InterContinental Hotels Group PLC (IHG) 2003 Q3 法說會逐字稿

Thank you for standing by, and welcome to the third quarter results conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press 1 on your telephone keypad. I must advise that the conference is being recorded today, Wednesday the 19 of November 2003. I would now like to hand the conference over to your speaker today, Mr. Richard North. Please go ahead, sir.

Thank you. Good morning everybody. I’m actually here in London, or rather in Windsor, and Richard Solomons is in New York, so we’re a bit boxing and coxing, but we’ll do the best we can.

What I want to do is to start by Richard taking us through the numbers. I’ll then make a few comments about what we’ve been doing over the last year, and then we’ll take your questions. So, without further ado, we’ll turn it* over to Richard Solomons in New York.

Thank you, Richard. The Group operating profit for the three months 30 September 2003 is up 9.6% in sterling terms, showing the fundamental strength of our hotel and soft drinks businesses. Total hotel turnover is flat, but operating profit for the three months to 30 September 2003 are up 6.6%, benefiting from reduced overheads.

In the Americas, operating profit is up $5m to $82m, demonstrating the strength of our mid-scale franchising business, and indicating signs of improvement in some markets, but no consistent trend.

We have seen some red-par growth in the Intercontinental owned and leased estate, resulting from the benefits of the refurbishment program and the brand repositioning investment in the prior year. Adjusting for the sale of the sixteen Staybridge Suite properties to Totality Property Trust in July, owned and leased operating profit was marginally higher than the prior year.

Operating profit from the managed and upscale franchise business was flat for the quarter, and the growth in operating profit in the mid-scale franchise business, of $7m in the quarter, was due to a mix of trading and overheads savings, and Express continued to out-perform the market.

In our year at Middle East Africa region, operating profit is down £5m, at £37m. Conditions across the region varied significantly over the quarter, with Paris, Frankfurt and Rome in particular continuing to be affected by the reduction in international visitors.

In London and the UK regional estate, there were signs of improvement in the last quarter. The UK Holiday Inn estate experienced red-par growth of over last year’s levels, for four consecutive months, and continued to significantly out-perform its relative market. In London, the Holiday Inn estate also continued to out-perform its peer group.

In Asia Pacific, operating profit is only marginally below last year at $6m, with business now close to pre-SARS levels. In September, red-pile at the Intercontinental Hong Kong was only down 5.9% on 2002 levels, compared to 46% down for the six months to the end of June 2003.

The reduction in other costs reflects in part our continuing focus on driving costs in our business and the organization review, but also as a result of the phasing of certain marketing slants.

Our soft drinks business continues to produce excellent results, helped by the exceptional summer weather. Operating for the twelve weeks to the 27 September 2003 was £5m above last year. This is a direct concert to volume increases and growth in average realized price, due to a higher mix of premium priced products generated by our new product development program.

As we have stated in previous announcements, we have, and will continue to focus on improving the operating cash of the Group, with vigorous control of working capitals and capital expenditures.

In October, Intercontinental Hotels Group launched and priced an offering of €600m, of Euro denominated bonds, and the bonds have a final maturity date of 20 October 2010, and carry a coupon of 4.75% payable annually. We received the proceeds of 20 October, on which date we cancelled the $887m 364 day tranche of our syndicated loan.

Thank you. I’ll now hand you back to Richard North.

Thank you, Richard. It’s actually a little over a year since I took over as Chief Executive of the company, and if I’m being honest with you all, at the outset, I felt the problems we faced were of Everest proportions, made worse, of course, by the terrible trading conditions that we were experiencing.

What therefore gives me the greatest pleasure is to be able to highlight what the team has achieved since then, having particular achievements against the plan that we set out in the Listing Particulars in March. They are as follows: first, the organization review where we completely redesigned the organization, and brought very significant changes in responsibilities across the piece, centralizing certain functions and ensuring that the work that was closest to the customer, our guest, was in the regions.

The key management appointments we made, particularly at executive level, but equally, throughout the organization, our cost-cutting exercise, our target of achieving at least £100m against our budget, at which we’ve already achieved £70m to date, our methods, and our target of course is to December 2004, reduced CAPEX, the asset review, which is substantially complete, and so therefore we’re at the point where we know which hotels we don’t need to own, but the key question then is, which we need to test on a regular basis, is, is the great value to holding or to selling today? And as we’ve seen, we have actually sold a number of assets and we have one or two still in the pipeline.

And finally, and something which we haven’t talked about a lot, but which is equally important to us, is the development of the enabling culture within the organization so that we become a company which is about continuous improvement, sharing best practice, living our values, and about execution, execution, execution.

So all that has culminated in our being able to report profits up for the third quarter by 7%, earnings per share in fact up by considerably more, which I would contend is a rare achievement for any hotel company across the world, at this point in time.

So, that’s where we are. Finally, I’m also pleased, incidentally, to see that we are seeing improved trading conditions in the UK, and we’re at a turning point in the US. So with that, Richard and I will be delighted to take any questions that you have.

Thank you. (Operator’s instructions) Your first question comes from James Lowin of Newtons.

Good morning.

Good morning, James.

The debt figure was clearly very positive at the end of Q3. Can you just talk through any phasing differences that may impact as we move toward the end of the year, and given the those sort of [indiscernible] you’ve had on reducing debt, how that feeds through to capital allocation decisions next year?

Richard, would you like to answer that?

Yeah, thank you. James, hi, morning.

Morning.

Yeah, the low debt number at the end of September is partly due to phasing. The guidance that we gave previously was that debt at the end of the year would be no more than £800m. The reason why you’re effectively going to see an outflow in the fourth quarter is, we have quite a number of actually bullet payments on our capital expenditure program, projects like the Crown Plaza at Brussels, and like the Intercontinental in Atlanta.

So, the overall forecast for capital expenditure for the year broadly stands as we’ve given it the fourth recent series number there.

There are some working capital phasing differences actually caused partly by the year end of Britvic falling on 27 September. So, overall, we will see an outflow relative to what we have seen in the last quarter, [indiscernible] Q3 in Q4.

And your comment about capital allocation, I think, our position stands on that, that our intent is to reduce the capital intensity in the business, and that clearly as we look going forward at our ability to make disposals and to ultimately return capital to shareholders, one of the key factors is going to be the view of the rating agencies and our ability to maintain and retain our investment grade rating.

So, we’ll obviously look at the debt at the end of the year and as we go into 2004, keep looking at the situation as we have been doing. But the intent remains the same.

Okay, thank you very much.

Thank you. Your next question comes from Ian Reynoldson of Merrill Lynch. Please go ahead.

Good morning.

Good morning, Ian.

Hi. Two questions. One, you talk in parentheses about a rate led recovery in the US. Could you maybe expand a little bit on that, please? And secondly, maybe discuss the trend in the other line, because that seems to be quite volatile at the moment, which way that might be going. Thank you.

Richard, do you want to do the other line?

Do you want me to do that first?

Yeah.

Yes, Ian, what you’re seeing is clearly some of the costs savings coming through in other, in terms of the central overhead costs savings. As we said, the bulk of that will be coming through as we get into next year.

We’ve also got some movements on the income side, where the [indiscernible] dividend was only $1m, compared to $4m last year, and we had some liquidated damages last year on the income side that we didn’t have this year. There’s benefit relating to [indiscernible] leases as well, as we mentioned in the release.

But it’s particularly volatile in the quarter, because obviously the numbers are just... a few million dollars here and there in the quarter make a bigger difference.

Sure. Okay.

As far as the rate led recovery, I’d love to be able to say that we’ve got a rate led recovery in the US. I think it’s much more occupancy driven. In fact, if you look at our numbers, the one area where you do see a big improvement in rate, is Holiday Inn in the UK, which is very pleasing.

Okay. Thank you.

Thank you. Your next question comes from Tony Baldwin of Goldman Sachs. Please go ahead.

Hi, it’s actually Richard Chamberlain here from Goldman. Hi guys.

Hi, Richard.

Hi.

Just a couple of questions. First of all, could you just give some guidance on the tax rate for the full year? It sounds like it might be lower than 25% if you can release further tax provisions. I just wondered if that’s changed at all. And second, could you give any sort of guidance on the red-par uplift you’re looking for from Candlewood? Just by putting those hotels on your own distribution system, what sort of red-par uplift do you think we can expect there?

Richard, do you want to talk about rates?

Yeah, Richard, on the tax rate, I think we’ve, in the pro formas you’ve seen, we’ve retained the 25% rate and that pretty much is going to be the underlying rate this year, and probably next year as we’ve said before. There are some benefits that we’ve had in terms of settlements that have resulted in some tax cash inflows as we’ve highlighted, but that really isn’t changing the underlying rate.

Okay.

And as far as Candlewood is concerned, we don’t want to be held to making any predictions as to how much we’re going to raise it by. What I will say is that having the... well, we don’t own them yet. But actually I was thinking about the Summerfields we transferred over to Staybridge, in which case

I was going to say that the day we transferred them across, or shortly thereafter, we had maintained the red-par on them, which is a good place to start from. But forgive me, I don’t want to be held to increasing in red-par on Candlewood just yet.

Okay, fair enough. Thank you.

Thank you. Your next question comes from Nigel Carson of William Debro. Please go ahead.

Morning, gentlemen.

Hello, Nigel.

Morning.

Hi. The one area that surprised me in terms of your numbers, that looks very good against what I was expecting, was European owned and leased hotels, and I wondered if you could sort of give a sort of a split out or a flavour of what drove the performance there, in terms of any sort of one-offs coming through or costs savings, or particular regional performance.

Do you mean the EMEA in general, or the actual hotels in Europe as opposed to the UK?

Yeah, EMEA owned and leased.

Hang on, because, I mean, within Europe, life remains very tough, and I have to say Paris has been particularly difficult, so there’s nothing I’d be highlighting there. London has come back, so we’re encouraged by London, and of course the Holiday Inn estate in the UK is doing extremely well. So those are the highlights.

Yeah. Is there any benefit from The Grand at all at this stage, or is it just negligible?

No, actually, Paris is not The Grand, per se, it’s Paris, Paris is the problem. It’s very weak, we have not had the Americans coming to Paris, and they’re still not coming to Paris. And I guess our assertion is it’s going to take some time for Paris to come back.

What more can I say? It would have been nice if we had, when we knew we were going to refurbish it, we could see what the future looked like, but the lead-times are so great, you can’t. So Sod’s Law we’ve opened it at a time when the Americans really aren’t coming.

Okay, all right. Thank you.

It’s a fabulous hotel though, I do recommend it!

Thank you very much.

Thank you. Your next question comes from Lesley Sarka of Citigroup. Please go ahead.

Good morning, Lesley Sarka from Citigroup. I’ve got a few questions actually. The first one is, how much are the actual costs saving compared to the £17m annualized you mentioned in the release? Second question, can we get some clarification on what is included in the order activities line, and how could we extend that going forward? And the last question is on the US profits. I just don’t understand why the turnover is down 5.5% and operating profit is up. If you can clarify that? Thanks.

Lesley, I actually had trouble hearing you. I think I’ve got it, and I’m going to pass it on to Richard anyway, to see whether he could hear it better than I could.

Okay, I’m sorry. You want me to repeat some of the questions?

Lesley, what if I answer 1 and 3, and then repeat 2?

All right.

You asked about costs savings.

Yeah.

Comparative run rate of that £17m. The actual costs savings are in the order of about £40m for the year, a little bit less in the first three quarters. In terms of US profit turnover down and profit up, there’s a number of things happening there, obviously with the mix of business.

One of the movements that you’ve got is that certainly in the quarter with the sale of the Staybridges, we’ve obviously lost some revenues and some owned and leased profit, and the other side of that, the profit growth has really been in the franchise business and that’s a mixture of, as we say, of trading, the performance there on the red-par line, as well as some overheads savings coming through.

Okay, thank you.

And your second question I didn’t get.

It was on the other activities line. I just... can you clarify what is in there, and how we could expect that line to move forward? Not the other line in the hotel, but the other activities, the one which was line...

The other activities at the Group level?

Yeah, exactly.

That is a mixture of things that’s in there. I mentioned some of the things that have moved the overall other, in terms of the income, on Felcore and liquidated damages. We’ve also got some still residual costs in the nine month period in other relating to some of the PLC and headquarter costs.

Okay, but is this line meant to disappear going forward?

Certainly as we ration up the Group and take up some of the other overheads, then we’ll be expecting that number to come down.

Thank you.

Thank you. If anyone wishes to ask any further questions, please press *1 on your telephone keypad, and wait for your name to be announced.

Your next question comes from Mark Finney of Deutsche Bank. Please go ahead.

Good morning chaps. Can you hear me Okay?

Morning, Mark.

Oh, yes.

Good, perfect. I’ve asked this question before, but I’m just trying to get a bit of an update. You mentioned that the asset review is, I think, Richard North said, was substantially complete. How are you going to communicate to the market what your intentions are, vis-à-vis the assets? Now, people probably don’t expect you to run through and say, you know, which assets are going to go and which are going to stay, but as a general guide, what are your thoughts on this area going forward?

Well, the key, I think, Mark, is to say what the principle is, and the principle is that for many of our assets, or most of our assets, for strategic reasons, they’re not our core holding. You then have to ask yourself the question, am I better to sell this asset today, or will it be greater value if I hold it for a while and then sell it? I mean, you have asked me the question before, and I haven’t got a better answer than actually to state what the principles are that we’re using, to determine at any point in time whether we should be selling an asset.

I wish I could come up with a better answer than that, and I will continue to think about it, but that essentially is the principle that we are applying.

Okay. Just one quick sort of follow up point, and you mentioned, I think, again, in your text, that there were one or two disposals in the pipeline, Central Park South being discussed. Are the one or two others significant assets, or relatively modest affairs?

Well, as you know, Mark, we’ve got about twenty really big assets, and once you get below them, it’s just large numbers and smaller assets, which are less interesting to talk about. We are looking at, probably in the next couple of months, taking some decisions on some smaller assets, so that as we go into 2004, we will be looking to market some, but none that I’d want to highlight today. But we are actively looking at it.

Okay.

All right?

Yeah, thanks a lot.

Okay.

Thank you. Your next question comes from Simon Larkin from ABN Amro. Please go ahead.

Good morning, gentlemen. I’ve got three quick questions, sort of a follow on from Mark’s question did before me. You mentioned, Richard, that you now know the hotels you don’t need to own. Could I perhaps get an update on, in broad terms, of those hotels you don’t need to own? What kind of asset value are we talking here in sort of total?

Secondly, given your CAPEX plans over the next couple of years, I’m guessing obviously your effective tax is going to increase. Can you give us an indication of how that might fade over the next few years?

And finally, on costs savings, of your $100m US target, how does that split broadly, should we expect, between central and marketing, and that between divisional? And if you are going to exceed $100m, where would you exceed it from? Would you exceed it from the divisional level, or would it be from the central function?

Well, the two parts of the last question, we’re not changing what we’re saying at the moment in terms of a peak of $100m. So we’re just going to go with that for the moment. I’ll ask Richard to talk about the spread of the costs and the tax rate. In terms of asset value of the hotels that we feel are core, they represent well under half the total value of the assets that we own. Would you go any further than that, Richard?

No, I don’t think so.

Okay. Do you want to deal with tax rate and...?

Yeah. On tax rate, Simon, it’s not just capital expenditure that’s driving our tax rate. There are sort of structural issues, regional issues, geographic issues, so we’ve said 25% as a sort of pro forma underlying rate at the moment, and I don’t see that changing hugely in the next year or two. We’ll obviously update you if we think it will do, but I don’t at this point. It’s not just CAPEX driven.

In terms of the cost cuts, you asked where they’re spread. I mean, they are right across the business, they’re right across the regions, and we haven’t highlighted exactly where they’re coming out of. Partly, frankly, because the business is reorganizing, processes are changed. There’s an amalgamation of costs. For example, central shared services, which we’re pulling in centrally, have costs that are currently all around the world.

One thing we are looking at is trying to maybe clarify some of our external reporting as we move forward in [indiscernible] business, and when we do that, I think it will become clearer exactly what is where. But right now, I think you can just assume, it’s really coming out right across the piece.

Does that mean we’ll get a sort of re-statement of where the costs are so that central overhead line going forward will look very different?

I’m not sure. It may do. I mean, the central overhead line is obviously not all the costs, or even the majority of the costs.

Okay. Thank you for that.

Thank you. There are no further questions at this time.

Okay, well, thank you very much indeed, everybody, for listening in on our call, and in particular, anybody who happens to be in the United States, for whom it’s half past four in the morning, so thank you. Goodbye.

Thank you. Bye.

Thank you. That does conclude our conference for today. You may all disconnect, and thank you for participating.