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Whitbread AGM Report – More Fun Than Lloyds?

The Whitbread Annual General Meeting took place at Church House Conference Centre in Westminster on the 21st June. This was one of the few FTSE-100 AGMs I have attended where the Chairman seemed to pay good attention to the views of private shareholders rather than considering it a tedious 2 hours that had to be suffered.

In addition shareholders (and I am a new one) could learn a great deal about the strategy of the company and its affairs from the meeting. In short, an example to be followed.

This is a very brief report on the meeting – a summary of a much fuller report available to ShareSoc Members. ShareSoc now publishes many such reports which can be very informative for investors who cannot attend in person, or do not currently hold the stock.

Some background first: Whitbread now has three main business strands: Premier Inn budget hotels, restaurants (Beefeater, Brewers Fayre, etc), and the Costa coffee shops. The former two tend to be lumped together in reporting as “Hotels and Restaurants” with little discussion on the latter probably because hotels are growing more rapidly and that is where money is being invested.

Whitbread has grown strongly in the last few years due to the roll out of new Premier Inns and Costa and the share price grew to match. It reached a peak of about 5,400p in March 2015 but then declined down to a low of about 3,700p in March this year. This was probably due to the perception of analysts that growth in future might not be as rapid but a view also that the coffee shop market might be becoming saturated. In addition the departure of the well respected CEO Andy Harrison during the year and replacement by the inexperienced (at least in this business) Alison Brittain may not have helped. However the share price has perked up more recently, and the trading statement issued on the morning of the AGM helped further (up another 1.6%). As the Chairman indicated in the meeting, Whitbread is one of the few FTSE-100 companies where profits have been growing in recent years.

What follows is a report of what was said at the meeting, summarised and paraphrased for brevity.

The Chairman, Richard Baker, commenced by saying sales grew by 12% last year with underlying earnings per share up by 11.7%. Positive cash flow funded development of their brands and also enabled a 10% increase in dividends.

They have made a positive start to the new year – see the announcement made on the morning of the meeting. He introduced the new CEO and said she had already reviewed the strategy. He said she has brought some fresh thinking to the company and “as great businesses grow they must also improve”.

The CEO then gave a presentation. She said she had reviewed the business and would share a few conclusions. She summarised the results for last year – it was a combination of like-for-like growth and expansion of the business. Return on capital was a healthy 15.3% and the leverage was a comfortable 3.1 times. The first quarter results were sales growth of 8%. Costa has done well and Premier grew in a competitive environment. Restaurants were up 0.2%.

They have a clear strategy for profitable growth with opportunities for organic growth. Some 86% of customers at Premier Inn book directly via their web site which is a great competitive advantage. Their growth targets are:

– Premier Inns to reach 85,000 rooms by 2020 (implies market share to rise from 9% to 11%).

– Costa to achieve £2.5 billion in sales.

They are focussed on delivering growth in eps while maintaining a good return on capital (comment: something I always like to see). But the external environment is evolving. Competitor dynamics are changing – for example AirBnB, the rise of artisan coffee chains. Costs are under pressure and there is increased competition for skills and people. They also need new capabilities in IT and digital.

In the UK there continue to be growth opportunities in Costa. But expectations of customers are rising – for faster service, fresher food, digital loyalty schemes, etc. They will also continue to innovate in Premier Inns – new pricing schemes and “Hub” hotels so as to gain access to new customers, segments and markets. They have a pipeline of 12 Hub hotels (City centre formats). There are lots of exciting opportunities and the international business is only at an early stage of development. The company has grown rapidly in the last four years and they need to invest in people, skills, IT systems and digital.

We then moved onto questions from shareholders, of which I’ll just cover a few.

One shareholder questioned the rise in debt. The Chairman responded that the company can borrow at much less than the current return on capital so they are taking advantage of that to grow. The CEO mentioned international opportunities, particularly Germany and said they need to speed up exploitation. In response to another question it is was mentioned that this year will see increased investment in IT systems, through to 2020.

Another shareholder welcomed Ms Brittain and said it must be a shed-load more fun than working for Lloyds Bank.

I asked the following questions, after thanking the CEO for an informative presentation and the Chairman for handling questions intelligently:

  1. I commented on the lack of segmental analysis – e.g. revenue, profits and assets by business line and geography which is normally in Note 1 to the accounts, but here is patchy and spread throughout the report. Answer: they will look at this.
  2. I complained about the backgrounds of the non-execs which seemed mainly irrelevant. Could we have some with a “hospitality” background next time they recruit one. Banking showed how important it was to have non-execs who understood the business. Answer: some directors have relevant experience but comments noted.
  3. As remuneration policy is currently being reviewed (for 2017), could they please simplify it – for example the Investment Association have raised this point. I also suggested bonuses of up to 367% of base salary were excessive. Answer: they are taking on board comments. Note: I spoke to Mr Williams (head of Rem Comm) after the meeting and asked him to look at the recently published ShareSoc pay guidelines which he will do. I also suggested maximum bonuses should be more like 50%. He said the existing LTIP had resulted in very high payouts because of the unexpected growth in profits and hence share price – latter up 5 times in a few years. Comment: so perhaps one reason the former CEO could afford to leave was the enormous payouts?

There was a question re increasing dividend and share buy-backs. The CFO responded: We don’t do buybacks because we can get a good return by investing the cash. Comment: a good response and one I always like to hear.

We then moved to a poll using electronic voting devices. This was efficient and quick, and enabled us to see the results immediately although I still prefer a show of hand votes. But if companies are going to use a poll, this is the only sensible way. There were only 4.6% of votes against the Remuneration Report, 7 to 8% against share allotment resolutions which is unusually high, 8% against the change to 14 days notice of general meetings, and surprisingly 28% against the re-election of Sir Ian Cheshire. It was reported in the media the next day that this was because he had missed three board meetings last year (one was “unscheduled” and he had prior commitments for the other two). He has not missed any so far this year. This seems somewhat of an over-reaction to a minor issue but no doubt it brought it to his attention.

In summary, a useful AGM for shareholders. I wish more were like this but it demonstrates that it is not difficult to revive the format if directors have the commitment.

Roger Lawson

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