InterContinental Hotels Group PLC (IHG) 2004 Q3 法說會逐字稿

Thank you for standing by and welcome to the InterContinental Hotel Group’s third quarter results. [Operator Instructions]. I would now like to hand the conference over to your first speaker this morning, Mr David Webster. Please go ahead Mr Webster.

Thank you very much and Good Morning Everyone. As you know I am Chairman and Interim Chief Executive of InterContinental Hotels and I am joined by our Finance Director, Richard Solomons. Thank you very much for joining us today for our Trading Update for the Third Quarter and for the 9 months to 30 September 2004.

First of all I would like to hand you over to Richard who will take you through some of the key financial results and highlights of this announcement. I will then summarize key areas of interest and priorities going forward before we open to any questions you may have. Richard.

Thank you, David. Good Morning, everyone. I’ll give you a brief overview of the headline numbers before looking at the regions in more detail. Group turnover for the third quarter grew 3% to £563m in constant currency terms. Turnover in hotels increased by 3.5% to £377m, whilst Operating Profit was up 8.2% in constant currency terms. In sterling, Hotel third quarter turnover fell 2.6% and Operating Profit remained at last year’s level, due primarily to the weak dollar, and trading remained a challenge in certain European locations.

The results were also factored by bonus costs in the quarter compared to the same quarter last year when bonuses were not accrued. Our soft drinks business, Britvic, showed a good performance against a difficult comparable due to the very good summer weather last year. Turnover grew 2.2% to £186m in the Quarter. Due to continued revenue investment in the business Operating Profit was marginally down at £26m. However, Britvic gained market share during the Quarter.

Looking now at Hotel performance in a little more depth. In our Americas region, we’ve seen encouraging growth with operating profit up 12% to $84m. America’s owned and leased estate was flat at both the Turnover and Operating Profit level but adjusting for hotels sold Turnover was up 5%. RevPAR increased at the owned and leased InterContinental Hotels by 7.9% in the Quarter and has risen 9.3% year-to-date, driven by the strong New York, Chicago and Toronto performances.

There was a small impact as a result of hurricanes in the period, mainly impacting our San Juan, Miami, Jamaica and Hilton Head properties.

The Americas Managed Business saw considerable profit growth in the period, partly driven by the Candlewood brand, which we acquired at the end of last year. America’s Franchise Turnover increased 9% in the Quarter, Holiday Inn RevPAR was up 4%, Express up 6.2% and Crown Plaza up 4%, all driven by both rate and occupancy gains.

Both at period end we see considerable activity in the region, our new hotel brand, Hotel Indigo, opened its first property in Atlanta and our new flagship, InterContinental Buckhead, also opened in Atlanta.

In Europe, Middle East and Africa, we have seen a £2m reduction in Operating Profit in the Quarter due to weak market demand impacting certain of our large owned and leased properties and the impact of sterling strength versus the euro.

We saw weakness, in particular, in our French owned and leased estate with Cannes experiencing a lower level of Middle Eastern business and Paris still impacted by the weak Dollar and ongoing weakness in Corporate Incentive business. The Frankfurt market was also weak in the Quarter than in 2003, as a result of timings of Trade Shows.

The UK Holiday Inn estates continue to grow RevPAR, especially in London, with a 12.3% increase in the Quarter and an 18.3% increase year-to-date.

Managed and Franchised Turnover was slightly up in the period while Operating Profit was significantly up, including the impact of small amount of liquidated damages. As such, year-to-date we’ve seen strong profit growth in the region, and we remain on target for a strong full year.

There has been 80% upswing in Operating Profit in our Asia Pacific region, but this is, of course, against a backdrop of a weak SARS affected comparable. We are seeing growth in market share in InterContinental Hong Kong and significant RevPAR increases throughout mainland China, which is moving forward encouragingly.

October trading has been strong, with RevPAR growth experienced in every region. The strong growth in individual corporate traveler volumes is expected to continue, while booking lead times have lengthened slightly. This gives us confidence of a full year outcome in line with company expectations.

Continuing on down the Profit and Loss Accounts, the central overheads are down £11m in the year-to-date despite an increase in bonus costs over the prior year, reflecting our continuing focus on driving costs out of the business. As previously noted, we expect 2004 overheads to end the year broadly in line with 2003 at constant currency.

Our interest charge for the quarter was much reduced versus 2003, primarily as a result of lower level of debt in the business. The tax charged on ordinary activities for 2004, as noted earlier in the year, is expected to be approximately 18%. The exceptional tax credit year to date is £150m.

Adjusted earnings per share grew by 23.5% in the quarter and are up by 52.9% in the year-to-date.

We continue to focus on improving the cash flow of the Group, with strong control of working capital and capital expenditure. Operating cash flow for the quarter was £145m, with capital expenditure of £63m, down from £77m in 2003. Hotels Capital Expenditure is expected to be no more than £250m for the full year.

Return on capital employed, calculated on an annual basis, was 5.6%, a considerable improvement over the same period last year but still well below the level we consider acceptable. We are working hard to improve this further through the execution of our growth strategy coupled with asset disposals and return of funds to shareholders.

Revenue through our reservation channels was up almost 20% on the same period last year, to around $1.1b. Quarterly revenue to our hotels from Priority Club Rewards, our Guest Loyalty Scheme which now stands at over 23m members, increased 12.2% to $841m. At a gross level we have added almost 18,000 rooms to our estate year-to-date whilst at net level we added 599 rooms in the Quarter, after planned terminations in the US Holiday Inn estate and disposals.

Global pipeline growth increased 10% year-on-year with a stronger growth in the US, Mexico and China.

Moving on to returning funds. £239m for our initial £250m share buy-back announced in May 2004 has been completed at an average price of £5.44. As part of our plan to return funds to shareholders, we will pay a special dividend of £500m in December followed by a further share buy-back of £250m to be carried once the existing program completes.

As already announced in September, the total amount of funds we have committed to return to shareholders is £1b. We will return more in due course, depending upon the progress of our asset disposal program.

Earlier this month, we announce a new £1.6b syndicated banking facility that will allow more appropriate financing and certainty moving forward. The facility will provide more flexible committed funding at a reduced cost for the medium-term and will be used in [indiscernible] to fund a tender offer launched to buy back €600 Eurobonds and to redeem £18m sterling Bonds.

Turning to the asset disposal program, we are making encouraging progress on return of the hotels. The sale process for the Americas hotels is well advanced, and good progress is being made on the sale of the other hotels on the market. The process of selling a hotel can take at least 6 months, and we are encouraged by the level of interest we are seeing in the various portfolios we have on the market.

Thank you, and now let me hand you back to David.

Thanks Richard. Trading for the first 9 months of the year has been strong, with earnings up 52.9% over last year and up 23.5% in the last quarter. The outlook for the full year remains positive and is in line with company expectations.

October trading, traditionally the largest month in Quarter 4, was strong, giving cause for optimism for the balance of the year. We’re also making good progress with our existing Costs Savings program, which is on track for completion by full year.

As Richard has outlined, our asset disposal program is continuing and we are on track on returns to shareholders and improving the capital structure for the Group going forward.

We continue to concentrate on being a predominantly Hotel Management and Franchising company, with high quality earnings far less operationally geared to a hotel cycle and significantly cash generative.

Finally, I am, of course, focused on the appointment of a new Chief Executive for the company. Thank you, ladies and gentlemen. Richard and I will now be very happy to take any questions you may have.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. Your first question today comes from Mark Finney at Deutsche Bank. Please go ahead.

Yes, Morning -- morning Gentlemen. Can we just talk a little bit more about this bonus accrual, because I’m not entirely clear in my own mind what the, what the phasing is here. Can you maybe just say what’s your expectation for the, if you like, total bonus accrual for the year? What was accrued in the first half? And would we expect a sort of hit, as such, in Q4 that we’ve just had in Q3?

Yes, Mark, this is something we flagged earlier in the year in terms of a full year issue that effectively last year. Given trading performance, we really didn’t pay bonuses and these bonuses are simply the regular annual short-term bonuses both across the hotels, across corporate overheads. And the impact really has hit this quarter to the tune of about £10m. In effect, last year it became clear in the second half that we weren’t going to hit targets for bonuses so there was no accrual made, in fact there was a very small provision release. But this year, as we said, we’re in line with expectations and therefore targets, and effectively we’ve made a full accrual.

In Q4, I think the way to really look at it is actually at the full year. And so clearly then have a full-year effect which I think we said, across the corporate overhead, is in the order of about $30m. And full year we are still saying that our ‘04 Overheads will be broadly flat on ‘03 at constant currency.

Okay. Can I just ask another quick one seeing as how I’ve got the line?

Yes.

The Continental European RevPAR numbers for Interconti-- [indiscernible] lease [which we] (ph) can see, and you’ve flagged up the 3 cities which are effectively the 4 hotels I guess. What was it like if you stripped those 4 hotels out, if you’ve got the numbers?

I haven’t got those numbers in front of me. I can pull it out and talk to you afterwards, but I think broadly across the piece we were in line with the market or slightly ahead of the market in InterContinental in those other locations, and we had some pretty good performance in London. It really is thos -- those were big ones that pulled it down.

Yeah, yeah. Okay, great. Thanks a lot.

Okay, pleasure.

Thank you. Your next questions comes from Ian Richardson of Merrill Lynch. Thank you. Please go ahead.

Yeah Hi. It’s Ian Leonardson of Merrills.

Ian, Morning.

Morning. Just a couple of questions on next year. I’m wondering about CapEx when your selling hotels? How does that affect your planned CapEx expenditure in ‘05?

And a boring question on likely tax rate for 05? Thanks.

I think as far as capital is concerned, I think overall we’d expect capital certainly to be no more than this year and hopefully a bit less. As far as disposals go, it really depends on the timing of the disposal. Essentially we’re clearly only looking at spending maintenance capital expenditure on the hotels that we’re disposing of so that, as and when they’re disposed that will stop.

As far as tax rate’s concerned, we said 18% this year is effectively -- I wouldn’t say artificially low but low due to some of the releases that we’ve had that we’ve highlighted before. Next year we expect it, sort of, mid to high 20% tax rate.

Okay. And just finally, David, I think, said he was focused on the appointment of a new CEO. Is there a progress update?

David.

I really can’t be more helpful than to say that it’s well under way. And I’m working very closely with [Egan Vendor](ph). I can assure you that when we make the appointment it will be announced.

Thanks very much.

Thanks, Ian.

Thank you. Your next question comes from Victoria Steadman of UBS. Please go ahead.

Hi, it’s actually Julian at UBS. Just a quick question on the structure of the debt moving forward. Obviously at the moment you’re running quick big cash, UK cash balances and with big dollar debt positions. Is that likely to continue, moving forward?

What I’m quite keen to get to, is the sort of medium term blended rate that you’ll have under your new banking arrangements.

Right. Well I think the UK cash balances are there because we’re about to pay a special dividend, so that will be used for those purposes. As we look forward, the less US real estate we have the less dollar borrowings we’re likely to have because that’s effectively -- we’ve hedged the balance sheet and under the new accounting rules that what one’s able to do.

So you will see less dollar debt. You’ll see obviously a chunk in euro debt, a chunk of sterling debt, it will partly depend upon the profile of the assets at the time.

That means that your blended rate at the moment of 4.8% is likely to be rising, then?

It really is -- it’ll depend on the mixture between euro and sterling.

Right.

But the new facility that we’ve signed up is certainly a cheaper facility than we’re currently paying on the existing facility under Eurobonds.

Okay. Thanks a lot.

Pleasure.

Thank you, sir. Your next question comes from Jamie Rollo at Morgan Stanley. Please go ahead.

Thanks. Good Morning.

Good Morning.

The first question was on the final tranche of hotels that you are yet to announce, Continental European Assets. Do you think the, sort of, relatively weak summer performance of the InterCons there may impact the timing of that disposal?

Yeah I think our performance has been to broaden in line with the market. I mean there’s industry issues going on in Europe, it’s not just us. But clearly what we want to see is a balance between trading in the hotel and the real estate market, as well, which is the reason why we said this year was not the time to proceed. So, we’ll look at it again next year and it’ll be as much on expectations as it will be on historic trading.

So it’s still our intention at some point to sell more of the European assets, but I can’t be more specific on timing.

And are you prepared to talk about some of the sort of press speculation at the weekend that seems to quite well source much of this? They were talking about discount-to-book value for the US and UK assets.

I don’t like to comment on press speculation for obvious reasons. I think -- I suspect that people looking at, getting confused around exchange rates and so on, but we’re focused on maximizing the price on these disposals and getting franchise and management contracts and that’s what we’re doing. We’re seeing good, encouraging progress.

And one more while I’m on if I can. The FelCor stake. You’ve turned it into current asset investment recently. Are you going to sell that in the short-term?

Well, I think we’re not going to hold it for the long-term. But that’s -- would be unhelpful, because it’s not going to be effectively a long-term hold when we have to move it into Current Assets, which means we have to marked-to-market. So we’re looking at it. We have a good relationship with FelCore. We manage nearly 100 of their properties, but we don’t need to hold an investment in the company. So, again the point when we think there’s the right value there we will sell it.

Okay. Thanks.

Pleasure.

Thank you. Your next questions comes from Barry Dixon at Davies Stockbrokers. Please go ahead.

Yes, Good Morning. 2 Questions. Firstly, in terms of the regionally UK market, a sort of sole weakness in RevPAR in October. Any set of reasons for that, or is the trend continuing in November?

Barry, oh, sorry, do you want, after the other 1.

Just the other question, it’s in terms of progress on the Britvic IPO, if you’ve anything to say on that?

Right. As far as the regional RevPAR number, that actually was quite specific for us. There is a Textile Trade Show that takes place in Birmingham every 4 years, and it took place last year and had, in fact, 125,000 visitors. We have 3 big hotels in Birmingham, some sundry ones around the area, and it really was a second half of October problem, which is where it hits us. So no long term issues there, just very specific.

As far as Britvic’s concerned, as we’ve said before, we’ve got a 4-year window to float that company. The shareholders have agreed that IPO is the way forward. It’s just about maximizing, maximizing value on that and getting the market timing that works to maximize value. So when we set a date we’ll let you know, but so far we haven’t. But we’re still focused on it.

Great. Thanks.

Thank you. Your next question comes from Patrick Hargraves at Goldman Sachs. Please go ahead.

Good Morning, gents. 2 very quick questions. The first one is about net room additions. There’s 599 in the quarter. I was wondering whether you could give us that number for the 9-month period. And secondly, I didn’t catch exactly what you said about the booking lead times lengthening. Was the purely for the single sleeper corporate nights or are you seeing that trend across the piece now for all types, including leisure punters?

We’re really talking about more corporate and corporate group in it. And it’s certainly the case in the US and the UK. We aren’t seeing it, for example, in Paris. I think it really is a function of available rooms, and so if people know that they can get rooms by booking late they’ll leave it to book late, because there’s no advantage in booking early. The sooner there’s a concern that hotels are filling up, as they are more so in like London and New York, then booking times lengthen, which is encouraging and what we like to see. It helps us predict. The 599 actually rooms, is actually a year-to-date number.

Okay. It’s all right, I thought you said it was a Quarter number.

I might have done. I apologize if I did.

Thank you. The next question comes from Lesley Zarka at Citigroup. Please go ahead.

Good Morning, Lesley Zarka from Citigroup. Actually, most of my question have been answered. I’ve got a last one for you. You -- for the first time, you broke down the hotels to be disposed between EMEA and the UK and the estimated ‘04 profits from these hotels have slightly been downgraded from 85, if I remember well in the first half to 79 this time, in terms of EBIT contribution. Does this mean that most of that comes from your profit from Europe as opposed to UK, or how does it break down compared to last time?

There’s just probably a little bit of currency effect in there, but really it’s just more up to date estimates, to be honest.

But why is it at -- why is it €5m? Is it because of the poor trading in Continental Europe or--?

That would be a little bit of it, because effectively we just updated the estimates for the full year.

Okay, alright. Thank you.

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

Good Morning, gentlemen, just a quick question on cost savings. On the call you said that cost savings will be, I think, completed by the full year. Can you give us an update on what that costs savings number would be -- will be completed by the end of the year?

And then a second question, a bit more forward looking than that, presumably as you dispose of such a significant amount of hotel real estate it wouldn’t be inappropriate to achieve a [indiscernible] cost savings potentially to come in the future? Could you just possibly [comment] on that as well?

Yeah, when we cost savings completed, what we were just referring to was the -- what is now the $120m program against the ’03 [indiscernible], which is the one we’ve always talked about following from the organization review. And so we’ll have effectively delivered that in full by the end of the year. It doesn’t mean that we are taking our eye off the ball in any way, and we’re obviously look to try and keep a handle on overheads and costs going forward.

As far as disposal of the real estate, in fact, if we sell the hotels into management, which is what we’re certainly looking at in a lot of cases, there really isn’t a big impact on overheads. Essentially, one has to give broadly the same support to Managed Hotels as one does to Owned Hotels. So we really talking at the margin in that case.

In terms of the regional structure going forward, over and above just normal looking at the costs, there’s no big chunks of, sort of, regional savings to come anywhere?

Not big chunks. We’ll look to shave off, obviously, and keep the pressure on costs there but, no, you won’t see a big step change like we saw coming out of the organization review.

Okay. And as a very quick second question, planned terminations in the US Holiday Inn business? I mean there must be -- we’ve seen quite a long time now net/net that being diluted to your billing(ph) systems side. At what point do we get to the core of that business, which is no longer going to get terminations?

Yeah, I think we’ve had a long plan and intuitive actions to make sure we try and improve the overall quality of that portfolio and make sure that we’ve got the right hotels in there. I think with the advent of the Holiday Inn prototype, which we talked about end of last year and we’ve now got about 45 or so in the pipeline -- those are, on average, smaller than the hotels that are leaving the system. So we’ve always got that dynamic going on.

I don’t [indiscernible] -- think in terms of number of Holiday Inns, we’re down in the US to around about 1,000. That is not a bad number going forward. But I think our focus now on growth is with the new brands and with driving the existing brands that still have major growth opportunities.

And if you look at the pipeline, you can obviously see Holiday Inn Express is continuing to grow in America as well as in other regions. Crown Plaza, obviously with Candlewood, and hopefully in the future, although it’s very early days, Indigo.

With the exception of, obviously, the asset disposal progress, is what you’re saying that from here there’s going to be less dilution from estate churn, if you like?

Well, that’s certainly our focus, absolutely. I think with 18,000 rooms added in the 9 month period we’ve clearly done a lot to improve the system size at growth level. Our pipeline’s gone up by about 10,000 rooms against the same period last year. So the trick, really, is reducing the number of terminations and that’s what we’re focused on. I haven’t got a forecast I can certainly give you today, but there’s an awful lot of effort on that. I think you can see that from the activities that’s going on in that region.

Thank you very much, gentlemen.

Pleasure.

Thank you. Your next question comes from Thomas Masuricks at Goldmann Sachs. Please go ahead.

Yeah, Good Morning and thank you. Just a quick question. Post the tender offer for the bonds, what are the plans for the credit rating? Will you retain a credit rating and, you know, is there any target rating or need or desire to retain a certain credit rating in an environment where you may not have any bonds outstanding? And are there plans, longer-term, to fund in the bond market?

I think it’s a good question. Clearly if we’ve got no public debt outstanding then we don’t need to have a rating. At the moment we obviously have had our ratings re-affirmed over the course of the year by the rating agencies and we’re very comfortable with our relationship there. So we haven’t made a formal decision on that, and I think that, in any event, even if we didn’t have a rating we would certainly run the Company broadly on investment-grade ratios. We think that’s right place in terms of balance sheet efficiency and the sort of business we are and the various owners and franchisees that are out there, their expectations with how their partner’s going to be funded.

I think going forward, bank debt is the right thing for us right now in terms of flexibility. We’ve got cash coming in; we’ve got cash going out and it’s a very flexible way of running a business and very certain. And it’s right for us right now. In the medium to long term we may well, you know, be able to go back into the bond markets; no firm plans right now.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We have a question from Arate Luis of Morgan Stanley. Please go ahead.

Hi. Just a further question from a credit perspective. Did the --old bonds used to have a guarantee type of structure between Six Continents and InterContinental. And I’m just wondering if that same guarantee’s going to hold for the bank facility?

Yes, it will.

Okay. And it’s just a downward guarantees, up from -- so from InterContinental’s point down to Six Continent or the other way round?

Both ways, full cross-guarantees.

Okay. That’s great. Thank you very much.

Pleasure.

Thank you. You have no further questions at this time, sir.

I think, having taken your questions, we can now bring the conference call the a close but I would, on behalf of Richard and myself, thank you very much for joining us and for your interest and we look forward to speaking to you soon. Thank you.

Thanks very much.

That does conclude your conference for today. Thank you for participating. You may all disconnect.