InterContinental Hotels Group PLC (IHG) 2007 Q3 法說會逐字稿

Thank you for standing by. And welcome to the IHG Q3 results conference call. (OPERATOR INSTRUCTIONS). This announcement contains certain forward-looking statements as defined under U.S. law, Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the fact that they do not relate to historical or current facts.

Forward-looking statements often use words such as target, expect, intend, believe or other words of similar meaning. By their nature forward-looking statements are inherently predictive, speculative and involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Factors that could affect the business and the financial results are described as risk factors in the InterContinental Hotels Group PLC annual report on Form 20-F filed with the United States Securities and Exchange Commission.

I would now like to hand the conference over to your host today, Andy Cosslett. Please go ahead.

Thanks very much indeed. Well good morning, ladies and gentlemen. Thanks for joining the call. This is Andy Cosslett, Chief Executive of InterContinental Hotels Group. And I'm joined here in London by our Finance Director, Richard Solomons.

I expect you all had a chance to look at our results statements already, so I will just briefly highlight a few key points. And then Rich and I will take any questions that you have.

The Group has had a good third quarter. Trading was healthy around the world, and signings and openings of new hotels continued at a record pace. Global RevPAR for IHG increased 6% on a constant currency basis. And year-to-date we have grown our RevPAR faster than the market in all our major geographies and by 7% overall.

Regionally, Asia-Pacific region was the strongest with RevPAR growth of 8.6%, driven primarily by rate increases. In EMEA RevPAR grew 6.7%. This was a strong performance across the region, including 18% growth in the Middle East. It was impacted by slower growth in Germany, as we lacked the football World Cup that took place there last year.

In the Americas RevPAR grew 5.6%, impacted in July and September by the timing of holidays. But both InterContinental and Crowne Plaza outperformed their market segments. Holiday Inn and Holiday Inn Express continued to deliver a strong RevPAR premium to their respective segments. During the quarter both grew rates ahead of the market, but saw slightly weaker than market declines in occupancy levels.

In our continuing businesses revenues increased 20% and operating profits 31% at constant exchange rates. Both our franchise and managed businesses grew strongly, with operating profit up over 15% at constant currency. The profits from our owned and leased hotels increased by GBP10 million to GBP15 million, as the InterContinental London Park Lane traded well over the summer following completion of its refurbishment, and trading at InterContinental Boston continued to ramp up after its opening a year ago.

Once again, we signed a record number of rooms in the period, nearly 30,000 in total, taking the total for the year to date to over 18,000. For the first time our development pipeline stands at only over 200,000 rooms, the largest of any hotel company, and equivalent to 35% of our existing room count.

Our newest brand, Hotel Indigo, signed 12 hotels in the quarter, taking the pipeline to 47 hotels, nearly 6,000 rooms. These signings included key locations in New York, Miami and Las Vegas.

We continued to build our leading position in Greater China with 12 new hotels signings, included five Crowne Plazas, as that brand maintained its position as the fastest-growing upscale brand in Asia-Pacific.

Net room count growth was strong at 7,395 rooms, almost doubling the net room additions achieved in the first six months, and nearly three times the growth that we achieved in the same period last year. We have now added over 33,000 rooms net towards our target of 50,000 to 60,000 net rooms additions by the end of 2008. We remain confident that we will exceed the top end of this target.

Net debt at the period end was GBP811 million. During the quarter we generated GBP81 million of cash from operating activities and GBP27 million from disposals, which was partly used to fund the repurchase of 2.4 million shares at a cost of GBP23 million. We still have GBP127 million of the current buyback program to complete.

Finally, just a word or two about the global relaunch of our Holiday Inn and Holiday Inn Express brands. As most of you will know, we have been dealing with something of a legacy quality issue with the Holiday Inn brand, particularly in the USA, for some time. In a drive to improve quality generally we have been removing over 20,000 rooms a year for the last five years. We have designed and built a new prototype Holiday Inn, of which 22 are now open and over 200 are in the pipeline.

Now as a result of these actions Holiday Inn and Holiday Inn Express can now operate from a far greater position of strength. And we have over 1,000 hotels in our pipeline under those brands, reflecting owner confidence in the brands. Combined in the U.S. we have a 23% share of the total midscale market and a 30% share of the entire midscale construction pipeline. And they both deliver a significant RevPAR premium to their segments.

This work has given us a platform on which we can now take forward our biggest brand. Using the insight that we have gained over two years of extensive guest research, we have developed new brand standards, which are focused on best-in-class service, improving the physical quality levels of the hotels, and a completely refreshed look and feel to the brand.

Every Holiday Inn hotel around the world will be expected to have implemented the relaunch program by the end of 2010. During that time we expect our owners to have invested up to GBP1 billion around the world. IHG will invest up to GBP60 million as a one-off exceptional revenue investment. This will be used to run pilots, fund the change in signage for recently owned hotels, and accelerate the conversion of those hotels in particularly high-profile locations such as London, New York and Shanghai.

Once implemented we expect these changes to deliver a meaningful increase in RevPAR for our owners, driving a significant return on their and our investment. We launched these changes to our hotel owners at the annual franchisee conference, 5,000 strong, two weeks ago in Dallas. The reaction so far has been very positive based on both anecdotal reaction, and indeed the findings from a post conference intercept surveyed conducted for us by an independent research company. We're looking forward to the next few months leading to the opening of the first rebranded hotel, which we expect to take place in spring 2008.

Continually making our brands stronger is the core activity of IHG. It is what the success of our business model rests on as we seek to attract more and more owners to the IHG system.

So in summary, this has been a very good quarter, both in terms of building for our future and delivering for today. We have a good progress against our target and seen RevPAR growth in all our key markets. Since the end of September RevPAR growth has been good, and early indications from corporate rate negotiations also looks encouraging. Overall, we continue to have a positive view on the remainder of the year.

That's it for me. Richard and I now stand ready to take any questions you may have.

(OPERATOR INSTRUCTIONS). Patrick Sholes.

This is the same question I had asked back in September during your investor meeting here in New York. Have you seen any changes, such as any dropouts from your existing pipeline, or any changes in inquiries due to the recent credit crunch here in the U.S.?

It is Andy. No, we really haven't. We have been obviously monitoring the situation, as you would imagine, very closely. And we were all in Dallas recently for the conference and got the opportunity to talk to a lot of owners on the ground, as well as being in Atlanta to examine our actual pipeline and see what is going on.

We're running at the usual levels of attrition. We have always said we expect to open 90% of the hotels that are in our pipeline and lose about 10%. There doesn't seem to be any change in that trend. Our signings pace remains strong, and we're not really, again, seeing any change in that dynamic. And the operating performance of the hotels is staying up there. So, no, I think what is happening in the wider macro market is, at the moment at least, independent from the operation and performance of the hotels that we're running in the States.

That's great. My next question concerns the potential Atlanta sale, your InterContinental Hotel. What is the status on that? And I am wondering if you can give us a ballpark number of what you're looking -- potential proceeds on that property?

Let me ask Richard to comment on that.

I can't give you a number. It is not our practice, although I will remind you we have achieved ahead of book value for all disposals we have made so far. The process is progressing well. We are well into the second round of bids and talking to potential bidders. All that said, I think not surprisingly the froth is off the market in terms of some of the slightly top end, surprising people who turned up in these auctions a few months ago and no longer there. But there are certainly serious bidders for good cash flow assets. So as of the moment we have something to say we obviously will come back and say it, but nothing right now.

My last question concerns your international expansion, especially in China. Approximately what percent of your pipeline there is going to be via management contract versus franchisees?

And I think you had mentioned in the past that you're going to be beginning more franchisee growth, but the problem had been really finding qualified operators. Has anything changed or progressed in that area?

Just to remind you, the vast majority of our businesses are deals in Asia-Pacific, both current and ones we're signing up, are managed on a management basis. Virtually the whole of Asia runs on a management basis. And there are some franchises in Australasia and in that region. But we're driven really by the management contract business in China particularly and in Southeast Asia. And that continues to be the case.

What we have done over the last two and half years is building a franchising platform in China specifically for the Holiday Inn Express brand. And we have worked very hard to make sure that we had a protectable and deliverable platform there, which we could use to extend the brand.

That has really just begun. We launched it a couple of months ago. We are talking to a number of people. We have had a couple of deals confirmed. But it is early days for that, but we hope to see some acceleration in the Holiday Inn Express franchising business through 2008. But for now at least, and certainly into the next couple of years, management contracts are going to be the bulk of our deals.

Harry Curtis.

You got the tag team? Two quick questions. Can you give us a sense in terms of your removals of some of the hotels that aren't living up to your standards, would you expect that 20,000 removals a year to begin tapering off over the next year or two?

We have said in the past, and we sort of stand by this I think at the moment in the light of even the latest news following the conference. But we expect this journey that we have been on for the last three or four years to continue for at least another two in terms of the magnitude of the numbers we have been taking out.

As part of the relaunch package we're actually confirming the quality standards that we're expecting owners to get on Holiday Inn II. And we've got a deadline by with we're expecting them to get to that, which in America is by the end of the first quarter 2010.

And we have done a lot of work to try to model the range of sensitivities that might occur around removals. But equally, there's still a lot of owners in the United States particularly who don't have a relationship with IHG, who we think might come to IHG as a result of this new initiatives around Holiday Inn. It is hard to say until we actually get into hand-to-hand combat over the next few months out there, but the early reaction has been strong.

We have been suggesting that the recent rates of removals is probably round the right level. It might be a touch higher, a touch lower, but I would think we can expect to be somewhere around there for another couple of years at least.

My second question pertains to your leverage ratios. Can you give us a sense of in 2008 what leverage ratio you're going to feel comfortable with?

It is Richard. We really haven't changed our position on that. 2.5 to 3 times debt to EBITDA is what we said. It is not a firm target, but it is what we're comfortable with as a Company. And it is sort of investment-grade. And in today's market I think having a strong balance sheet, strongly financed, is not a bad place to be. So we're not moving from that.

The reason I asked is that as your stock price valuation sinks slowly into the West, does it make sense to perhaps take advantage of that? If no one really wants to buy your stock, does it make sense for you guys to buy your stock? And you have been, but I'm just wondering if at some point it doesn't make sense to take advantage of those valuations?

We've got GBP120 million odd still to go on the existing program, which we will continue it. And as we always said, we will look at the uses of cash flow over time, whether it is reinvest in the business or return it to shareholders. And we will just keep an eye on that. But certainly at the moment we wouldn't expect to leverage higher in order to do that.

Okay, thank you.

I won't say never, but no plans for that.

Bill Tuinen.

It is Bill Van Tuinen. I had a question, just the room signings in '05 and '06 were seasonally strongest in the fourth quarter. And last year your net room openings were strongest in the fourth quarter. I'm just wondering if we should think of 4Q as just a seasonally strong time for room openings and signings?

Fourth quarter is typically good for openings. And signings seems to have adrenaline happening around that time, and obviously it is just sort of planning the calendar. But the A&A deal last year was the major driver of the change in the final quarter, which obviously was a singular event last year.

We've got some good momentum with us at the moment. But we have said the program is back end loaded. I think what we're seeing now as we hit Q3 result is the system opening up -- the pipeline opening up finally, having this lag that we have to go through to get these hotels open. But, no, we don't sort of call individual quarters. The second half has always been bigger than the first half. And take the A&A event out then probably we are there thereabouts. But we expect it to obviously remain strong because it needs to stay strong to get to our forecast or to beat our target, which is what we're saying we're going to do.

(OPERATOR INSTRUCTIONS). Marc Greenberg.

Could you talk about the negotiated rate, the corporate rate? You mentioned you're starting work on that now for next year. But at what point do you have most of those set? And what percentage of the room nights in the different categories in different regions are under the corporate rate? And has the -- we're using the corporate rates. Has that changed either more rooms, fewer rooms, whatever, than you might have done in the past?

The corporate rate negotiations, they seem to be getting longer. They affect -- I'm not sure how precise it is -- but between 20 and 25% of our revenues. And we've got the process under way, but it would be too early to try and give you a clear picture of what is going on, other than to say that it is encouraging.

We've got good outcomes so far, probably better than we expected, and better than this time last year in terms of where we're at against our expectations. That is good news, but as I say it is early days and a lot can change. They go on for a number of months yet. And some don't conclude until the new year. So I think it is early days, but encouraging signs.

And In terms of the amount of our business around the regions today -- is that what you asked? Sorry.

Yes.

I'm just looking at some guidance for that. Obviously the USA is our biggest. I think pretty much it falls -- I think it pretty much falls against the profile of our overall business, which obviously is three-quarters in the U.S. and then the majority of the rest in Europe, some in Asia-Pacific, because it is not particularly big in China at this point through. We probably just bias it slightly towards America and Northern Europe, but the considerable -- the thick end of the business will be down there.

Is the percentage of the rooms going under the corporate rate, is that increasing or decreasing the last couple of years?

I don't think -- I can't answer that question specifically. My view would be that it is pretty stable, because we are getting growth across the board in terms of, if you look at the shape of our business we're getting individual Web bookings on the rise. We're getting more TPIs coming in. So I think we're getting growth across the piece, which probably means that the overall pie is growing. But I don't think the composition is changing fundamentally.

At this time there are no further questions.

Thanks very much for coming on everybody this morning, and appreciate your time and your attention. Thanks again and we will update you soon.

Thanks.

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