InterContinental Hotels Group PLC (IHG) 2004 Q2 法說會逐字稿

Well good morning everybody and welcome to the InterContinental Hotels Group's first half 2004 results.

The format of the conference call this morning is that we will start with Richard Solomons, who'll take you through the numbers and I'll then provide an update on the strategic developments in the business.

Each of the members of the executive team will then give a brief overview of current trading. Afterwards we will be happy to take questions.

So without more ado, over to Richard and the numbers.

Thank you, Richard. Good morning ladies and gentlemen.

I'm pleased to present another set of results showing improvements in trading and further progress on our actions, that are driving up returns on capital employed.

In particular, trading remains strong in hotels and our soft drinks business continues to grow turnover, despite tough comparables.

We've raised the interim dividend in line with our policy and announced a further £750m return of funds, bringing the total announced since separation to £1m.

We're also discussing with the trustees of the UK Hotels pension plan a special one-off payment to our pension fund, approximately £50m, broadly equal to a current estimated hotels plan deficit following the tri-annual actuarial review.

Group turnover for the half year is 6% ahead of the same period last year at £1.1b. EBITDA at £254m was up to 19% in sterling terms with operating profits up 34% to £153m.

A significant tax credit position is still expected for the full year, with a tax charge for exceptional items of 18%. Exceptional tax credits of £138m have been recognized in the first half.

The interim dividend has increased by 6.2% in line with our stated policy, ahead of inflation to 4.3 pence.

Hotels turnover for the 6 months was up nearly 4%, whilst operating profit was up almost 51%.

Lost the slide, you've got them in front of you, I'll carry on.

Soft drinks continued to perform well with turnover up 9%. Operating profit was only marginally up on last year, primarily reflecting reinvestment in the business.

I'll now look at the Hotels performance in a little more detail.

Operating profits have shown a strong recovery from the depressed levels of the first half of 2003 across all regions, particularly in Asia, the Americas and the UK.

Central overheads, shown here net of [indiscernible] income, decreased in the first 6 months but planned cost savings continue to be delivered to target.

Overall, therefore, operating profit for the 6 months was £113m, 51% higher than last year.

Improving trends we reported in quarter 1 have continued through quarter 2 in every region. Combined with continued reductions in overheads, operating profit for the quarter was up by 65% in dollar terms and 50% in sterling, to £69m.

As on previous occasions, before I take you through the details of hotel results for the 6 months, it's helpful to look at the overall shape of RevPAR so far in each of our regions.

This graph shows the movement in RevPAR against last year of our owned and leased hotels and highlights the highly diverse nature of regional conditions.

This actually is shown on a comparable basis, to remove the impact of closed and sold hotels.

The Americas showed a strong growth in RevPAR, particularly through quarter 2. Growth is still primarily occupancy led, however we are seeing some great growth across the owned and leased estate.

EMEA RevPAR improved during the second quarter from the relatively weak performance in the first months of the year.

Trading within this division remains consistent with UK Hotels, showing strong growth. And Continental European properties remain weaker.

In Asia Pacific, RevPAR growth has been very high, due to depressed first half results last year. Nevertheless, the level of international business travel has significantly increased across the whole.

America's total operating profit increased by nearly 11% in dollar terms, although it was slightly down in sterling terms to £80m.

Revenue grew by 4.6%, with RevPAR growth across all brands, partly driven by an increase in business travel.

InterContinental [indiscernible] recorded the highest RevPAR growth, at 12% and 10.4% respectively.

We continue to see profit growth in the owned and leased InterContinental estates, driven by occupancy and some rates growth.

We have seen a particularly strong performance in New York, with the InterContinental Barclay recording one of its highest ever occupancy levels for the month of June, at 92%. Trading was less buoyant in other key cities with some occupancy gains but more limited rate growth.

Managed turnover grew partly as a result of the management contract signed at HPT and a strong recovery in Latin America. However, operating profit fell slightly due to performance payments, [limiting] the HPT transaction.

The franchise business continued its record of solid growth, with profits up nearly 9% in the period.

As you saw on the previous slide, operating profit in the American franchise business was up $12m for the half year, with the strong first quarter performance continuing into the second, driven by increased revenues from RevPAR and system growth.

The Holiday Inn system size reduced by a net 8 hotels, reflecting management actions to improve quality.

The Express system grew by 30 hotels, adding 6.2% to existing rooms supplied during the 6 months, and continued its strong trading, consistently growing both rates and occupancy and growing market share.

EMEA operating profits have grown from £32m to £50m, driven largely by further market share gains in the UK and in Eastern States, and overhead reductions.

Improved stability in the Middle East and increased visitor arrivals have contributed to the growth in managed RevPAR profits. Also contributing to the increase a one-off in liquidated damages of some £4m, relating to the termination of our management contract at the InterContinental in Barcelona.

Franchised operating profit is up 13% to £9m, as a result of the increased RevPAR and increased systems sites.

EMEA regional overheads decreased by £2m to £12m for the first half, through continued implementation of the organization review actions and cost control.

[Indiscernible] in the owned and leased estate remained mixed for the first half.

InterContinental's RevPAR growth in Europe has been driven mainly through occupancy gains, with London, Amsterdam and Madrid showing positive rate growth year to date.

Our Holiday Inn UK estate saw a further 6 months of RevPAR growth. Our London Hotels performed extremely well with growth of 22.3%, driven by rates and occupancy, outperforming the overall market.

The regional Hotels also posted strong growth of 6.7%, mainly driven by rate.

The rest of the European owned and leased estate did not show a consistent pattern of improvement and Paris in particular remains very weak. Although we are building share, following the re-opening of the Legrand Hotel in June last year.

Asia Pacific has seen a strong recovery following the impact of SARS last year. Trading has now fully recovered to 2002 operating profit performance in dollar terms.

The InterContinental Hong Kong, one of our most significant owned assets, has recovered well, showing both occupancy and rate growth, as well as a significant growth in food and beverage profits.

The managed estate performed well in both its key markets in China and Australia.

Capital expenditure continues to fall as we both move forward on our disposal program and maintain our tight controls on spending. We have therefore reduced our forecast capital expend in the hotels business for 2004 by £50m to £250m.

Britvic capital expenditure remains at £80m for the full year.

Capital expenditure in 2005 will be below the level of 2004, but the absolute number will depend on the speed of the disposal program.

The 2005 spend will, however, include a refurbishment project at the InterContinental London, which will run through 2005 and 2006, which will have a material impact on trading. Given the removal of the Mayfair and Churchill InterContinental Hotels in London, it is right that we ensure this hotel is of suitable quality and a strong representation of the brand.

Moving on to Britvic, turnover grew by more than 9% to £366m, driven by continued market share gain across all the major brands. This turnover growth is matched by levels of growth in gross profit margins.

Growth in operating profits was held back to 2.6% for the period as a result of reinvestment in the Pepsi brand, where we are gaining market share, and investment in new Robinsons brands extensions.

We continued to improve our cash generation and cash flow before disposals has grown by more than 50% to £125m in the period.

Exceptional items arose in the receipt of tax refunds, net of cost of closing out some interest rate swaps, in addition to the adjustment to our FelCor estate market value and profit on disposal of assets.

Matters which have been settled during the year, and which will provided for in previous years, and the creation of a deferred tax asset have led to the recognition of £138m of tax credits.

As for the balance sheet, we've made significant progress in reducing net debt over the last 12 months, funded in part by the reduction in fixed assets as the disposal program continues.

We have almost completed our existing share buyback program, with £213m of shares acquired at an average price of 534 pence, compared to last night's closing price of 584 pence.

We're pleased to announce today the next stage in our program to return funds to shareholders, with a further £750m. A special dividend of £500m to be paid in December 2004, and a further buyback of £250m to be carried out once the existing program completes.

Further returns will be considered in the light of the total program proceeds, selected reinvestment in the business, maintaining appropriate gearing and of course, market conditions at the time. We remain cognizant of all stakeholders in this process.

So in conclusion, trading remains strong in Hotels and Soft Drinks continues to grow turnover and underlying profit. We've raised the income dividend well ahead of inflation and announced a further £750m return of funds, bringing the total to £1b since separation.

Thank you ladies and gentlemen. I'll now hand you over to Richard North.

Thank you Richard.

What I'm going to do this morning is to update you on the actions we're taking to execute our strategy.

In summary, my message is - our brand performance and system delivery are showing strong improvement. We have developed our strategy, further concentrating on our key strengths and the 2 key plans are to grow brands and to develop our managed and franchised business.

We're accelerating our asset disposal program and we're planning to return a further £750m to shareholders, which will make a total £1b since separation.

Let me start by recapping where we were at separation.

Our strategy was very clear - to build brands; to extend distribution with only limited use of our capital; to reduce capital intensity and so drive up returns; to leverage our overall systems scale and to continue to develop our people.

Our overall objective was, and remains, to increase return on capital employed and drive total shareholder returns.

We have some key actions we intended to complete in the first phase of the transformation of the Company. These actions were - to redesign the organization, strengthen management, cut costs, cut capital expenditure, and begin the process of reducing asset intensity.

We also intended to start the return of funds to shareholders.

As we reported at the prelims in March of this year, we achieved all the objectives we set out in 2003 and negotiated a new bottling agreement with Pepsi, plus the ability to IPO Britvic sometime between the beginning of 2005 and the end of 2008.

This was Phase 1 of the transformation of IHG - essentially the stabilization of the Company.

We're now into the second phase of the transformation. From now on we will concentrate solely on what we're good at and we do have real strengths.

We've developed a cadre of top quality hotel branders, in my view as good as any in the hotel industry. That team, as does the Company, has a strong record of brand development - brands such as Holiday Inn Express and Staybridge, as well as brand innovation.

First and foremost we're branders. We're regarded as one of the best, if not the best, hotel franchising company in the world, with strong relationships with owners. We have around 2,500 franchised hotels in the US and we are the largest franchiser in EMEA.

We're one of the top management companies in the world, with over 400 management agreements. We're the biggest management company in Asia Pacific.

We have one of the most powerful reservation systems in the world and our loyalty scheme is the biggest in the world. And we have scaled where it matters in many of the Top Ten hotel markets in the world, and in particular in the US, UK and China.

Based on these strengths we've added more flesh to the bones of the strategy we laid out at separation.

We are therefore making the following choices to create value for IHG shareholders. To be a brand owner; concentrating on franchising and managing, with focus on a selected number of key markets, including the US, UK and China; putting a renewed emphasis to grow InterContinental; and with focused operations to sustain lower operating costs.

We're now confident our strategy best exploits our strengths and the environment in which we operate, and we're moving forward rapidly to execute this strategy.

And so we've now set out for ourselves the following actions. Strengthen the core business, grow managed and franchised fee income, develop our people and organization, continue the execution of the asset disposal program and of course, continue to return funds to shareholders.

All of these actions, with the overall objective of increasing the return on capital employed and driving total shareholder return, so as to enable us to become the world's leading hospitality brand owner.

I'd now like to talk a little bit more on each of these actions.

First, strengthening our core business.

The stronger the brand, the more revenue it drives to the hotel. Which means for us, both higher management and franchise fees and the more attractive the brand becomes to potential hotel owners.

Therefore increasing the power of the brand through improving the quality, differentiation and appeal of the brand, is a key action. The Holiday Inn Express breakfast bar and the Crown Plaza sleep initiative are just 2 examples of how we do this.

Increasing system delivery has the same beneficial impact on franchise fees and additional distribution, as does strengthening the brand.

The second key action is therefore to pursue initiatives that drive more revenue through our reservation channels and pursue initiatives that further strengthen our loyalty program.

The third key action is to strengthen our hotel management skills. And the fourth key action is to extend our brand portfolio, either by launching new, innovative brands of our own, for example Indigo, or by purchasing reasonably established brands at moderate cost, for example Candlewood.

So how do we do it?

I'll reiterate the importance of our system again. I cannot stress enough that our system delivery is what underpins our offer to our franchisees, and thus allows us to secure new distribution and pipeline growth.

Our system delivered revenue has had another watershed 6 months, with 26.3% growth. More than 33% of room nights are now delivered by one of our channels.

We saw particular growth in the Internet channel, where an increased proportion of business is now being booked direct, the result of our low Internet rate guarantee and new consumer friendly stance on intermediaries.

This decisive industry leading initiative shows how we're taking control of the consumer and our brands, to strengthen still further our franchisee and owner offer.

Our loyalty team revenue also continues to grow, 16.5% in the first half of this year. Now more than 28% of room nights are booked by the Priority Club member.

With over 21m members, it is the largest in the world and we achieved more top 3 positions in the Freddies - the US industry's loyalty scheme Oscars - more top 3 positions that anyone else at this year's awards.

On the new brand front, we've launched Indigo. Indigo is a lifestyle brand that delivers an inclusive hotel experience in response to current consumer trends. The brand targets middle market consumers who are trading up to a higher quality and modern offering.

Hotel Indigo looks at the hotel experience from the consumer's point of view, similar to how retailers view a shopping experience, and is designed so that the hotel can be easily refreshed to reflect changing consumer taste in decor. The first Hotel Indigo is scheduled to open in Atlanta this autumn, with a second in Chicago by the end of the year.

It's imperative that the brand will be priced in the up-scale segment that the Crown Plaza operates in, and has been developed primarily for hotel conversions where a current hotel may not be reaching its full potential.

On the acquired brand front, Candlewood made real progress since its acquisition at the turn of the year. It was recently awarded the highest ranking in the extended stay sector in the JD Power survey satisfaction index, with a score of 809, and is one of only 5 hotels, hotel brands, out of 64 that have a score above 800.

We've also had significant success growing the brand, reflecting the benefit of our systems and loyalty program, [indiscernible] 2 individual brands.

We started with 109 hotels and just over 12,500 rooms. Since the announcement of the acquisition, we've signed 11 new franchises representing almost 1,100 rooms, to give a total pipeline size of 2,500 rooms. A potential addition of more than 20% for the system.

Now whilst over the next 2 or 3 years the majority of value creation will come from reducing asset intensity and return of funds to shareholders, longer-term value creation must come from growing our system size. We have significant opportunity worldwide to do this. But to make best use of our strengths and resources, we need to and will, focus on a small number of key markets.

These will include the US, UK and China. The markets we have identified are those with the greatest growth potential and where we already have scale.

We have in fact had some real success adding new distribution but this has been offset by the reduction in size of the Holiday Inn brand in the United States, as we tackle the quality issues relating to the older properties.

This year we've added almost 13,000 rooms to our system on a gross basis, a 5% annualized growth. And even after the planned terminations on the Holiday Inn brand, this resulted in a net addition of 2,589 rooms year to date, representing nearly 1% growth on an annualized basis.

Our pipeline has increased by more than 5,000 rooms over the last 12 months, an 8% growth year on year, and by 2,098 rooms in the year to date, representing an annualized 6% growth rate.

Looking forward, 2 key points.

First, we're targeting to maintain the US Holiday Inn system at around, broadly, its current size, by replacing older properties with a new prototype. Currently we have over 40 prototypes in the pipeline.

Secondly, the overall pipeline is growing significantly in key focus countries such as China and the US.

The containment of, and actions to reduce costs, remain as a high priority. We expect to see such benefits from 4 areas.

First, the delivery of the current target already announced.

Second, through efficiency gains, as we simplify our organization through focusing on pure markets.

Third, a reduction in costs associated with the pure ownership of hotels as we sell hotels and four, through processing improvements.

In terms of developing our people, it will be done through a mix of formal training and continuous improvement activities.

At the time we de-merged in March of last year we owned hotel assets with a net book value of £3.9b. Following today's announcement, we will have sold or are in the process of selling over £2.2b worth of assets at book value.

Our whole approach to reducing assets intensity has been, and remains, to sell assets when 2 conditions are met. Namely - is the asset ready for sale and are we selling the asset into a strong market?

Market conditions were weaker in 2003 and so we only sold assets where there were compelling reasons to sell them.

As we moved into the spring in 2004, market conditions improved dramatically in the United States, which is why we placed almost all our US Hotels on the market in July. Conditions have also improved remarkably in the United Kingdom, which is why we're now placing almost all our UK assets on the market.

We will monitor closely market conditions elsewhere in the world and when appropriate, we will market further hotels.

That said, special conditions, special circumstances applied in InterContinental Paris, namely the presence of the brand [defining] Le Grand in the city and the unique nature of the asset, which is way we've also placed this hotel on the market today.

I must however reiterate, this program is about maximizing value and so we will not sell a hotel if we do not receive a satisfactory offer.

And the final key strategic priority is to return funds to shareholders. Richard's already taken you through the detail of today's announcement, so I won't repeat it except to say that for the avoidance of doubt, we expect to return more in due course.

So what will we look like once we've completed Phase 2 of the transformation of IHG?

We'll be predominantly a hotel management and franchise company with high quality earnings, [higher] operations geared to the hotel cycle, and significantly cash generative.

We'll be a company with world-class brands and with strong branding skills. We'll have scaled presence in a limited number of key markets. We'll have far less capital tied up in asset ownership and we'll be a company that the talented of our industry will find attractive to work for.

And so today's announcement of the next steps to take us there. As I've said at the beginning, the key messages are - brand performance and system delivery have improved strongly.

We've fleshed out the strategy we announced at separation. We'll play to our strengths and grow brands both existing and new, and develop our managed and franchised business.

We're accelerating our asset disposal program and we'll return a further £750m funds to shareholders, making £1b in all so far.

All against a much improved trading performance.

Ladies and gentlemen, thank you.

I and my executive team will be happy to take your questions.

In fact before we start the questions, as has been our policy at recent presentations, I'd just like to do a quick run through of current trading and get some color from the various regional [tradings], and also some details on the systems side.

I should start, I suppose, by baldly stating what we said in terms of overall current trading, namely that trading rates from our key profit regions of the UK, where we're getting significant market share, and in the US and Hong Kong.

We continue to see strong occupancy growth across all brands, led by the return of the business traveler. Room rate growth has begun in key urban locations, such as London and New York, but we still do not expect broad-based rate improvement before 2005.

The European market remains weak, with Paris in particular very depressed and hard to predict. Booking lead times remain short, particularly in intensive and meeting business. And that was our overall trading statement.

Let's start with Peter Gowers and ask him to give us his prospective.

Hard to think if I can add anything really to that. Brand power, probably the first key thing. I'll leave Patrick and Richard to talk about the domestic brands. We're very pleased with the performance of InterContinental in terms of its up-tick.

You'll have heard from Richard it's mostly about occupancy and I think that's driven by 2 big things. Brand awareness is up quite significantly in our target market, partly to do with our sponsorship of CNN, which is square on target, and the result of our in-flight media on awareness.

And we issued new brand standards at the beginning of the year, which have helped drive the quality perception of the brand up.

In the US we came third in the JD Power survey this year, only behind Four Seasons and Ritz Carlton, which is bang on the positioning I want from a cost to customer quality prospective.

I think that that means that going forward I expect the focus to be continuing on the differentiations of those brands, but also more portfolio marketing to leverage the scale we've got. And some of you who live in the UK will see the campaign break tomorrow for Holiday Inn and Express and Crown Plaza, doing all 3 brands, marketing them with a channel message as well.

On system delivery, obviously you'll see in the papers and your own reports, we took pretty decisive action to address the issue presented by online intermediaries, which saw us pull out of Expedia and Hotels.com.

We could do that because our direct Internet revenues are up 60% on prior year. 80% of all our online bookings go direct. We've got great brand power, which means that intermediaries like Travelocity, Priceline and 80 others so far all want to do business with us on the standards we've laid out. And above all, because we've got the franchisee relationships, which mean when we want to act we can act decisively. And I think you're seeing the impact of that right now.

Overall, Richard mentioned system delivered revenues are up just about 3 times the rate of the market growth, which obviously I'm pleased with. But I should stress that the second half of the year the comparables will be tougher, because it'll reflect the trading programs we put in place at the back end of last year.

The combination of those 2 things, brand power and system deliveries working really well for InterContinental, where system contribution - that's the number of room nights we deliver through our distribution - is up to 20% almost of total room nights. And Priority Club members now account for 17% of all the room nights sold there. Those 2 positions are up from virtually nowhere 18 months ago, which is a result of the focus we are putting on that brand.

It is also worth noting that the people enrolling in Priority Club, of them about - in InterContinental itself - of them about 10% have already chosen this year to use another brand in addition to InterContinental. So there is cross-selling even from the very top of the portfolio down.

Overall, I think we have always known we could drive system, contribution and brand power in the mid-market. We are strengthening that and now we are extending it to up-scale the [indiscernible] for the pipeline.

Thank you Peter. Steve?

Thanks Peter. Thanks Richard. As both Richards have pointed out in their messages, the strength that we have seen in the last year has just continued into the first half of this year throughout the Americas, especially true in Latin America, in line with the improvement in that region across all brands.

The United States has been very strong for us and our performance, especially in the InterContinental and Crowne Plaza brands, has been very strong. Franchisee confidence is great and evidence of a very successful first half. We have sold just shy of 130 license agreements, which we are very pleased with that, especially the uptake on the new prototype Holiday Inn, which is very important to stabilizing our position in the mid-market. And we've been successful with meaningful brand events to strengthen the position of Express, with breakfast bar, a continued residence there.

Introduction of Sleep Advantage in Crowne Plaza has been very well responded to. That program is now in all of our hotels throughout the United States. We accomplished that in a 90-day time period. The introduction of Indigo has been well received and as Richard pointed out will open up soon in Atlanta. [Indiscernible] in Chicago.

So very pleased with that particular strength, of being able to use our existing portfolio and successfully introduce new concepts to grow the pipeline as we look ahead. So very, very solid position in America.

As you know, we operate 4 divisions in EMEA and of the 4, it's a mixed story. The UK and the Middle East are exceeding our original targets. Western Europe is falling behind, primarily because of what's going on in Paris. And Northern, Central and Eastern Europe is pretty much right where we expected it to be.

The UK and Ireland has often formed a competition with large gains in market share and as Richard Solomons said earlier, where in the London area we have a 22% growth in revPAR year on year. We are now touching right at fair market share in the UK, and if you recall, we were coming from a 10% discount in the market about a year ago.

Western Europe is extremely disappointing because of Paris. However, we are growing share in the Paris market. The brand is moving forward just as we expected it would on a relative basis. And this partly comes from the recovery of the market in general. As you can imagine, the biggest changes in the Company pursuing our new strategy, are going to happen in the EMEA, where we've reduced our ownership and our asset intensity here. And along with that, we really need to deal with growing the business going forward.

We have had a pretty good growth in franchising this year. Today, rooms availability is up 6.8% and our revPAR is up 8.5% in the franchise estate. And as was mentioned earlier, our overall franchise earnings are up about 13%.

On the InterContinental front, we have 7 new InterContinentals that are either under construction or about to start construction - some in Europe, some in the Middle East and one in Central Africa. So we are getting ready for the big change that is going to come very soon and we're going to have a lot of fun. Patrick?

Thank you Richard. [Trading from] InterContinental Hong Kong has done very well. SARS is well behind us and we're well up on 2002 results. Food and beverage profitability is strong at the hotel. China, overall trend is very, very well as well, as was explained in some of those key markets.

InterContinental Crowne Plaza, Holiday Inn, continue to outperform the competitors in all of our key markets and we are experiencing revPAR growth in all of those brands that are actually doing some business. So we're really delighted with that.

Picking up on Richard's key message of China. Pipeline with 11 signings this year so far, which is about 3,500 rooms. We are really focusing on growing our pipeline in all areas, but China is a priority for us. And effectively it's a case of outstripping the performance of the brand and strengthening the proposition to franchisees and to owners, and that's what we're delivering against. And I look forward to talking more about that at the franchisee - franchising and management get-together we're having on October 11, so we can be more specific.

Thanks Patrick. Now we would be delighted to take your questions. Would you mind very much giving your name and the name of your company? It's not that we don't know who you are - it's just for the benefit of the transcript. Yes?

[Keith Dunster] from CSFB. Some very quick questions on the report data you show in your release. In the EMEA in the first half InterContinental owned and leased you are at 4% revPAR, year to date to July, [including one month], that was 1.9%. That decline is a very big [indiscernible] other than below last year's and about minus 10. And the benchmark data that we are looking at looks like it's positive for Europe countries. Explain what's causing that? So can you please give an idea of what you think has happened there in August?

And third, in Holiday Inn UK regions in April, you showed a revPAR of zero. Is that right? What has happened there?

[indiscernible] I'm sorry, we're looking at the picture. Would you like to pick up the Intercon one Richard, and you'll maybe talk about the UK.

What happens in the EMEA is really all about Paris and France, because we are very skewed obviously there with the Intercon levels, 2 in Paris and 1 in Cannes. And that's really what's driving that movement.

[Inaudible - microphone inaccessible]

Well [InterContinental's] comparable revPAR was down 7.8% in July. Which is on the supplementaries, which are at the back of the pack. You can see that movement. The UK regional finance Richard?

Yes. We ran into a little bit of a pricing problem in July. We have-- In order to gain share, we have traded out a lot of discounted business over the past several months. We are now the number 2 preferred company in corporate meetings and seminars. A year ago, we were dead last in preference. We have consistently traded that out.

And what happened to us, I think, was we just mis-priced ourselves in July when the corporate meeting market and the corporate group market is the weakest and our price point was just slightly too high for the growth that we needed in the leisure side of the business. We have learnt. We are adjusting things. But I think overall we made the right decision because what we were doing in the past was really relying too much on government business, deep discounted business, and deep acquisition cost business in '02 and '03.

[Jamie Orley], Morgan Stanley. The first question is could you maybe give us a figure for what debt the pro forma business going forward could sustain? Just so we can work backwards, see how much further cash could be returned, maybe a debt to EBITDA multiple.

Secondly, you have announced a variety of initiatives which taken together could have a revenue impact. I'm talking about the Park Lane establishment, the prototype rollout in the US, thinking of the loyalty scheme and so on, taken together, is there anything there we should be aware of from a costs or revenue perspective?

And my third question really relates to the implied EBITDA multiple, for the £1.3b of assets you've sold, 10 times EBITDA, which is below the multiple of recent disposals. And also, it seems to be below the implicit multiple, given the £3.5b of book value you've got and what profits that that estate currently generates. Is that because the remaining assets are [indiscernible] assets and they're just generally lower yielding, or is it because of the way you - it's the cost between what is going to be sold and what is going to be kept?

Okay, you always ask that question. I think on that, clearly it's been an ongoing matter of discussion. And at the prelims, I presented my mini seminar on the rating agencies. I think on a serious note, it's important, we're an investment grade company, we are running the Company at investment grade ratios and it's important to us that we balance therefore the debt and equity requirement from the different holders.

So I think-- I can't give you a definitive multiple. So, here's a multiple we're going to run through [indiscernible] going to run to. One thing I can say is that we are pushing ahead on the disposal program and we are being definitive at this point in time about return on capital, which connects us to - because we have the ability with the debt level currently today at £500m or £520m, and improvement in trading gives us the ability to do that. We will continue to push to make sure we're balancing that right, to [both equity holding ones] and debt holders.

But you asked about revenue impact. I think most of the initiatives that we talked about, about our income and so on, they won't have a direct revenue impact. They will have a benefiting revenue and cost impact. Technically if you-- [Indiscernible].

The [indiscernible] revenue succeeds from during in the regional numbers, so they'll be more driven by the trade and a combination of things.

The cost question which you asked, it's worth noting all the costs in our reservations infrastructure and our loyalty program are off P&L, they are borne by the assessments paper franchised hotels. So, as we increase spending on that, that comes from continued efficiency driving there. So there's no P&L impact, there's no cost increase even as we grow those programs, which is why it's such a good model. In the [openings] of marketing, the heavy marketing that is on the P&L is the InterContinental brand itself. That is vastly P&L funded and we don't expect that to be materially different next year to this year, just come about through tighter focus on the key markets. And it will grow.

Richard thank you.

The EBITDA multiple point. I think what we've - we've told you in the EBIT and the EBITDA, expect estimated 2004 numbers for the latest book value we've put on the market. We've given you the book value and clearly we're going to go out there and look to maximize value on disposal. But I think you're right in your point that actually the portfolio for the Americas modern market, that's one of the assets that we're retaining. They do have different profiles, both in terms of brand and region and development in markets as well. The different EBITDA mark was relative to the book value.

Can I come back? That EBITDA then, I presume you paid the full [indiscernible] cost region of [indiscernible] direct cost hotel?

Yes. Hotel EBIT and EBITDA.

It's all well paid for.

Just to come back to my first question on the debt. Presumably [indiscernible] if you say that you won't want [to be] net cash at the end of the process?

We're looking to have an efficient balance sheet, which is highly unlikely to be [net cash].

Thanks. It's Ian Rennardson at Merrills. In terms of the UK assets you've put on the market today, is there any implication on tax? Are we going to wait for any news on the [rates]?

And secondly, the comps in the second half do get a little bit tougher against last year than they were in the first half. What are you really thinking about between now and the end of the year in terms of possible revPAR progression across the different regions?

We're not waiting for the rates. That's why we've put them on the market today. [The results are] whether we're going to get rates [for hotel] [indiscernible]. They're probably waiting for that. And equally we believe that the market is very strong that we're selling them into here in the UK, and that we should get more than satisfactory prices, which is obviously what we're after.

Second half - Richard?

Yes, I think we're not - making revPAR predictions hasn't been our practice obviously. But the current trading gives you the shape of where we see the market and where we see the strength in the market.

I think the only point to say about the second half, just a reminder, is that the comparables were unique in the first half because it was a very difficult 2003 - SARS and the war and so on. We actually saw profit growth both in Q3 and Q4 last year, so the comparables become much tougher. So confident about trading but the comparables have changed.

Thanks very much. It's Julian Easthope at UBS. I've got a question on management contracts. So far you've built - the disposals you've made or big disposals you've made. London has been [indiscernible] whereas the Staybridge Suites were actually achieved, but you actually gave minimum profit guarantees in those contracts. So I guess my question is do you think you will have to give guarantees in terms of retaining management contracts with the UK portfolio? And what yields do you think that the asset owners are now wanting?

And as a more general thing, from the heady days of management contracts that were originally signed at 5 and 10s or even more, what sort of deals are you expecting under those current conditions?

Yes, Richard? He's in charge of the disposal programs.

Thanks Richard. I think - yes, we did give some guarantees on the terms of reference with HPT, although net we still have very positive transactions on those 3 pieces of deals with the 2 separate transactions and [Canberra] was one. I think our practice on guarantees is we are pretty sparing at giving guarantees. That has been our policy and that will continue to be our policy. We treat them very carefully and we look at them as capital in effect, so we don't just ignore them and think that [indiscernible] will never happen.

I think that there has been a practice of guarantees on transactions across the industry. It seems to be a little bit less now than it was, as serious buyers actually look through it and say we're buying good assets with good returns. And then of course short-term guarantees, which is all we ever give, we claw back our [indiscernible], it's not really that valuable.

But we look at, when we sell the hotels, we will look at retaining [indiscernible], as we've said, management or franchise. We look at the total value of the transaction. Capital value versus trading profit versus any support we have to give. But we certainly expect to minimize that. In terms of the yields, I don't want to put a price out there that I expect people to have to pay, so we are obviously looking to maximize value - the demands and the interest in hotel real estate is strong. We have seen revenue [indiscernible] so we're relatively further down the road and we certainly see it within the UK, so we look to maximize value there. Which doesn't mean we're going to do very quick transactions. We are going to work to maximize value, which may take a little longer. But we feel confident about that.

And I think you're right. The heady days of management contracts of 5 and 10 - I'm sure maybe Richard and Steve could give a bit more color on that. It would be nice to find those amounts, not many around. But certainly there are very profitable management contracts around and we've got 400 already, which will make decent profits and we expect to add some more.

Steve or Richard, do you want to add something?

Yes, the Americas market today, which is mostly the US market, its typical structure is a base fee of 2% or 3% of total revenue. And it's something that's used as some kind of a pre-return part of negotiation. Typically, we recover accounting fees on a current basis and then all the system fees. So reservations, marketing contribution and that kind of thing. It's all pretty standard and we've been very comfortable at meeting the market.

Thank you. Mark Finney from Deutsche Bank. Just on that point about HPT, you mentioned that there was still negative impact of that in the half or the quarter. Can you add just a little comment to back up what you've just said, about the positive [mid-term] transactions are a claiming issue there?

Secondly, why are you purporting to put £50m into the pension fund now?

And thirdly, on a broader question, I think you mentioned that you renewed focus on trying to grow the InterContinental brand and I note what was said about Middle East and Africa and so on. In the States, do you think that you've now got a platform, because of the movement in system delivery and so on, that you can go out and be more successful in the next 3 or 4 years than you have been in the last 3 or 4 years? And is this something you can say tangibly in terms of some sort of pipeline there because that's always been the strategic problem, shall we say?

Right, well I will deal with the pension and I will get Richard to deal with the HPT and I will get Steve to deal with InterContinental. Richard, do you want to start with HPT?

Yes, I think there is an element of timing actually, because the way the deal works just in very broad terms is there is some support for a profit level, but we have the ability to claw back what we pay in at the time as excess cash is generated. But I guess conservative or appropriate nature of accounting is that we don't account for the claw back right, basically, until we know it's coming back. So we effectively take all of the pre-tax funds and [indiscernible] if trading improves as we [indiscernible] [of the bit that's set out] but then we have ability to claw it back, so there is no [indiscernible].

[Inaudible - microphone inaccessible]

Probably not this year, but going forward.

Just to put a little bit of perspective on that, as Richard pointed out, the agreements we have with HPT, it's really 3 deals. The first one was the Staybridge transaction, a very successful sale, well ahead of book value, potential of [flag] management, solid performance. The second one was the Somerfield Suites, 15 hotels, 14 converted to the Staybridge flag. One we successfully sold out of that flag and put into the Holiday and Express Suites flag, which was an unexpected gift there and we retained that license agreement.

That is the trend that has proven to be the most troublesome in the near term, driven largely by a very strong performance when we took it over. We overestimated what we felt the impact - what the impact could be. We have been and re-furbed but it's taken longer to come out.

Transaction 3 has been Candlewood, extremely successful, solid revenue growth. First year it's going to have positive revPAR growth and probably 3 years is what we had expected. We can improve the GOC margins from roughly 50%, 52% on that particular business. A lot of management contracts sold with [indiscernible]. So really quite pleased with the way those 3 deals have come together.

On the InterContinental front, yes we have spent the past 3 years strengthening the position of the brand in the Americas, integrating the tools that Peter brings to the table, and there is solid interest in that brand. So I think we finally have the platform that we need to grow it forward. From the screening standpoint, we have a significant number of opportunities that we're currently reviewing. We have had interest brought to us by those who are interested in acquiring hotels and the cost of the transactions. So I think we will see the attraction that we have been working for, yes.

And this is about focus, Mark. It's about concentrating and growing our presence and our distribution. Stop doing acquisitions and build up some [indiscernible] to keep us on our performance track.

On the pension fund side, I think this is an issue for the UK plc. In a lot of pension funds the rules were written, I think, for the defined benefit schemes in the '60s and '70s, which gives [indiscernible]. Our pension plan doesn't have particularly big debts yet, on an actuarial basis it's adjusted for the new longevity rules. I think it's about £37m on an FRS17 basis it's round about £50m. I think companies are going to be asked to put more money in via their trustees. And I think they, in many cases, are going to have to put it in because I think they'll be required to. But we're still discussing with our trustees the amount to go in. And on the basis it's around £50m and [indiscernible].

Thank you. Ivor Jones from Smith Barney. Could you put a bit more color on the next tranche after this of potential hotel disposals? You talked about looking at other assets becoming available for sale as their markets improved. Is there any proportion of total assets or type of hotel that can't be sold? So what level of assets?

And then secondly, perhaps you could just kindly indicate a little bit about the way lending banks think, we're trying to think about the debt level the business might support. If there were to be a hotel business that had no asset backing, would such a business have the capacity to borrow money or is the ability of a hotel business to borrow money linked to its ownership of assets? And is that what the debt has to be tied to?

Right, well several points. First of all, we won't ever have no assets. We will still have some assets. But they're there - asset ownership is about supporting our brand and strengthening our brand. In particular, if we're launching a new brand, kick starting the launch of a new brand. But clearly the amount of assets we're going to have is going to be very significantly less than we started out with and, after all, we have already dealt with this problem and dealing with the United States and the United Kingdom, that's already taking out over 50% of the assets we started with.

And I think you can just see from the direction we're going that - draw your own conclusion - just how many assets we're likely to have. What we've always done as a matter of policy and forgive me for this, was we never wanted to talk about targets or individual assets or whatever, but that we committed that we would mention when we put assets on the market. But I hope that our actions speak louder than any words that I could express today, so you will see the direction we're going in.

As far as lending banks, Ivor, there's a few in the room actually. I'm sure they'll come up to you afterwards and talk to you about their [indiscernible]. I think you don't need to have a lot of assets to borrow money. We feel very confident that whatever our profile, particularly with the good cash generation, very stable and resilient earnings in the - particularly the franchise business - that we are going to have no problems getting the amount of [indiscernible].

Thank you.

Morning, it's Patrick Hargreaves from Goldman Sachs. 2 quick questions. First of all CapEx. It may be somewhere in the presentation, but I'm not sure I can see it. But have you got any indication of what the actual cost will be for the London re-furb in the InterContinental?

And the second part of that question, is it fair to assume that your CapEx on hotels could actual halve over the course of the next 2 or 3 years as you sell the assets? Or is that being slightly too aggressive?

And then finally on current trading. The [indiscernible] numbers we're seeing in July and August seem to suggest we are being moved towards rate increases [rather than] [indiscernibles] in the US. Is this something we are seeing more across the InterContinental estate now, or is it - you use words like localized and inconsistent for the rate growth so far. Could you give your comments on that please?

Sure. I'll start off then on that notion. Yes, we are seeing the same kind of numbers that Smith is reporting. The difference for us at times is 1, our skew to the mid-market. When you look at our area of the portfolio. InterContinental has been a solid performer in New York City, a solid performer in Washington DC. Some nice movement in Miami, though of course we've had some hurricanes to help us [indiscernible] Florida. And finally, some traction in San Franciso, both occupancy and average rate. So not where we want to be, but moving in the right direction. We had a solid year in Chicago, the second half looks to be reasonable and this has continued to be an off-year in Chicago for convention traffic. So to the credit of our team, we've stabilized our position and down the year, next year looks pretty solid for half year. So pretty pleased with what we've seen and we're participating in all the numbers that you see on that report.

The CapEx, no we haven't actually identified what CapEx for the InterContinental London is, but it is obviously in the number, total CapEx number, that Richard talked about.

So 2005 will be lower than I formerly said it would. It really depends on the pace of disposals, because there is maintenance CapEx. So even if you're going to sell a hotel, you've obviously got to make sure you're maintaining [indiscernible]. So the number will get lower, obviously I don't know if it's going to half or what - we'll no doubt talk about that as we get close.

Hi, [Barry Dixon] from JP. Can you just talk a bit about booking patterns, particularly on the large conference and incentive type business and whether or not that's giving you higher yields, certainly in the more recent past?

And secondly, a more general question in terms of the brand development. Are you looking specifically at any particular part of the market in terms of mid-market budget, extended stay, in terms of potential new brands that you're going to develop yourselves or ones that you potentially acquire?

Let me take the first. We are essentially concentrating on the mid-scale and the up-scale segments. We are not into the luxury segment at the top and we are not into the bottom section at the bottom. And these are the 2 segments, where the greatest of our revenues can grow. It's concentrated and that is why we are concentrating on those 2 segments.

Otherwise on the booking patterns, I'm going to ask Richard Hartman as a view from the EMEA.

Well, the corporate meeting and corporate groups and the incentive business has now become an in year for the year booking cycle, whereas previously it was anywhere between 2 and 3 years out. In fact, what we're experiencing right now is booking cycles that are down to 3 months for very large groups. I think that we are going to continue to see that trend. I also think that in the industry, we are going to have to respond by getting the booking cycle for us from the time of enquiry to closing the deal, down to a matter of hours going forward, rather than a matter of days or even weeks as it has been in the past. And we are responding to that. We've got some things going on now where we're almost getting to the point of self-closing in some cases.

Obviously, this whole thing creates a huge amount of volatility in the big hotels that we have, particularly Paris and London, the triangle of Prague, Budapest and Vienna, because these are hotels that have historically relied very much on the high-end incentive, high-end corporate meeting business coming in from the United States and elsewhere. Well, it's the market condition we are going to have to learn to live with.

Sorry, can I just have 2 quick questions off Mr. Hartman again. Firstly, what do you think you're going to do with corporate rates in London next year from your Company, are you looking for the same prices we've paid this year? And secondly-- They're going to go up? All right.

And secondly, can we write off American incentives in Paris in summer '05? What's your view on that?

The corporate rates, we are going to be aggressive in London. We are going to be aggressive. We found that - we found last year if we just played chicken a little bit, we got what we wanted. Quite interesting.

As far as the American incentive next year in Paris, there is a lot of interest in Paris. But there is no - right now, there is no booking. And I think what's happened in the incentive industry is the same thing that's happening in the corporate meeting and corporate groups industry. No one is making commitments until they absolutely have to. And it's just incredible, the short-term nature of the business going forward. So personally I think, because of the underlying [end of audio].