InterContinental Hotels Group PLC (IHG) 2008 Q1 法說會逐字稿

Welcome to the IHG Q1 results conference call. This announcement contains certain forward-looking statements as defined under US 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 with 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 actual results and developments to differ materially from those expressed in or implied by such forward-looking statements. Factors that could affect the business and the financial results are described in risk factors in the InterContinental Hotels Group PLC Annual Report on Form 20-F filed with the United States Securities and Exchange Commission.

(Operator Instructions). I must advise you all the call is being recorded today, Wednesday, May 7, 2008. I would now like to hand the conference over to your speaker for today, Mr. Andy Cosslett. Please go ahead, sir.

Thank you very much. Good morning everybody. Thanks for joining us. This is Andy Cosslett, Chief Executive of IHG. And I'm joined here this afternoon in London by our Finance Director, Richard Solomons. Just a few key points from me and then Richard and I will be more than happy to take any questions you've got.

Well, the Group had a good first quarter with solid trading right around the world. In aggregate, the hotels operating under our brands delivered a rise in total gross revenues of 10% to over $4 billion. Global RevPar increased 3.5% on a constant currency basis. This was made up of 6% growth in January and February and a small decline in March due to the earlier timing of Easter, which as you know hits the volume of business travel. As expected, we saw a corresponding rebound in the first two weeks of April and US RevPar growth as a whole across the four-week period impacted by Easter remains pretty much in line with previous trends.

During the first quarter, we received an abnormally large contract cancellation fee of $13 million from one hotel leaving our Americas development pipeline. Because this distorts the underlying picture of our performance, all the comments I'm going to make now on our results from here will exclude this gain. But even on this basis, our continuing revenues and operating profits grew strongly in the period, up 10% and 24% respectively. Our margins increased by over 2 percentage points to 25%, driven primarily by the ramp-up in contribution from our owned hotels. Management franchise hotels have generated revenue growth of 12% and profit growth of 7%.

The profit figure reflects the phasing of investment in resources that we made in 2007 to drive up quality growth. And we can start to really see the results of that investment in our signings and openings performance. In the quarter, we signed up nearly 20,000 rooms including 15,000 in the Americas, which is up 13% year on year. These new signings have pushed our development pipeline to over 230,000 rooms now, which is equivalent to nearly 40% of our existing system size and on its own would create the ninth-largest hotel group in the world.

[Crucially], we are opening this pipeline at a much faster rate. Net room additions in the quarter numbered 5267, which is more than twice the number we managed to add in the first quarter of 2007. And year on year system growth in total is 6%. As you will be aware, the first quarter is typically the smallest quarter for both signings and openings. And we do expect to see the pace pick up through the remainder of this year.

In total, we have now added close to 53,000 rooms net against our three-year target of adding 50,000 to 60,000 net rooms by the end of 2008. Thus, we have reached the bottom end of our target nine months early. So, we're clearly winning more deals and attracting more owners to our system. This is happening because we're winning their confidence through the efforts we're making to strengthen our system and strengthen our brands.

Now, for 2008 and 2009, our priority is the Holiday Inn brand relaunch. And in the quarter, we made further encouraging progress on this journey. In the US, we completed a series of 18 regional meetings where we met with the majority of our owners and secured from them specific dates for the installation and completion of the relaunched hallmarks and service standards. A high percentage have now signed up either for late 2008 or early 2009, which is strong endorsement for our plans. Financing the change has not come up with owners as a major issue.

In EMEA, we recently launched the new brand identity at an owners conference here. And we've already been successful in securing the support of our biggest European owners to the program. We have 21 hotels now operating with some or all of the new signage and brand hallmarks in place. A further 13 pilots are about to come online. The rollout will gather pace during the summer and all-new hotels that are currently opening are now opening with the package of changes fully in place.

Now that confidence I spoke of in the brand continues to strengthen with the owner community. We signed 88 Holiday Inn brand family hotels in the quarter, taking the total in that Holiday Inn pipeline to 1100. And in the US alone, the Holiday Inn brand family has a one-third share now of the new build construction pipeline.

Turning to our cash generation, in the quarter, we generated GBP24 million of free cash flow and GBP4 million from disposals which was used to fund GBP7 million of investment capital expenditure, an additional GBP10 million special contribution into our UK pension scheme and the repurchase of 1.6 million shares at a cost of GBP13 million.

We've also continued to reduce our asset intensity and recycle our capital. Since the quarter end, we have sold a 17% stake in the Crowne Plaza Amsterdam City Centre for EUR18 million. We have retained a long-term management contract on that hotel which is our first management contract with host hotels. We've also broken ground on a new building, Indigo Hotel, in San Diego. This is an IHG development where we are using our own capital to support the development of Indigo in a strategic market for us with a view to recycling that capital at a later date.

I'll just finish with a few comments on the outlook. And we'll look at new rooms growth first. Our 2008 openings plan remains on track, and we are breaking ground on hotels that are due to open in 2009, again in line with our plan. Around 40% of the total pipeline of 1720 hotels is already under construction. We continue to see very limited impact from the credit crunch on the status of our pipeline or on our ability to get deals done. At this stage, the only area where there appears to be some tightening is on larger projects, most often where there is a mixed-use residential component as part of the deal. But this represents a negligible proportion of our pipeline.

Looking at RevPar, underlying performance has been harder to read because of the timing of Easter this year and US public holidays. The trends over the four-week period ending on April 12 continue to show growth and momentum in the RevPar line. Looking ahead from here, our forward bookings are up year on year and again remain in line with previous trends that we've observed.

Now, like in any other business, we can only see a certain way into the future. And experience, as you all well know, has shown that the hotel industry tends to lag rather than lead the wider economic trends. But, even if the economic outlook is rather less certain, our fee-based business model and leading industry pipeline remain great assets for us and ones which we're confident will continue to allow us to grow well into the future.

So, that's it from me. With that, Richard and I are now happy to take any questions you may have.

(Operator Instructions). David Katz, Oppenheimer & Co.

One of the things that jumped out at us in the quarter was the Holiday Inn RevPar performance. And certainly in the context that we all could be a bit RevPar growth obsessed, particularly here in the US, it was low relative to I would say the peer group and what we've seen from other similar franchising companies here in the United States. And I know that that is a system that is evolving. So, can we just talk about what's in that 0.5% RevPar growth in Holiday Inn franchises in the US?

Sure. Well, I think the overview we've got of the market in America is a bit mixed because of the Easter effect clearly. And it looks like it's impacted Holiday Inn if anything slightly more than our other brands. The early news of April by the way is that we've rebounded strongly. So, we would expect a number of these numbers to pick up quite sharply by the time we get to the end of April and into early May as we are now. So, I think as the months go by, we will start to be able to get much more clarity on what's going on. We would expect quite a rebound on the Holiday Inn number from where we are.

I think if you look back -- I don't have all the comparables in front of me -- I'm not sure but I have a memory that Choice and a number of our other competitors in the first quarter of last year weren't doing particularly well when Holiday Inn was. I think we closed Q4 out last year very strongly on Holiday Inn and whilst that shouldn't have any immediate impacts on Q1, it just obviously shows that in a quarter you can't draw too many conclusions.

The overall situation with the brand is very good. We've just had a series of owner meetings where the owner position has been very encouraging for us. Obviously we've been talking mainly about the future and the relaunch package. So, maybe they've got their eye off that and maybe they're more focused on the relaunch and trying to get themselves organized around that than actually driving business today. I don't know. That's speculation. But certainly, it's nothing that we're concerned about at this stage. The portfolio moves up and down over a few months.

And whilst obviously Holiday Inn is a big part of our American business, it's just one of the portfolio. And I think as the months go by, we'd expect it to even up. Again, it might just be that we've got so much focus from people and the Holiday Inn ownership particularly on what's going on with the relaunch that they are thinking more about that than driving today's business. I'm not sure. But I can't give you a compelling answer. It's certainly not something we're overly concerned about. And we should see it come through in April into May I hope.

Right. So, with respect to the Holiday Inn brand, years ago, 1.5 years ago or so, there was this new prototype Holiday Inn that's been out there. And presumably, new owners have been going down the road over the last couple of years of building those prototypes. Now, what happens that there is sort of a brand relaunch? What are the mechanics of how an owner that maybe opened 18 months ago with this new prototype, which was perfectly nice, now they are sort of confronted with some additional money to spend. How does that play out?

Bear in mind -- yes, it's a good question. Bear in mind we have about 30 of those open. So whilst we have plenty in the pipeline, I think most of what happened last year was that we built up our pipeline for these prototypes, which as you know take sort of 18 months to get built. So, I think we're well placed in our timing on the relaunch. Because most of what is in the pipeline will now be coming out -- well, all from now on of those prototypes will be coming out in the new livery with the new look and standards. So, that's great news because we've got 250 of those in the pipeline about now. And we've only got to deal with about 30 that are already open.

And if it goes back far enough, then I'm afraid they just have to deal with the refurbishment within the time frame that we've said, which is by the end of the first quarter 2010. But we do have an ability with owners to on a sliding scale basis make some remediation to them on the cost of signage particularly. And it's a bit galling if you've just put up a brand-new sign and then six months later somebody sort of asks you to redo it. So we do have funds available within our 50 million that we've identified from our own coffers -- $60 million from our own coffers that we're contributing to this process.

Part of that money is to be made available for owners who are particularly disadvantaged by having to change signs that are actually quite new. But it's only for the signs. And it's also to cover the cost of temporary signage when a hotel is opening and we don't want them to go up with a new sign. And obviously, we're opening so many at the moment, there will be a number which are going up with temporary signage and we'll pay for that.

Right. And then I have one more, which I guess is for Richard. You know, with your stock where it is right now and your sort of general financial position, I guess we were a little surprised at the relatively small amount of share repurchase in the quarter. The arrows to us seem to be pointing toward a little more aggressive share buyback. What are we leaving out?

I wouldn't read anything into it. There was a closed period for a large proportion of the first quarter with our results in February and then the results now and the market volume isn't huge. So, we're out there. I agree with you. I think at this price, we're very happy to buy back the stock and we will continue to do so. It probably will take the better part of the year to finish off the rest of the 100 million, do the remaining 87 [million] we've got to do. But we're not hanging about particularly. We're just trying to buy sensibly. And there are some rules over here in terms of the price you pay and the percentage of volume that you can pick up. So, within that, we're getting on with it.

So there aren't any other sort of major capital needs or any opportunities you need to pursue with capital? It's just a function of logistics?

No, no. It's totally factored into the cash flows of the year and we're just getting on with it.

Harry Curtis, [Beach Hills] Investment Company.

Two quick questions, just following up on David's question. Andy, if you could give us a sense of what your strategy is for capital allocation, specifically related to your share base. Is there a sense of -- do you have a sense that the current share base can be shrunk significantly over the next two to three years?

We obviously keep the whole thing under review. We've got a policy to reduce the asset-intensive business as you know, which might throw out some more cash and that's a very nice cash-generative model. But what we've always said and we just keep repeating is that the business has three uses for the cash. We can either pay down the debt, we can return it to shareholders, which has been typically what we've been doing for the last three years, or we can invest it in growth strategies.

And at the moment, we've got some of our own capital going into the construction of an Indigo in San Diego which is a good use of the cash. We might have other opportunities like that as we take the brand out into Europe and the Far East. As you know, we're not averse to doing something that supports brand strategy with our own capital. Our IT needs are pretty well clued up for the next few years. So we've got a good sense of how much we're going to need. But we keep it under review. We don't say yes, and we don't say no. I think it's a good use of funds if you can't find better uses of the cash. That could change in the future. But we have no plans at this point.

So when you compare your return on invested capital, if you will, in buying your own stock back versus expanding the Indigo brand, what sort of numbers do you come up with?

That's a sum that we have to do. We don't have the opportunity at this point -- in our current frame, we don't have opportunities to take Indigo out very aggressively with our own cash. It's one of the things we've just agreed to do, to take it out of Americas. And I don't think we want to invest too much more cash in the Indigo brand, maybe perhaps two or three investments, but not too much more in America. But where we are particularly excited is to do something with it in Europe and the Far East and there might be opportunities that open up for that. Richard?

Yes, I think broadly over time, our strategy is to fund growth CapEx through disposals (technical difficulty) through recycling. You can't always match it as you can imagine quarter to quarter or year on year. But that's still the objective. So over time, we will have surplus cash. We will finish the 100 million buyback, which, as I say, will take us the better part of this year. And thereafter, we'll look at the balance, as Andy said. But, the likelihood is some proportion of what we have will come back at some point. But we'll not being more definitive than that.

And then following up on your comments about selling more hotels, do you have any other hotels on the market? And if it's a small number, what conditions do you need to see before you take a more active stance?

Well, we've said in terms of where most of the value is on the big four InterContinentals that we'll keep that under review. And obviously that is where a lot of the value is and we're not pressing the button on any of those right now as it's a years, not months, question. I think the rest of the balance sheet, a little bit like with the Crowne Plaza in Amsterdam, we keep a close eye on. When we see opportunities, we will make a move on them.

So, the rest of it will happen -- it's really down to market. And what we've seen is that for the right property at the right price, there are buyers out there. It's taking longer to do stuff. Some of the people who are out there buying today aren't buying. It takes longer for due diligence to happen. It takes longer for financing to get in place. So you don't want to necessarily be hanging out to dry for years trying to run a process. But if the opportunity comes up, then we will make a move. So as ever, the big value is in the big four; the rest, we'll report as and when we move on it.

Are there any more questions, Operator?

(Operator Instructions).

I think we're there.

There are no further questions at this time.

Thank you very much everybody for coming online. I appreciate your time and I look forward to updating you again very soon. Thanks very much.

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