject to German competition authority clearance, will increase the open estate to 29 hotels and the total pipeline to 68 hotels. 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 £16.5m were £0.5m higher than last year. Net finance costs increased by 197.4% to £11.3m, as a result of 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 financial performance in H1 reflects the closure of the vast majority of our business for a large part of the period. Our hotels and restaurants were temporarily closed at the end of March, reopening in May in Germany, and from July and through into August in the UK. During the period of closure, total statutory revenue was 99% behind the prior year, driving overall H1 statutory revenue down 76.9% year-on-year

· The significant decline in revenue resulted in an adjusted loss before tax of £367.4m. Statutory loss before tax of £724.7m includes a non-cash impairment charge of £339.9m 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

· The business retains a strong balance sheet and liquidity position, enhanced by the successful £1bn Rights Issue completed in June. At the end of the first half, the business had access to £936.2m cash and cash equivalents, and to an undrawn RCF of £950.0m

Financial highlights

Statutory Revenue

Statutory revenue of £250.8m was 76.9% behind last year as a result of the lockdown closure of sites across the UK and Germany. Sites reopened in May in Germany, and throughout July and August in the UK.

Adjusted EBITDAR

Other income of £86.0m includes £85.5m of benefit recognised in respect of the UK Government's Job Retention scheme (furlough). Operating costs of £490.2m were 25.5% 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. As a result of the hotel and restaurants closures, and the subdued market post reopening, adjusted EBITDAR was a loss of £153.7m.

Adjusted operating loss

The leasehold estate grew by eight sites in the UK compared to the same period in the prior year and increased by 15 sites in Germany. This resulted in a £10.7m or 21.3% increase in IFRS 16 depreciation charges to £61.0m. Other depreciation and amortisation increased by £4.4m to £84.9m, driven by new openings. The adjusted operating loss of £295.1m compared to a profit of £296.4m in H1 last year.

Net finance costs

Net finance costs (excl IFRS 16) were £11.3m (H1 FY20: £3.8m). This was £7.5m 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 £61.0m was £4.0m above last year primarily driven by the opening of 15 leasehold sites in Germany.

Adjusting items

Total adjusting items before tax were £357.3m, including a non-cash charge, primarily as a result of COVID-19, of £339.9m 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 will 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 reporting process, resulting in charges of £238.8m relating to goodwill arising upon acquisition of the Foremost Hospitality Hiex GmbH and £101.1m relating to property, plant and equipment, right-of-use assets and other intangibles. The quantum of the impairment charges is primarily driven by:

· 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 year end, reflecting market volatility in the spot risk-free rate and equity risk premium inputs used in the Group's WACC calculation, and;

· A reduction in anticipated cashflows in the UK and Germany, particularly over the next 12-24 month period

· 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 head office restructure programme incurring £5.3m 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.

Further details on the non-COVID-19 related adjusting items can be found in note 4 of the accompanying financial statements.

Taxation

The adjusted tax credit for the period was £49.0m compared to a tax charge of £49.0m in H1 FY20, driven by the adjusted loss before tax in H1 of £367.4m. This represents an adjusted effective tax rate of 13.3%. Following the UK Government's 2020 budget announcement that corporation tax rates would remain at 19%, rather than reduce to 17% as had been previously indicated, an additional tax charge relating to FY20 profit has been recognised in the first half. The statutory tax credit for the period was £64.2m (FY20: (£47.7)m), representing an effective tax rate of 8.9%, and includes a tax credit on adjusting items of £15.2m.

Statutory loss after tax

Statutory loss after tax for the period was £660.5m, down 483.6% year on year driven by the closure of the majority of the business during H1, impairment charges primarily as a result of COVID-19 and offset by the tax credit recognised.

Earnings per share

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

Adjusted basic loss per share of 181.9p and statutory basic loss per share of 377.4p reflect the adjusted and statutory losses reported in the period, driven by the closure of the majority of our sites for a large part of 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 8 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 covenant waiver period, which lasts until March 2022, as a condition agreed with Whitbread's lenders and pension trustees. The Board hopes to return to paying dividends again following the normalisation of the Group's financial position and performance.

Cashflow

Net cash outflow before shareholder receipts and debt repayments for the period was £461.7m, approximately £150m better than the previous guidance issued in May. This improvement versus guidance was driven by the earlier opening of our hotels than was anticipated in our previous base case, which assumed hotels and restaurants would remain closed or at low occupancy until September.

The £129.0m working capital outflow was primarily driven by a £57.8m 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 of the half. £27.9m of the movement was driven by outstanding amounts due from the Government in respect of the Job Retention Scheme and the Eat Out To Help Out scheme. An increase in our stock holding of personal protective equipment resulted in an additional £9.9m outflow, alongside the payment of our FY20 VAT creditor of £23.5m.

The £28.1m other inflow is driven by £15.8m of insurance proceeds, the reversal of non-cash charges of £5.2m share based payments and £4.5m share of loss from joint ventures.

Maintenance capital expenditure of £40.0m and expansionary capital expenditure of £81.1m 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 £14.1m to £105.4m driven by the higher number of leasehold properties entering the estate, particularly in Germany.

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 £12.6m.

Total net cash inflow for the first half was an increase of £444.2m after accounting for the £981.0m proceeds of the Rights Issue that completed in June, and the repayment of £75.1m of US private placement notes maturing in August 2020.

Debt funding facilities & liquidity 

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

2: CCFF would reduce to £300.0m if Whitbread is downgraded below BBB-

Whitbread entered the financial year with a strong balance sheet, low leverage and strong liquidity. This position was further enhanced by the £1bn Rights Issue, successfully completed in June, and by the Group being confirmed as an eligible issuer under the UK Government's Covid Corporate Financing Facility (CCFF), with an issuer limit of £600.0m that is undrawn. The business is also backed by a valuable freehold property estate.

The Group announced in May that an 18-month waiver for debt and interest related covenants had been accepted by lenders for both the Revolving Credit Facility and the US private placement debt, meaning that the existing covenants are next tested in March 2022. The existing covenants have been replaced during the covenant waiver period with two new tests: net debt (excluding lease liabilities) must be less than £2bn and liquidity headroom to available facilities must be greater than £400m.

During the period, £75.1m of US private placement notes that matured in August 2020 were repaid.

With the current extensions of local and regional lockdowns driving increased levels of uncertainty and the reinstatement of the covenant tests in March 2022, we will continue to carefully manage our cash flow. However, the Group's strong balance sheet, access to over £2bn of liquidity, and the potential to access funding through our freehold estate means there is financial flexibility, with good headroom to the temporary covenants.

Capital investment 

Total capital expenditure in the first half was £121.1m, in-line with expectations, and reflecting the postponement or deferral of all non-essential capital expenditure. Excluding the Germany acquisition announced earlier, the Group expects capital expenditure for FY21 to be in the region of £250m as previously guided. In addition, the acquisition of the 15 leasehold hotels in Germany will require around £40m of capital, of which 50% is the expected cost to refurbish each hotel.

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

We are 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.

Pension

The Group's defined benefit pension scheme, the Whitbread Group Pension Fund (the "Pension Fund"), had an IAS19 surplus of £164.8m at the end of the period (H1 FY20: £222.3m), with the lower funding position primarily driven by asset performance being lower than the discount rate which was partially offset by favourable inflation experience. 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 conducted.

In May, Whitbread announced that it had reached an agreement with the Trustee for a covenant waiver period for the existing EBITDA related covenant which will now not be tested until March 2022. In the event of a breach of the original EBITDA related covenant, a cash payment would have been required to improve the funding position. 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. An additional £50.0m of security has also been given to the Trustee for the duration of the covenant waiver period. A waiver for the same period was also agreed with the Trustee for any possible technical breach that may have resulted from the temporary closure of our hotels and restaurants.

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 1 of the attached interim financial statements.

Risks and uncertainties

The directors have reconsidered the principal risks and uncertainties of the Group and have determined that those reported in the Annual Report and Accounts 2019/20 remain relevant for the remaining half of the financial year.

In addition to those risks detailed below, the possible reduced levels of business travel as a result of increased working from home and improved virtual meeting technology is a new risk that could emerge as a direct impact of the pandemic. Premier Inn has a broad business customer base, including a significant proportion of customers with manual professions who need to be physically present to perform their roles. Premier Inn also under indexes in those areas of business travel that may be more exposed to these structural changes, for example, group bookings for conferences or internal meetings.

The previously highlighted risk regarding the tightening labour market due to the uncertainty surrounding Brexit has reduced in the short-term, as the available labour pool increases as a result of COVID-19. However, the risk remains in the medium to long-term that the sector will face challenges to attract and retain talent in specific roles such as housekeeping and chefs.

The following summaries the risks and uncertainties set out in the annual report:

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

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

· Cyber and Data Security - reduces the effectiveness of systems or results in loss of data;

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

· Change - ability to execute the significant volume of change;

· Retention and wage inflation - failure to maintain staff engagement and retention in a tightening labour market with sector specific challenges and talent hotspots;

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

· Terrorism - impacts the safety and security of customers or staff and the consequent impact on trading;

· Health and safety - death or serious injury as a result of company negligence; and

· Food safety and hygiene - the preparation and storage of food and/or supply chain failure results in food poisoning and reputational damage.

The risk of a wider macro-economic effect 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.

Environmental and Social risk, of which sustainability is a key area, is an emerging risk for Whitbread and our approach to identifying and managing this is embedded into the risk management framework and integrated through policies and the risk control mechanisms.

The detail can be found on pages 54 to 57 of the Annual Report and Accounts 2019/20 which is available on the website www.whitbread.co.uk.

Supplementary information

Further information is available in Microsoft Excel from: www.whitbread.co.uk/investors/results-reports-and-presentations. This information includes:

· Premier Inn segmental pro forma income statements;

· Premier Inn network data;

· Premier Inn sales & financial information;

· IFRS 16 adjustments and impact to financial statements; and

· Adjusting items.

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 like-for-like sales, adjusted operating profit, adjusted profit, adjusted basic earnings per share, net debt, discretionary free cash flow, lease-adjusted net (debt) / cash : FFO and EBITDAR. Further information can be found in the glossary and reconciliation of APMs at the end of this document.

Responsibility statement We confirm that to the best of our knowledge:a) The condensed set of financial statements, which has been prepared in accordance with IAS 34 Interim Financial Reporting, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole;b) The interim management report includes a fair review of the information required by the Financial Statements Disclosure and Transparency Rules (DTR) 4.2.7R - indication of important events during the first six months and their impact on the financial statements and description of principal risks and uncertainties for the remaining six months of the year; andc) The interim management report includes a fair review of the information required by DTR 4.2.8R - disclosure of related party transactions and changes therein.By order of the Board

Interim consolidated income statement

1 Earnings per share figures for the comparative period have been restated to reflect the bonus element of the June 2020 rights issue.

All of the results shown above relate to continuing operations.

Interim consolidated statement of comprehensive income

Interim consolidated statement of changes in equity

6 months to 27 August 2020 (Reviewed)

1 The share premium amount of £929.3m is net of £28.2m in relation to transaction costs associated with the rights issue.

6 months to 29 August 2019 (Reviewed)

1 As set out in Note 33 to the Annual Report and Accounts for the year ended 27 February 2020, amounts have been restated to reflect the Group's irrevocable commitment for the purchase of its own shares.

Interim consolidated balance sheet

1 The balance sheet as at 29 August 2019 has been re-presented to show investment property separately from property, plant and equipment.

2 Right-of-use assets - investment property represents leasehold sites which the Group acquired on the acquisition of Foremost Hospitality Hiex GmbH which are being temporarily subleased to a third party (see Note 18).

Interim consolidated cash flow statement

1 Cash consideration for the Group's acquisition of Foremost Hospitality Hiex GmbH of £169.5m (see Note 18) was included in the consolidated cash flow statement for the year ended 27 February 2020.

2 During the year ended 27 February 2020, the Group paid a deposit in advance of an acquisition which was subsequently aborted. During the period, the Group recovered £1.3m following settlement negotiations.

Notes to the accounts

1. Basis of accounting and preparation

The interim condensed consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors on 26 October 2020.

The interim condensed consolidated financial statements are prepared in accordance with UK listing rules and with IAS 34 Interim Financial Reporting. The interim financial report does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.

The financial information for the year ended 27 February 2020 is extracted from the statutory accounts of the Group for that year and does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. These published accounts were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union, and reported on by the auditor without qualification or statement under Sections 498(2) or (3) of the Companies Act 2006 and have been delivered to the Registrar of Companies.

The interim condensed consolidated financial statements for the six months ended 27 August 2020 and the comparatives to 29 August 2019 are unaudited but have been reviewed by the auditor; a copy of their review report is included at the end of this report.

Going Concern

The financial position of the Group, its cash flows, performance and position are described in the financial review and the principal risks of the Group are set out in the other information within the interim management report. Details of the Group's available and drawn facilities are included in Note 11. At 27 August 2020, the Group had a cash balance of £936.2m with available borrowing facilities of £1,689.8m for use in the going concern assessment of which £739.8m had been drawn down. The UK Government Covid Corporate Financing Facility (CCFF) of £600.0m is not included in the available facilities as the facility is uncommitted and undrawn and will be withdrawn by the Government from March 2021.

The future financial performance of the Group is dependent upon the wider market in which it operates. The COVID-19 pandemic and the temporary measures put in place to control the virus spreading, including social distancing restrictions, and both local and national lockdowns, has heightened the inherent uncertainty in the Group's assessment of these factors.

The Group has implemented a number of mitigating actions to reduce cash outflows and maintain liquidity, as follows:

• Received covenant test waivers for the period to March 2022 for its revolving credit facility (RCF), US Private Placements (USPP) and defined benefit pension scheme. Under the terms of the waivers, the Group is required to maintain £400.0m cash and/or headroom under undrawn committed bank facilities and total net debt must not exceed £2.0bn.

• Did not declare a final dividend for FY20 and no dividends will be paid during the covenant test waiver period.

• Raised £981.0m net of fees through a rights issue.

• Significantly reduced the level of capital expenditure, limiting the outflows to only committed spend, work in progress, compliance and health and safety related spend, pausing all non-essential discretionary and variable spending.

• Participated in government initiatives to protect the viability of the business, including the Coronavirus Job Retention Scheme (CJRS), Eat Out to Help Out Scheme, Business Rates Relief and have been confirmed as an eligible issuer under the CCFF with an issuer limit of £600.0m.

• Announced a major restructuring programme of the Group's support centre and site operations which is expected to result in the redundancy of up to 6,000 team members, representing approximately 18% of the total workforce. In addition, the Board and management team have taken voluntary reductions in remuneration.

All of the Group's restaurants and 98% of the Group's hotels have re-opened fully with the Group implementing new protocols to ensure the health and safety of its guests, employees and suppliers. The UK Government have made it clear that the industry should continue where these safe working practices are in place. As such, management do not anticipate that there will be a need to concurrently close all operations once more and therefore that the likelihood of a deterioration in financial performance to the levels seen in April, May and June 2020 is remote.

The Group has modelled two financial scenarios that reflect the impact of the COVID-19 pandemic on the rate of recovery of the Group's operations in the UK and Germany:

• A "base case" in which the Group is planning for a gradual recovery throughout the next year in which trading conditions begin to normalise while not returning to the levels of FY20. This allows for the potential of further outbreaks of COVID-19, resulting in further local lockdowns and corresponding reductions in business and leisure travel.

• A "severe but plausible case" which sensitises these forecasts for a slower than expected recovery or allows for either a national lockdown or prolonged series of local lockdowns.

Under both the base case and severe but plausible case, the Group can meet its funding needs through available funds and is able to meet the temporary covenants agreed as part of the waivers throughout the 12-month going concern assessment period. The long-term impact of COVID-19 remains uncertain and the impact of the pandemic on trading conditions could be more prolonged or severe than that which the directors have considered in the severe but plausible case.

Furthermore, a reverse stress test was performed to determine the market conditions in which the Group, without additional mitigating action, would cease to be able to operate under its current facilities. The significant reduction in sales modelled was well beyond what is considered reasonable taking into account the past closure experience and current economic forecasts for the Group.

A number of the mitigating factors available to the Group, both already utilised and those which could be implemented, are set out above. The scenarios modelled do not make any allowance for further mitigations that are within the control of the directors, including additional reductions in the cost and capex base and the sale of parts of the Group's valuable freehold property estate, which would be subject to the prevailing market conditions.

After due consideration of the matters set out above, the directors are satisfied that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, being at least 12 months from the date of signing these financial statements. For this reason, they continue to adopt the going concern basis without material uncertainties in the preparation of these financial statements.

Accounting policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 27 February 2020.

As a result of the adjusting items recorded in the period, the accounting policy used in determining adjusting items is set out below.

Adjusting items and use of 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 the business performance is measured internally by the Board and Executive Committee. A glossary of APMs and reconciliations to statutory measures is given at the end of this report.

The term adjusted profit is not defined under IFRS and may not be directly comparable with adjusted profit measures used by other companies. It is not intended to be a substitute for, or superior to, statutory measures of profit. Adjusted measures of profitability are non-IFRS because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS.

The Group makes certain adjustments to the statutory profit measures in order to derive many of its APMs. The Group's policy is to exclude items that are considered to be significant in nature and quantum, not in the normal course of business or are consistent with items that were treated as adjusting in prior periods or that span multiple financial periods. Treatment as an adjusting item provides users of the accounts with additional useful information to assess the year-on-year trading performance of the Group.

On this basis, the following are examples of items that may be classified as adjusting items:

· net charges associated with the strategic programme in relation to the review of the hotel estate, excluding those relating to financing;

· significant restructuring costs and other associated costs arising from strategy changes that are not considered by the Group to be part of the normal operating costs of the business;

· significant pension charges arising as a result of changes to UK defined benefit scheme practices;

· impairment and related charges for sites which are underperforming that are considered to be significant in nature and/or value to the trading performance of the business;

· costs in relation to non-trading legacy sites which are deemed to be significant and not reflective of the Group's ongoing trading results;

· profit or loss on the sale of a business or investment, and the associated cost impact on the continuing business from the sale of the business or investment;

· acquisition costs incurred as part of a business combination or other strategic asset acquisitions;

· amortisation of intangible assets recognised as part of a business combination or other transaction outside of the ordinary course of business; and

· tax settlements in respect of prior years, including the related interest and the impact of changes in the statutory tax rate, the inclusion of which would distort year-on-year comparability, as well as the tax impact of the adjusting items identified above.

The directors believe that the adjusted profit and earnings per share measures provide additional useful information to shareholders on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Executive Committee.

Government grants

During the period, the Group has received government support. The relevant accounting policy is set out below. No accounting policy was disclosed in the annual financial statements as no such grants had been received.

A government grant is recognised in the balance sheet within other receivables when there is reasonable assurance that it will be received and that the Group will comply with the conditions attached to it. Grants are recognised within other income in the consolidated income statement at a point in time to match the timing of recognition of the related expenses they are intended to compensate. Refer to Note 6 for details of government grants and support received in the period.

Seasonality

The Group operates hotels and restaurants, located in the UK and internationally. The Group generally earns higher profits during the first half of the financial year because of lower demand in the final quarter of the financial year.

The COVID-19 pandemic led to the temporary closure of the majority of the Group's hotels and all of its restaurants from late March 2020, with sites re-opening from July 2020. Although there is uncertainty surrounding the prolonged impacts of the pandemic, it is expected to significantly impact these typical patterns.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported as assets and liabilities at the balance sheet date and the amounts reported as revenues and expenses during the period. Although these amounts are based on management's best estimates, events or actions may mean that actual results ultimately differ from those estimates, and these differences may be material. These judgements and estimates and the underlying assumptions are reviewed regularly.

Critical accounting judgements

Adjusting items

During the period, certain items are identified and separately disclosed as adjusting items. Judgement is applied as to whether the item meets the necessary criteria as per the accounting policy disclosed above. This assessment covers the nature of the item, cause of occurrence and the scale of impact of that item on reported performance. Reversals of previous adjusting items are assessed based on the same criteria. Note 4 provides information on all of the items disclosed as adjusting in the current period and comparative financial statements.

Key sources of estimation uncertainty

Defined benefit pension

Defined benefit pension plans are accounted for in accordance with actuarial advice using the projected unit credit method. The Group makes significant estimates in relation to the discount rates, mortality rates and inflation rates used to calculate the present value of the defined benefit obligation. Note 13 describes the sensitivity of the defined benefit pension surplus to changes in key assumptions.

Impairment testing - Goodwill, property, plant and equipment and right-of-use assets

Where there are indicators of impairment, management performs an impairment assessment. The speed at which the Group's sites will recover from the impact of the COVID-19 pandemic is uncertain and as a result, all of the Group's sites have been tested for impairment. Recoverable amounts for cash generating units are the higher of value in use, and fair value less costs of disposal. Value in use is calculated from cash flow projections based on the Group's five-year business plans and extrapolated beyond five years based on estimated long-term growth rates. The value in use calculation is sensitive to the discount rate used as well as the expected future cash inflows and growth rate used for extrapolation purposes. Where sites are new, judgement is required to estimate the time taken to reach maturity and the sites' trading level once they are mature. Fair value is determined using a range of methods, including present value techniques using assumptions consistent with the value in use calculations, market multiple techniques using externally available data and with the assistance of independent, professional valuers where appropriate. Key estimates and sensitivities for impairment of assets are disclosed in Note 10.

2. Other income

3. Segmental analysis

For management purposes, the Group is organised into a single strategic business unit, Premier Inn, which provides services in relation to accommodation, food and beverage both in the UK and internationally.

In previous years, the UK and Ireland and Germany Premier Inn segments have been aggregated on the grounds that the Germany segment did not meet the thresholds of being a reportable segment. As a result of the increasing size of the German operations, the Germany segment will be presented separately going forward. As the Group's reportable segments have been changed, the comparative information for 2019 has been re-presented.

Management monitors the operating results of its operating segments separately for the purpose of making decisions about allocating resources and assessing performance. Segment performance is measured based on adjusted operating profit before joint ventures. Included within central and other in the following tables are the costs of running the public company, other central overhead costs and share of losses from joint ventures.

The following tables present revenue and profit information regarding business operating segments for the six months to 27 August 2020 and 29 August 2019.

1 Revenue from food, beverage and other items includes £10.8m (2019: Nil) of consideration receivable from HM Revenue & Customs under the Eat Out to Help Out scheme.

1 Adjusted operating (loss)/profit for the UK and Ireland segment includes the impact of Business Rates Relief provided by the UK Government of £55.0m (2019: Nil) and income from the job retention schemes in the UK and Ireland of £85.5m (2019: Nil). Adjusted operating (loss)/profit for the Germany segment includes £0.7m (2019: Nil) from the Kurzarbeit scheme.