InterContinental Hotels Group PLC (IHG) 2004 Q1 法說會逐字稿

Thank you for standing by, and welcome to the InterContinental Hotels first-quarter announcement. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I must advise you that this conference is being recorded today, Thursday the 27th of May, the year 2004. I would now like to hand the conference over to your speaker today, Mr. Richard North. Please go ahead, Mr. North.

Good morning, everybody, and apologies for keeping you waiting. We just had a slight technical hitch but everything's now fine. Thanks for joining us. As you know, I'm Richard North, Chief Executive of InterContinental Hotels and I'm joined by our Finance Director, Richard Solomons.

You have seen the first-quarter results statement. Richard is going to take you through the figures and then I'd like to briefly update you on progress on our strategic initiatives during the quarter before opening the call up to your questions. So first of all, over to Richard.

Thank you. I'll take you briefly through our performance in quarter one ending March 31, 2004. We've had a great start to the year, with group operating profit up 45.9 percent, although I will remind you this is against weak comparables and given our seasonality, that this is a relatively low-profit quarter. Group turnover is up 6.1 percent in sterling terms, 9.6 percent in constant currency. Hotel turnover for the quarter is up 2.1 percent in sterling, 7.1 percent in constant currency terms, while operating profit is up 51.7 percent.

Looking now at regional performance, turnover in the Americas was up 4.5 percent on last year and operating profit grew by 18 percent. RevPAR for the total American-owned and leased estate increased 12.1 percent or 7.1 percent on a comparable basis, with strong growth seen in New York and Houston. Total owned and leased operating profit for the quarter increased to $6 million from 2 million in the prior year. Total RevPAR in the Americas managed estate grew 3.2 percent. The addition of new properties resulted in turnover growth of 30 percent for the quarter. This was negated, however, at the operating profit level by front-loaded priority payments to HPT. Franchise RevPAR grew for the quarter across all comparable brands, resulting in profit growth from franchising of 10 percent.

Turning now to EMEA, trading in the UK and Ireland and Middle East continued to improve, while trading in the European owned and leased estate remained mixed. Operating profit for the quarter was up 23 percent at 16 million pounds. The recovery in London continued with RevPAR growth of 17.3 percent in the comparable London estate. In both London and the regions, our results reflect the fact that we are continuing to gain market share and outperform benchmarks. This strong performance was offset by Continental Europe, particularly France and Benelux. Overall, RevPAR for the EMEA InterContinental owned and leased estate was down on the prior year, primarily because of trading in Paris. Operating profit for the region as a whole was impacted by revenue growth weighted towards occupancy rather than rate increases, and lower margin non-rooms revenue, as well as by higher depreciation and business rates. Operating profit in Asia-Pacific grew 42.9 percent as trading stabilized in Hong Kong, China and Australia after the effects of the Gulf War and SARS. A high proportion of operating profit growth was attributable to the InterContinental Hong Kong, partly offset by increased depreciation of this property. Operating profit in the managed estate in Asia grew significantly due to improved trading in China and Southeast Asia and system growth in China, where six new hotels were added from the prior year. The 10 million sterling reduction in overheads in the quarter reflects our continuing focus on driving cost out of our business. We expect 2004 overheads to end the year broadly in line with 2003.

Britvic had another excellent quarter. Total volumes increased by 12 percent and turnover by 14.6 percent. In the carbonates market, Pepsi, 7-Up and Tango performed exceptionally well, with volumes increasing by 16 percent, 13 percent and 10 percent, respectively. The J2O and Fruit Shoot brands delivered exceptional volume growth of over 50 percent. Britvic also continued to drive its leadership in the licensed entree segment, the pub segment, securing major supply contracts with JD Weatherspoon and Spirit Pub (ph) Company.

Moving on down to profit and loss accounts, interest was much reduced versus 2003, primarily as a result of significantly lower debt in the business. Our tax position is quite complicated this year. The rate applied to this quarter is our best estimate of the rate that will apply for the full year. We have resolved or are soon expecting to resolve, a number of prior-year tax matters, which have resulted in the release of historic provisions and the recognition of a deferred tax asset. This therefore leads to an exceptional tax credit in the quarter of 24 million pounds, and an overall tax credit for the year -- of a tax credit rate of 30 percent. The tax charge on ordinary activity is expected to be around 18 percent. In the next few years, our effective P&L tax rate is expected to be in the mid- to high-20 percent. I should point out, as we have highlighted before and as evidenced by this quarter, the actual tax rate is likely to be rather more volatile in the future than in past years. Our cash tax rate for 2004 is expected to be less than 20 percent, due to certain prior-year tax repayments and use of tax losses. In the next few years, the cash tax rate is estimated to be in the mid-20 percent.

As we've stated in previous announcements, we have a more continued focus on improving the operating cash flow of the group with vigorous control of working capital and capital expenditures. Operating cash flow for the quarter was 66 million pounds. Capital expenditure, down 38 million to 49 million, was lower this quarter than last year, but is expected to remain around 300 million pounds for the hotel business for the full year. Thank you, ladies and gentlemen. I'll now hand you back to Richard North.

Thank you, Richard. As we've said, we're encouraged by the performance this quarter, but we do recognize there is more to do. We'll continue to focus on the plans we've already put in place to improve efficiency, drive returns and return capital to shareholders.

What I'd like to do now is update you briefly on four key areas of our business -- asset sales, return of capital, geographical focus to drive our business and our concentration on continuous improvement. Starting then with our sales and hotels, over the last few months, we've seen a continued strengthening in the market for assets, particularly in the United States, which gives us further confidence in our program to reduce asset intensity across the group. Since the merger, we've sold 314 million pounds of assets, representing 27 hotels, and since we last spoke to you in March, we've reached agreement to dispose of two more hotels, both – all above net book value, with net proceeds of 29 million pounds. We hope to be able to announce agreements soon on a further 13 hotels with a net book value of around 100 million pounds, and we're planning to place another tranche worth more than 500 million pounds on the market shortly. Once that tranche is on the market, it will mean that since the merger a year ago, we will either have sold or be selling 1 billion pounds worth of hotels, representing 25 percent by value of the hotels we started with at the merger. So there's a lot of activity on this front and we will continue to keep you updated with developments as they occur.

Moving on to returning funds, our initial return of capital to shareholders is proceeding on schedule. We've already purchased more than 100 million pounds of the initial 250 million pounds in the share buyback we announced back in March; that is 10.5 million shares in the quarter and 20.3 million shares to date, purchased at an average price of 504 pence. To be clear, the 250 million pound buyback is just the start of the return of funds to shareholders; we'll return more in due course.

Turning to our geographic focus to grow our business, we now have nearly 3,000 franchised hotels and more than 400 managed, and we remain focused on driving this high-return, cash-generative business. To that end, we're planning to focus development efforts on countries where we see the best growth, such as the U.S., the UK and China. This will entail using our strong portfolio of global brands. In the Americas, we've further strengthened the business through organic developments like the recent launch of Hotel Indigo, or when the price is right, small acquisitions like Candlewood Suites.

With regard to reducing costs, we remain on target with our cost savings program and we continue to concentrate on improving business efficiency in order to unlock more potential and further enhance returns. Looking forward, we're seeing continued strong performance in both North America and the UK. In the U.S., the individual business traveler is making a comeback, with double-digit growth year-on-year. This is driving RevPAR growth as it starts to displace lower-rated business. In the UK, we had RevPAR growth that has outperformed the market and allowed us to gain market share throughout the quarter. We've seen solid RevPAR growth in the regions, coupled with a positive performance in London. April shows London remaining strong. Booking leadtimes remain short, although business on the books is up with, for example in London, an average of 10 to 15 percent higher than at the start of the same month in 2003. Continental Europe remains difficult, with some small size of recovery visible after double digit RevPAR declines in the first two months of the year. Booking leadtimes have come down from 6 to 12 months and still remain at only one to three months with even quite large meetings. Incentive travel has get to return and is unlikely to do so much before 2005. U.S. visitors are broadly flat year-on-year to the region, but some slight increases in transient business give us a little hope for the future. Hong Kong is now virtually back to 2002 levels of occupancy. The new food and beverage offering in the hotel continues to drive revenue.

Overall then, continued recovery in the U.S. and the UK, albeit occupancy led, with tentative signs of recovery in Continental Europe. So in summary, we're encouraged by results but recognize there's still much more to do. We'll continue to concentrate on self-improvement in order to carry on reducing costs and improve business efficiencies without adversely affecting the guest experience.

Ladies and gentlemen, thank you. Richard and I will be delighted to take any questions that you might have. So I'll hand over to the operator.

(OPERATOR INSTRUCTIONS). Jamie Rollo, Morgan Stanley.

Thanks. Good morning. Just a question on the asset disposal program. You're shortly going to have 600 million pounds on the block so to speak. Could you give us a feeling for where the hotels are located geographically, how much profit perhaps they made last year, and is it too optimistic to assume they will be sold in this financial year?

Right. We're not going to name the hotels for the moment, Jamie, because we've got to go through a process, not the least talk to the people in the hotels. But the moment we put them on the market, we will let you know which hotels they are. What I will say is that we're talking about hotels both sides of the Atlantic. In terms of the time to dispose of these hotels, our experience is that it's taking somewhere between three and six months on average. Some a bit longer than that; others a bit quicker. But three to six months is what we've been experiencing. That's not to say that I'm promising we're going to achieve this in three to six months; I'm simply saying that that's been our experience. Our objective obviously is to get the best price for these hotels and not to set a time that gives any advantage to anybody we're negotiating with. In terms of the profit, I shall let Richard answer that piece of the question.

Jamie, we're not obviously at this point saying which hotels they are and therefore exactly what profit they made. But I think as you know, if you look at our owned and leased estate, we're talking about single figure returns, and clearly our focus is on disposing them is creating value, so getting a value that more than offsets, effectively, what we're generating from trading. That -- if you look so far at our disposals, the net P&L impact for the disposals we've made so far, especially in this quarter, is pretty neutral. And we would certainly expect to have a value-enhancing route forward on the disposables.

Ian Reynoldson (ph), Merrill Lynch.

Good morning, guys. Two or three questions, actually. One is, you seem to be outperforming the opposition in the London market. I wondered why that should be. Two, you've not mentioned the planned IPO of Britvic; is that still going according to plan? And linked to that is you've stressed the initial nature of your share buyback. Could you maybe put a little bit more color on that timing and amount, possibly? Thank you.

First of all, outperformance -- I think it's about having better targeted marketing programs and it's effective sales teams, has greatly contributed to our performance. The IPO of Britvic, we haven't actually come to a decision on the dates of the IPO of Britvic. The agreement we have with Pepsi, in any event, says that it can't be processed till January, 2005. So there's a while to go anyway on that. And then it's, we've got something to say, we'll let you know. Sorry, what was the third question? (multiple speakers) -- buyback.

What we're stressing, I think, Ian, is that we've always said that we've got three uses of the proceeds and the cash that we generate, which is paying down debt, which is -- we're at a relatively low level of debt now; selective reinvestment, very selective; and returning capital to shareholders. So I think we're just reiterating here that the 250 million is the initial; as we generate cash to trading and disposables, then we would look to do more in due course, but we aren't indicating how much or when at this point.

Patrick Hargraves (ph), Goldman Sachs.

Good morning, gents. One quick question about trading and -- well, current trading, rather, in Europe. I mean obviously you've given us the UK numbers in the InterContinental owned and leased. I was wondering if you'd give us an indication of how you're trading in Germany, Paris and Benelux in April, both year-on-year and underlying?

Well, the best area (technical difficulty) -- the best area in Europe actually is Budapest, and Eastern Europe is promising. Paris is sort of off and on. And so we're somewhat -- we're pretty cautious about Paris. Paris is, I suppose, our biggest concern and the Benelux is a bit iffy. But we are seeing improvement in Eastern Europe as I say, with Budapest very strong. And in Germany, it depends on which city you take, really.

Is it fair to say you're seeing stronger occupancy as a whole across Germany at the moment rather than rate increases?

Well, to the extent we're seeing improvements, it's occupancy rather than rate-led.

Mark Finney, Deutsche Bank.

Good morning, gents. You’re out-performing in the UK for the reasons you mentioned, one of which is also probably the amount of money you spent on some of the assets. I'm looking at the Americas line for InterContinental owned and leased, where again, you spent a fair amount on some of the assets. I’m slightly disappointed in that sort of RevPAR progression. It doesn't look like you're gaining share, and maybe I would have expected you to do so in some of the key cities. What can we see January, February numbers down to? Were there any specifics in there?

Well the bar trade in New York is doing incredibly well, number one. This sort of depends on cities. I mean, Chicago has got a problem as a city in that there is much less conference business in Chicago this year than last, and so Chicago isn't very strong. Tenwhan (ph) is good. Miami has had good periods and it's sort of positive and negative. I think the short answer to your question, Mark, is that we, in comparable terms with competitors, we're doing well. But if you're comparing us with somebody who's completely biased towards New York, they will look better because we've only got the InterCon -- The Barclay now in New York, and if somebody's got lots of hotels in New York, they will look like as if they're performing better than us. So it's a mix issue as opposed to an absolute issue.

Let me ask another way. When you look at your star reports, at your big assets, are you confident you're gaining some share?

Yes.

Fine. And not just in New York?

No.

Mark, we look, as you know, at the concepts against each of these hotels, as Richard said, because there's so few hotels looking at it against a particular competitor or the segment could be a bit misleading. And we've had really continual growth of share, really, certainly for the last 12 months or so in these big assets, which I think is a reflection of what we spent on them, and the revitalized InterCon marketing program. I think when you look at us against any other bigger group of hotels, because we're talking about just a handful of owned, then it is distorting.

Okay, that's fine.

Let me just give you some numbers from New York to make people realize how strong New York is, and therefore, if you've got a bias towards New York, what it means to you. If I take the last -- I don't know, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 weeks, we're talking about increases of 47, 104, 64, 24, 65, 112, 37, 49, 10, 35 -- you know, big increases in New York.

Simon Larkin, ABN AMRO.

Good morning, gentlemen. Two quick questions for you. One on where you voted (ph) your target -- when you last spoke to us, it was about 120 million of cost savings in dollar terms. Can you just give us a percent of where you were on an annualized basis versus that? And where, if there's any -- you talked about central overheads (ph) being flat versus '03. I'm just trying to conceptualize what that means in terms of the absolute level of cost savings. And secondly, can you give us an update on what your expectations are for capital expenditures this year?

Yes, Simon, it's Rich Solomons. I think on the cost savings, as Richard said in his preamble, we are absolutely in line with where we expected to be. So we talked about the total level of savings there at 120 million annualized, and we were at 100 at the prelims time. So we are achieving our targets there. Overall, as you commented, we're looking for 2003 to be -- 2004 to be flat on 2003 in dollar terms, managing out the effects of inflation, the exchange rate and the growth in the business. And so we're very much in line with what we have said previously on overhead. And this quarter is really just a reflection of that.

Okay, thank you.

With regards to -- what was your other question, sir?

Capital expenditure.

We expect, in the hotels business, to be in line with what we said at 300 million sterling for the full year. There's a lot of back-end phasing in the CapEx in this business, and so although the first quarter was low, we're still looking at 300 for the full year. It certainly won't be more than that. And Britvic is in line with expectations of 70 or 80 million for the full year.

Leslie Zarka, Citigroup.

Hello. Leslie Zarka from Citigroup. Can you -- I've just got two questions. Can you please explain where the 4 million of write-down comes from? And the second question is, can you explain a bit more how the asset disposal process is being implemented? I mean, I didn't know there were some tranches of where (ph) their (ph) asset being sold, and I just wanted to understand how you're implementing this process, how many tranches are there in total. Thank you.

We haven't actually said how many tranches there are going to be. But this is the sort of next batch of hotels that we're going to put on the market. And it depends on the type of hotels; in some cases, we may be looking to do it as a portfolio; in other cases, single assets. And we will be working with advisers to do it. And overall responsible within the company for affecting it is Richard Solomons and his team. So that's how we're handling that. As far as the write-down is concerned, Richard?

Yes, that's the write-down of our FelCor state to market.

(OPERATOR INSTRUCTIONS). Jamie Rollo, Morgan Stanley.

I had one just follow-up question on the balance sheet structure. Could you just help us understand a bit the split of gross debt and the current asset invest -- what the current investments on the balance sheet are. I think last year, your net interest costs were made up of very large interest received and likewise, interest paid. I don't know about the first quarter of this year, but could you help us understand how that sort of split, be it swap-driven or something else, actually works, please?

We've still got some quite big gross interest receivable, interest payable numbers netting down to the number that you see of 4 million in the quarter. And that's a lot lower than last year because of the lower debt levels, slightly lower interest rates and also just a small credit we had relating to a tax refund we had, which was part tax and part interest. So we have had some quite big gross numbers, as you quite rightly say, which actually -- those numbers will be coming down as we go through this year. And it's partly a hangover from being a much larger company before, prior to the merger. So it will become a cleaner picture as we get towards the end of this year.

Does that have any impact, Richard, on your average or your weighted average cost of debt or in the ability to return additional funds to shareholders?

It has no impact on our ability to return funds. In terms of the weighted average costs, I don't think it will make much difference. It might go up slightly as we unwind some of that, but not materially.

Nigel Hicks, Cazenove.

Good morning. I just wanted to ask, on Americas, where you've got this change in turnover and the change in profits, you've got -- in owned and leased, you've got a 2 million increase in turnover and a 4 million increase in profit, and yet you sold the Staybridge last year. And in franchised, I guess –well, it's plus 4 and plus 6 turnover and profit, and that must be Candlewood coming in, but also good cost savings coming through. And I just wondered why -- what was actually going on with managed, where again, turnover is up 3 but profit is flat. And you've got the HPT agreement in there -- if you can just explain?

What we've got, on the owned and leased side, the big difference here really is Central Park South, and you can work out how much money Central Park South is making or losing maybe. But that certainly helped the picture. The franchise side, as you say, we've got a good increase in profit growth; an element of that is cost savings on the franchise business, as well as clearly flow-through from the revenue growth. On the managed side, the reason actually that we're showing -- we made no money in the first quarter is really wholly down to the upfront weighting of some of the priority payments we had to make to HPT under the three agreements that we have with them. And that really is largely phasing; certainly, we we're expecting to make a reasonable profit from our managed portfolio in the full year.

Barry Dixon (ph), Davey (ph).

Hi. You mentioned in your call that you didn't expect the incentive travel business to recover before 2005. Could you just give us some sense of what the conditions you need to see in order for that to happen, and also maybe just in terms of what the lead times are for that corporate incentive business.

The lead times have been long, like sort of nine months or so. And the biggest area of where we lost it clearly is in Continental Europe, and in particular in Paris. And so what does it take for it to come back? Well it takes for Americans really to particularly want to come back to Paris, which is why we're saying that we think it won't come back much before 2005.

And just in terms of that business going to other locations in Europe -- is that -- are you seeing that, or is it just France that they don't like at the moment?

No, we weren't seeing that. And I think Americans were actually staying at home for this first type of business. Although we're not seeing too badly, I suppose, in what I call the triangle of France, Budapest and Vienna.

What you have, as Rich said, in terms of business, staying at home is one of the reasons why actually our property in the Caribbean and Taiwan has been so strong, because they are seeing quite a lot of the – they see that as domestic America and not overseas.

There are no further questions, sir. Please continue.

Well, just to say thank you very much for calling in, and if you've got any other questions that you want to ask us, please give Gavin Flynn or Rich Solomons a call; they'd be delighted to help -- or even me. Bye.

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 plus 44-1452-550000 or 0845-245-5205. The reservation number is 1344892 followed by the hash key. Thank you for participating. You may all disconnect.

Thank you, very much, operator.

Thank you.