InterContinental Hotels Group PLC (IHG) 2003 Q2 法說會逐字稿

Welcome to the InterContinental Hotels Group interim results conference call. (OPERATOR INSTRUCTIONS). I must advise you that this conference is being recorded today, Friday the 12th of September, the year 2003. I would now like to hand you over to your Chief Executive, Mr. Richard North.

Thank you, and good afternoon. For those of you in the United States and Canada, good morning. Welcome to the InterContinental Hotels Group's interim results for the six months (indiscernible) the 30th of June. Richard Solomons will take you through the financial results for the six months, and I will then update you on our strategy implementation and cost-cutting programs. So, over to you Richard.

Thank you Richard, and good afternoon ladies and gentlemen. I'd like to remind you that we've moved to a calendar year end, and in this presentation, I'm therefore concentrating on the six months to June 2003.

Turning now to the results. The group's overall results on a pro forma basis have, as expected, been affected by the problems facing the global travel and tourism industry, but are broadly in line with expectations. Turnover was down by 3.4 percent in sterling terms in tough trading conditions, although hotels turnover was up 3.1 percent in dollar terms. As a result of the fundamental strength of our hotels and soft drinks businesses, even after the one-off operating cost issues I will cover later, the fall in EBITDA was held to 14.5 percent. This translated into a reduction in operating profit of 27.4 percent, or a profit before tax and earnings per share of about 30.8 percent and 32.1 percent, respectively.

As you are no doubt all aware, this continues to be a difficult period for the hospitality industry. As a result, IHG's operating profit for the hotels business was down 31.7 percent to 86 million pounds, compared with the six months to end June 2002. We have, however, had another very strong six months from our soft drinks business, with profits up 14.7 percent to 39 million pounds.

Before we go further into the detail of the hotels results, I will take a moment to talk through the overall shape of what has been going on in each of our three regions. The graph sets out the movement in RevPAR against last year of our owned and leased businesses over the last six months. You can clearly see the diverse nature of our performance, from the relatively stable Americas to the more depressed and volatile EMEA, which has been more adversely affected by recent world events. This is due to our higher dependency on the international traveler in the owned and leased estate and the more pronounced economic difficulties in the region. And our Asia-Pacific business, with the significant impact of the SARS virus, can be clearly seen.

Overall, our hotel revenues fell by 62 million pounds. There were a number of factors already highlighted in May that have affected our profit flow-through. Firstly, we've achieved growth in revenues, but this has been driven largely by occupancy while rate has declined overall. Secondly, the higher depreciation charges reflecting the refurbishment spend to date. And lastly, the additional fixed costs, primarily insurance, which the whole industry has suffered from. In spite of these factors, the reduction in profit has been held to 14 million pounds. We have started to see some of the benefits of our organization review and cost-cutting programs, but the real effects of this will not impact our numbers materially until the second half, which we will update you on progress later.

Let me now take you through the detail of the hotel results, where in dollar terms turnover was in fact up $34 million, primarily due to the effect of exchange rates. The diverse nature of our regions and business models is further demonstrated here in our results for the second quarter to June, with the trends that we saw in the first quarter continuing into the second. The Americas region overall was relatively stable, with operating profit up 2.5 percent. EMEA's owned and leased estate continued to be adversely affected by the same macroeconomic factors as in the first quarter, namely Iraq and the depressed Euro zone economy, which has impacted both corporate profitability and leisure travel. Paris has been hit particularly hard, as has the German market.

In Asia-Pacific, the outbreak of SARS at the end of the first quarter severely impacted performance, and the region made a loss of $3 million. Overall, as in the first quarter, the hotels' results were significantly down on the same period last year. In aggregate for the six months, hotel profits were down nearly 24 percent in dollar terms and 32 percent in sterling terms as a result of the weakness of the dollar. Although the trading background remains difficult, our owned and leased InterContinental hotels in the Americas continue to gain market share, reflecting the ongoing benefits of our capital investment.

Our owned and leased estate in the Americas has shown relative stability over the six month period compared to our owned and leased properties in the other two regions, where trading has been more turbulent. Operating profit is flat compared to the prior year, at $13 million. Nearly 65 percent of the rooms available in our InterContinental managed estate are in Latin America, where the economy continues to be difficult, compared to the owned InterContinental estate which is centered on the key gateway cities of North America. It is this geographical factor that results in a poor RevPAR performance in this business compared to our owned and leased estate.

The Crowne Plaza managed estate was also adversely affected by the Toronto City Center property, where RevPAR fell by over 50 percent in the quarter to June as a result of SARS. In our Americas mid-scale franchise business, Express continues its solid outperformance of the market. While Holiday Inn, with its mix more heavily weighted towards the business market than the mid-scale segment as a whole, suffered disproportionately during the period of the war, underperforming the market. However, during July, performance has come back in line with the competitive set on the back of our new marketing campaigns. Although both of our mid-scale brands are very much in the drive-to markets, Express is more skewed to leisure while Holiday Inn is more biased to the business traveler. As a result of a slight pick up in leisure travel, Express has stronger relative performance. The royalty rate for Holiday Inn marginally increased over the period, while Express maintained its rates. Express continues to drive its systems size at a high rate. As a consequence of this strong momentum, the net movement in our total mid-scale rooms available was an increase of 1.4 percent. These factors combined led to a robust performance from our Americas mid-scale franchise business, with operating profit up $2 million to 102 million.

In EMEA, total operating profit fell by almost 46 percent in sterling terms compared with the six months to June 2002. The EMEA owned and leased upscale business continues to be adversely impacted by the reduction in US visitors to the region as a result of the Iraq conflict and the reluctance to travel overseas, and the depressed Euro zone economy. Within Europe itself, the situation is mixed, with distinct differences in performance between the different countries. So while trading conditions remain tough in France and Germany, there has been some stability in the UK regions. However overall, as in the first quarter, the specific cost increases previously indicated, and other one-off items, have resulted in operating profit being significantly down on the prior year.

Turning now to the UK Holiday Inn estate specifically. The graph shows the performance of our hotels in London and the regions against their competitive sets. As you can see, we are outperforming the market in both areas. However, we have yet to see this improvement at the earnings line for the reasons outlined earlier. As you might expect, the EMEA managed and franchise business was more resilient than the owned and leased estate, with operating profit down only 3 million to 11 million pounds. Indeed, RevPAR performance in our InterContinental managed properties was better than our owned and leased estate overall for the six months period, due to the bias of our owned and leased estate to the gateway cities. However, it was more adversely affected in the three months to June due to the high concentration of hotels in the Middle East as a proportion of the whole, where due to the war, occupancy dropped five percentage points in the three months to June.

The sharply reduced profit performance in the Asia-Pacific region was almost entirely due to the effect of SARS during the period. At the InterContinental Hong Kong, occupancy dropped in the quarter to June to below 10 percent, from nearly 60 percent in the previous quarter, a rate was slightly down. As you are no doubt aware, SARS appears to have been contained and the World Health Organization has now declared all countries in the Asia region free from SARS. China has now virtually fully recovered, and occupancy at the InterContinental Hong Kong in August was nearly 50 percent, a strong recovery from the levels of occupancy at the height of the epidemic.

Moving on down the profit and loss accounts. In the six months to 30th of June, we received dividends from FelCor totaling $1 million compared to $3 million in the prior year. Also, there were no significant liquidated damages in the six months to 30th of June, against $2 million last time. Our continuing focus on driving cost from our business has resulted in central overhead and marketing spend down $5 million on the same period last year. Our soft drinks business continues to produce excellent results. Both volumes and profit were up on the same period last year. Sales volumes were up by 3.2 percent, with significant contributions from Robinsons Fruit Shoot and (indiscernible) J20. Overall, turnover was up 8.1 percent to 335 million pounds, as a consequence of the volume increase and a further growth in average realized price due to a higher mix of premium priced products. Costs were well-controlled and operating margins grew, resulting in total operating profit up 14.7 percent to 39 million pounds. To help you understand the (indiscernible) of this business, we've included a slide on Britvic in the supplementary slides detailing revenue and operating profit by quarter for the calendar year to December 2002 and the two quarters to June 2003.

I would now like to turn back to the pro forma results for the group as a whole. As a reminder, the pro forma information set out over this slide and the next 2 slides comprises the results of those companies which form the InterContinental Hotels Group following the de-merger, as if the group had been in existence since 1st of October 2001. The information is provided as guidance only. We still expect the group tax rate to be more no more than 25 percent for this calendar year, compared to 28 percent for the year to September 2002. In these difficult times, we have to continue to focus on improving the operating cash flow of the group with rigorous control of working capital and capital expenditures. As a result, on a pro forma basis, we generated cash flow of 98 million pounds in the six months to June 2003. We now expect hotel capital expenditure for calendar year 2003 to be no more than 350 million pounds, slightly lower than our previous guidance in May.

We retain a robust balance sheet with over 4.4 billion pounds of tangible fixed assets and net debt of around 1 billion pounds. The disposal proceeds of the 16 Staybridge Suites announced in July and of the InterContinental Mayfair announced in August of this year, totaling 227 million pounds, are not booked in these results. Primarily as a result of these disposals and tight cash management, as well as favorable exchange rate movements, we now expect our net debt at year end to be no more than 800 million pounds, lower than our previous guidance.

As previously communicated, the directors of IHG intend to recommend that an interim dividend and a final dividend for 2003, together totaling 13.5 pence per ordinary share, be declared. Today we're declaring an interim dividend of 4.05 pence payable on the 14th of October 2003, with the ADR payments on 23th of October 2003. The proposed final dividend for the year totaling 9.45 pence per share is expected to be paid in June 2004. The directors intend to establish a progressive dividend policy that is appropriate to the strategies for the group, and we'll seek to grow dividends in real terms from the base of 13.5 pence per share, and build cover over time as the hotel cycle improves.

So in conclusion, there is no doubt that this has continued to be a difficult trading environment for the hospitality industry, with the resulting adverse impact on our groups results. However, most of our key brands have continued to gain market share over the period, and our soft drinks business has produced another excellent performance. Against this background, we are aggressively managing our costs, capital expenditure and working capital, resulting in positive cash flow for the period and reduced debts. Ladies and gentlemen, thank you. I will now hand you back to Richard.

Richard, thank you. As you've seen from Richard's presentation, the global economy has continued to have a negative effect on our results. Given the performance of the economy, it becomes even more important for us to focus on those things we can control, as to mitigate the effect now and to position us for the recovery when it comes. With this in mind, I would like to reiterate our focus -- revenue, overheads and asset intensity.

As I told you when I first put this slide up in March, our priorities are very clear, and would be so for at least the following 18 months. I'd now like to give you an update on progress and our (indiscernible) give the next steps.

The first key (indiscernible) within our control to drive revenue is our Priority Club Rewards, our award-winning royalty scheme. As we said in March, a study carried out during 2002, at a time when the market was significantly down, showed room nights from guests who are not Priority Club Members falling by 8.6 percent. However, room nights from guests who were in Priority Club grew by two percent. Effectively, this means we captured over 10 percent more room nights for members than nonmembers. Furthermore, priority club members spend more per room night than nonmembers. That, then, is why Priority Club is such an important tool; hence, our drive to increase enrollments.

Year on year, 1.8 million new members have been added to the program, to give us a total membership base of over 17 million members. Particularly gratifying is the increase in membership in our InterContinental brand, an area we highlighted in March as a key focus. The overall result of this initiative is that in the first six months of this year, 28 percent of all rooms booked were booked by Priority Club members.

System delivery -- that is, the room nights delivered to a hotel by our brands and reservations systems -- is another key revenue driver -- driving lever. Our system delivery continues to rise from 24 percent of total room nights to 30 percent; in absolute terms, an increase of 3.5 million room nights over the same period last year. As well as increasing the absolute delivery, we're also succeeding in optimizing the channel mix. Our lowest cost channel, the Web, continues to grow rapidly and now accounts for nine percent of room nights, up from 5.6 percent last year.

Meanwhile, we've increased the efficiency of our call centers. We've done this by increasing the rate of call conversion, which has meant that despite a lower call volume, we've increased revenue by $17 million. At the same time, we're making use of our call center network to perform routine administration tasks in lower-cost markets. Because many of these costs are system funded, these savings will directly benefit both ourselves and our franchisees.

As you have seen from Richard's presentation, EMEA has clearly been experiencing some real problems. We've had no assistance from the market. We've been disproportionately hit by the absence of the US travelers and their propensity to pay higher rates. We're also concentrated in the key gateway cities around Europe that have been severely affected by the depressed Euro zone economy. In addition, our refurbishment efforts have increased our depreciation charges, but the market is yet to recover sufficiently to enable these revitalized assets to drive rates to the level we should achieve. Frankly, we also need to improve the consistency of our operational management.

We've taken clear action to tackle these issues. New leadership is now in place, more effective accountabilities have been established for profit and revenue, and there is renewed focus on the hotels and general managers to drive quality and satisfaction. Clearly this will take time, but the new leadership team led by Richard Hartman is focusing on identifying the controllable issues and taking appropriate action.

Our second main area of focus is overhead cost reduction. I'm pleased to report that we are on track to make the savings we communicated previously. When we last presented to you, we'd achieved $39 million of annualized savings and eliminated 381 positions. As of today, we have eliminated a further 216 positions and achieved total annualized savings of $61 million. The majority of these additional savings have been in EMEA and have been affected following the conclusion of employee consultation. We remain well on track to achieve both the promised run rate of $75 million by December 2003, and at least $100 million savings by December 2004.

We've made significant progress on our third key area of focus, reducing asset intensity. Now, I should explain that whilst we have identified that we do not need to own a majority of our assets, as we've said before, we will only sell an asset when the time is right. And for most of our assets, now is not the right time. However, in a limited number of cases we believe that we are able to maximize shareholder value by selling now. Two excellent examples of this are the Staybridge Suites portfolio and the InterContinental Hotel Mayfair.

From a strategic perspective, the Staybridge Suites properties sold were by their nature not brand-defining. Furthermore, the brand now has sufficient power to grow without the use of our capital. Financially, many of the assets are in ramp up and have been relatively unaffected by the (indiscernible) downturn, making them prime candidates for early disposal, especially since the expected ramp up is built into the terms of the deal. Thus, the disposal of the Staybridge Suites properties meet the 2 key tests -- namely, strategically we do not need to own them; and in value terms, we can realize at least as much value today as we would continuing to hold them.

The same 2 tests were applied in deciding to sell the InterContinental Mayfair. From a strategic perspective, London is a key location. However, we already own one hotel -- the Hyde Park Corner -- and manage the Churchill in Portman (ph) Square. A third hotel is not strategically important. Furthermore, the hotel is in poor condition, which is detrimental to the brand. So strategically, we do not need to own it.

Financially, the asset has suffered from the downturn and also from the disruption of originally being scheduled for refurbishment. as such, short-term earnings were very low. Furthermore, a significant amount of CapEx was required. So providing we could achieve the right price for the asset, we decided we should sell it. Clearly, the very full disposal price recognized the potential upside of the asset, and so was one we believed right to accept.

And now moving on to Britvic. Britvic, our (indiscernible) business, has had another outstanding six months and continues to deliver both profit growth and cash. The success of this business over the last five years has been significantly enhanced by new product innovation, such as Britvic J20 and Robinsons Fruit Shoot, with volumes up 114 percent and 64 percent, respectively. We also continue to invest in our core brands, and an example of this is the successful re-launch of Tango in June, since when the brands have seen volume growth of 28 percent. Indeed, the combination of driving our core brands and converting a strong pipeline of concepts into new products is at the root of this business' excellent performance over recent years, and this continues to be our strategy going forward.

Finally, current trading. When we reported last May, we said that we saw no evidence of a sustained recovery in trading, and so we were very cautious as to near-term trading prospects. I have to say that little has changed since then to alter our view. More specifically, in the US we believe the improvement in RevPAR over the summer was leisure driven, and we are yet to be convinced that there's been an upturn in demand from the business traveler. In the UK, we've seen some improvement in RevPAR, particularly in the regions. Western Europe remains uncertain and Asia-Pacific is continuing its recovery post-SARS, but has yet to regain all the ground lost.

In summary, while trading conditions remain difficult, I'm delighted with the progress we are making in respective areas under our control. In particular, on the revenue side we're improving system delivery and gaining marketshare. We're reducing costs significantly and are on track to deliver at least $100 million of savings by the end of 2004, and we made some significant asset disposals where it made sense to do so at at this point on the asset cycle. This means we're positioning ourselves well for recovery when it comes. Ladies and gentlemen, Richard Solomons and I will now be delighted to take your questions.

(OPERATOR INSTRUCTIONS). There are no questions at this time, Mr. North.

In that case, may I on behalf of Richard Solomons thank you for listening to us, and wish you a great weekend. Take care.

Thank you.

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing the UK on country code +44 1452-550000; or locally, at 0845-2455205. The USA free phone numbers are 1-866-276-1167, or 1-866-247-4222. The access number required will be 433-947(indiscernible). You may all disconnect.