InterContinental Hotels Group PLC (IHG) 2008 Q2 法說會逐字稿

Good morning. Good afternoon. And thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. And if you have any objections, you may disconnect at this time.

In the following discussion, the Company may make certain forward-looking statements as defined under US law. Please check this morning's press release and the Company's SEC filings for factors that could lead actual results to differ materially from any such forward-looking statements. I will now turn the call over to IHG's Chief Executive, Andy Cosslett. Thank you, sir. Please go ahead.

Thanks very much. Good morning everyone. This is Andy Cosslett, Chief Executive of IHG. I'm joined here today by Paul Edgecliffe-Johnson, our Senior Vice President of Global Corporate Finance.

Now normally, of course, I have Richard Solomons, our Finance Director, with me on these occasions, but Richard is unable to join us on this occasion as he is attending Steve Porter's funeral, who some of you may be aware is actually taking place in Los Angeles today. Richard is representing the Board and [EC] at the funeral and also in his new capacity as Interim Head of the Americas region, which was a role I asked him to pick up in addition to his other responsibilities when Steve first became seriously ill back in July.

Now I know many of you knew Steve well, a great character. He was a great figure in the industry and a wonderful servant to IHG. He led our American business with distinction over seven years. And the rebuilding of our brand profile and our reputation is in large part down to his efforts in stabilizing our relationships with our owners there and pushing forward on the quality agenda, particularly with Holiday Inn. He will clearly be missed greatly by us all. And all of you -- all I can say from the executive point of view and his colleagues is that we will be more determined than ever to see through the changes and the initiatives that he played such a key part in in helping shape.

So a very sad day from that respect, but we will move on. And I would like to turn now to the results with a few highlights. After which, Paul Edgecliffe-Johnson and I will be happy to respond to any questions you may have.

I should start by highlighting that these are IHG's first set of results reported in US dollars, a change that we announced on May 30th to match our reporting currency with the currency in which we generate the majority of our profits. Hopefully it's got the added benefit of making things easier for you on the other side of the pond.

Having said that, I will still refer to constant currency growth to highlight the underlying performance of our business because of the movement in the Euro/dollar exchange rate.

So, turning to the results themselves and I think it's fair to say we had a good first half. IHG has two key drivers of growth, RevPAR and new rooms. And in the half, we performed well on both measures. Global RevPAR increased 4% with all our brands outperforming in their major markets. In the Americas, RevPAR grew 2.4%, declining occupancies reflecting weaker demand generally, particularly in weekend business, moderated the overall RevPAR picture.

Outside the US in our Europe, Middle East, and Africa region, RevPAR increased 8% with particularly good growth in the Middle East, up 27%. In Asia, RevPAR grew 5% driven by strong growth in Southern and Eastern Asia. In addition, we added over 13,000 net new rooms. On an annualized basis, the number of rooms in our system increased 4% in the Americas and 12% in the rest of the world, which combined to give us an industry-leading system growth of 6% in the half.

The revenue impact of this higher level of openings is significant. In the last 12 months, almost half of the growth in total gross revenues came from new rooms. This additional rooms revenue helps offset any slowdown in RevPAR and it also improves the resilience of our earnings. Revenue from new rooms is more predictable than RevPAR growth and it will normally stay in our P&L for at least 10 years. As a result, excluding the impact of two significant liquidated damages totaling $22 million, continuing revenues increased 9% and continuing operating profit 17%.

The results we're announcing today reflect significant progress that we have made within -- inside the business. But they also reflect too a generally benign six months for the industry. It is now becoming clear that we have some stronger headwinds now to contend with as we enter the second half.

The general economic picture has deteriorated since our Q1 results in May and our trading environment has become tougher. The most notable feature for the last three months of trading has been a further steady softening in occupancy rates, particularly in the States. But in the last few weeks, we have also started to see the first signs of rate growth coming under pressure.

In terms of our other short-term indicators, forward bookings are a little behind where they were in May. But having said that, they remain in line with the same period last year. And as yet, we have had no significant rate renegotiations to deal with with our major corporate accounts.

Overall then, we would characterize the general situation as one of a gradual slowdown. It does look like our US business in particular will have a tougher second half in terms of RevPAR. But balanced against this, the outlook for new rooms remains very good. Our 2008 openings remains on track and over 50% of the hotels planned to open in 2009 are currently under construction. We are breaking ground on more hotels than at this point last year.

We signed 48,000 rooms in the first half, just below last year's level. But in the Americas, we actually signed more deals this year to the half-year than at the same point in 2007 before the credit crunch really hit. This obviously reflects what we see as a strong continuing demand for our brands in the US market.

In Asia Pacific, our signings were in line with the record signings that we achieved last year which we think is a very good result. More than half of those room signings were in China, where the pipeline is now more than double the number of hotels we have open. Overall, our pipeline is the largest it has ever been at over 240,000 rooms and it remains the largest in the industry. Importantly, we estimate that around 70% of the pipeline is financed and we have only lost a handful of hotels so far this year due to financing issues.

So the size and quality of this pipeline gives us confidence in IHG's growth trajectory. But this step change in our growth does require additional management support and resource and getting the balance right between supporting this unprecedented level of growth and overall cost control in a less certain economic environment is something we are very focused on.

Our transition to a fee-based earnings model is virtually complete. Over 85% of our profits are now generated from managed or franchised hotels compared to 60% back in 2002 giving us a higher quality, more defensive stream of earnings.

We have invested in our technology so that IHG is now the most visited hotel website and has the number one presence on search engines like Google. Our loyalty scheme prior to Club Rewards is the largest in the industry with 39 million members worldwide, whose decision-making we can directly influence. We've commissioned new research around the world to better inform and shape the development of our brands. And we've built a strong financial platform. Generating surplus cash and maintaining the strength of the balance sheet are key areas of focus for management. This all stands us in good stead in these more uncertain times.

Our trailing net debt to EBITDA ratio of 2.4 times is conservative. And in the half, we successfully refinanced our debt facilities on broadly the same terms as under the previous facilities. All in all, we are well-positioned for both sustained growth into the future and solid business delivery today.

With that, Paul and I are here to answer any questions you may have. Thank you very much.

(Operator Instructions). David Katz.

Good morning. Firstly, I wanted to -- I wanted to express our condolences and sorry for your loss. I do have several questions. Firstly, on the holiday (technical difficulty) one of the issues that we've struggled with a little bit is the amount of corporate support that is being offered and what exactly that is going for and are there any royalty discounts being given on any of that? I know we've talked about $60 million of support in the past. But if we could get some color on what form that will take.

And how exactly are you presenting the value proposition to franchisees in terms of return? Particularly at this point, presumably there is some rate accretion that is expected out of it. But now, with the change in outlook and becoming a bit less more positive, how has that value proposition changed if at all?

Yes.

I realize there's about five questions in there.

That's okay. Let me see if I can get to some of that, and I will just look across to Paul to see if there is anything he can add. We'll do this double handed today if you don't mind. Yes, you're correct. We committed and have committed a $60 million budget for one-off items that we will cover. What's in there are a number of things. Let me just talk about the ones that are the main recipients.

The actual logistics management of managing a relaunch of 3000 hotels is very considerable. The project management, the logistics management, administration skills, all of which was additional to normal headcount budget. Because at the same time as we're doing all of this work, we're also having to open 1800 hotels. So our people are very busy just getting on with their basic job and the Holiday Inn work is additional. So we are actually employing project management externally which we feel is our right and responsibility to subsidize and cover.

It also includes several schemes which we think are equitable and helpful to franchises in particular circumstances. For example, we have a sliding scale rebate scheme in place where people who signed up with us pretty recently, let's say six months ago, and they took an old sign, we will give a rebate to help support the transition to new signage. Because obviously it is not reasonable to expect somebody to pay for Holiday Inn signage in very, very short order twice. So we have a scheme that is in place for that.

We also have temporary signage costs which we are covering, where hotels want to open quickly but we can't get the signs made for various reasons until we get around to auditing the (technical difficulty). So we have temporary signage which we make a contribution or cover completely. And we also have our pilot hotels that we're making more of a contribution to. Because in setting up the pilots, we had to take a lot of learning from -- some of the changes we made had to have amendments and rectifications as we went forward, and we knew that to start with. So we thought it was fair and reasonable that we should pick up some of the cost of those early learnings.

So those are the broad sums and some other bits and pieces but those are the main ones. In terms of how we are presenting this, I think it's fair to say that the franchisee base understand that there is -- the Holiday Inn work has been well researched. We do talk about our expectations to get a higher level of guest satisfaction over time as a result of the changes that are being made. And we make the presumption through that from the modeling we've done that that will lead to RevPAR increases over time relative to general market performance and the previous performance of their hotels.

So whilst that's not cast in stone, it's certainly a general expectation. But I think it goes hand-in-hand with an understanding that the source of money that we are generally asking franchisees to commit to over a three year period in most cases don't exceed the normal capital expenditure in their hotels. And it is more of a redirection of where the money should be spent over that time period that they are seeing. Given the time we've given them to make the changes, I think one of the reasons we're getting such an enthusiastic response in the franchisee base is because we're working within a long-ish timeframe and they can manage their cash flows accordingly. So it's a long answer but Paul, is there anything else on there?

On the $60 million, you asked whether it's still that sum of money. The $60 million is still what we're aiming for. We have charged $9 million in the first half through our exceptionals line. And we think the majority of that will probably be spent during 2008. Some of it may spill over into 2009 depending on how things progress. But that's still the number that we're aiming to.

Now, are you seeing -- I know that as we talked to industry people, we hear more and more anecdotal evidence anyway of new hotel projects being delayed as a result of financing conditions here in the US. How much of that have you factored into your pipeline and unit growth expectations or should we be discounting what we see today based on what we hear?

All I can tell you really, David, is what we see ourselves obviously, which is that while the overall situation of getting financing seems to be a little tougher and some of the terms are a little bit more onerous on owners, the volume and the delay in demand is actually in our case still material and still visible. And therefore, that is translating into deals getting done.

In terms of overall opening pace or rather opening timing, we've seen signings to openings stretched out by about a month in the last few months, the last six months probably. So it is taking a little longer to get projects through.

But in terms of attrition out of the pipeline, which I think is at the heart of your question, as you know, we normally run at about 10% attrition rate in any given year. That's our long history of the pipeline attrition.

This year, we lost 8000 rooms to the half-year out of a pipeline of 242,000 rooms. So what's that? Just under 4% to the first half. So it looks like we're going to be on track for 10% or just actually under it this year, which is an interesting situation. That's what we're seeing. Interestingly as well, only a handful of the 8000 rooms we lost in America particularly we lost for financing reasons.

So we are in a good place with our pipeline. We are, as you can imagine, scrubbing it hard. Things can obviously change. But at the moment, the financing of basic construction loans with small town and regional banks with midscale owners appears to be holding up.

Now, your outlook commentary for the remainder of the year was -- I guess the best way to say it is less negative than what we have seen and heard from other US companies so far. Could you just give us a little bit of color with respect to what you are really expecting the back half of this year? And I realize that this is all against a backdrop which has changed seemingly dramatically in the last 30 to 60 days.

Well, to the extent we can, I will try and say a bit more. We don't obviously get guidance as you know. And you know we don't do that. Our statements try to give the right sense of where we see things. We have seen some easing of rates, which I think we would all agree the last first four or five months for the industry as a whole. Those in particular, I think rate disciplines held up remarkably well and still is in truth. But we have seen a bit of slippage coming off rate and that obviously got our attention.

And the occupancy trend continues to gradually decline, which has obviously got to the point where some rate depression has happened. We are experiencing it mainly in the weekend business in Holiday Inn in the midscale. We don't have a huge meetings business, so we don't get that pressure coming through. And it just seems to be a general softening.

Our numbers in July looked pretty good compared to the market. We ran at 1.5% RevPAR increase in July, and obviously we've got other parts of the world. I know you're looking mainly at America, but we have other parts of the world which are just carrying on including some markets in Europe as well as the Far East.

So on the balance, we've tried to give you what we think is a reasonable view of our expectation. The visibility we have about forward booking, as you know, is limited. But, as we said, year-on-year, we are absolutely around the same pace. And we haven't begun the major renegotiations yet with corporate buyers. But even there, we would expect to be in a reasonably good position because if there was a time when IHG's global network and midscale orientation really comes into its own, it's at a time when corporate buyers are looking for a more economical set of accommodation choices for their employees and their own business I would expect.

So I think we are well-positioned. We are obviously looking at the future with more hesitation in terms of being very, very optimistic. So less pessimistic is probably a good way of describing it. Plus we've got from our point of view, the knowledge that we've got 1800 hotels which are going to open up in the next three to three and a half years. And on the face of it and our recent openings pace, we're very confident we will continue to see the same trends of opening coming in the next couple of years, which will give us a very healthy top-line revenue incremental gain.

If I can ask one more and then I will give someone else a chance if there is.

Okay, last one.

On share repurchases, I see that your authorization is winding down and obviously you can't tell me what the Board is going to do. But when would the Board be revisiting the issue? What do they meet again next? And when would they be available to debate as to whether or not they should put a new one on there?

Well, it's under review, but let me pass this over to Paul who holds the key on that issue, mainly.

We've got GBP30 million left to do of our current buyback. And that's what's been announced to the market. But in the UK, you put in place at your general meeting an authorization to buy back stock and we have that authorization. So we can buy back more stock without having to go back and get permission from shareholders. So it would simply be a case that we'd announce to the market that we would do it and then progress with it if that's what we chose to do.

Okay. And I asked the question in the context that you are generating a fair amount of operating free cash flow and does not appear that there are any large capital needs out there, so it will have to go somewhere.

We think we've got a good track record there. But we do the best thing for the shareholders. And we've said before that we think 2.5 to 3 times net debt to EBITDA is not a bad place for a business to be. We're a little below that at the moment and I think we will see how things progress.

Okay perfect. Thanks very much and all the best.

Patrick Scholes.

Good morning, gentlemen. Just a couple of questions here. First one being it sounds like US credit availability is a bit more challenging than it has been. But how does that compare to what you are seeing for lending and credit availability for new hotels, your new hotels in Europe and Asia? How is Europe and Asia looking?

Generally Asia is very healthy in terms of funding. There's been some timing in China, but we have been able to get through to the half-year without too much trouble. But China has been the area where we have seen some changes in the owner base. Japan has been more difficult and I think we have seen projects there really having trouble getting off the ground because of funding restrictions.

Europe a bit of a mixed bag. I think it's fair to some places much easier. I think the general point would be that in midscale, we can still get deals done coming through. And in most situations, that's still possible. We're still signing deals in the UK, although the situation here is pretty tight. The top end deals, as you will have heard from other people, are more difficult to do, and are just taking a lot longer and on more onerous terms for borrowers.

But even there, we're still doing things. Obviously we're still signing InterContinental deals and we've got a number of what we're working on at the moment with owners, which we are confident will come through in the next few months. So certainly not the bubbles -- the froth on the top that we were seeing in 2006 and 2007, but deals are much harder to come by, but still being done. And I think with the work we have done at the top end on Crowne Plaza and InterContinental, it's keeping us in good stead. Our pipeline for InterContinental remains very healthy. We've got 67 in our pipeline to open over the next few years, so a bit of a mixed bag. Let me just ask Paul if he's got any further color on that.

I guess the only thing I would add is once you get above about $50 million financing requirements on a project, banks are typically needing to go to a club to do that, which makes it a little harder. But a lot of our financing is $20, $25 or less on an individual project. And regional banks are pretty happy at that level at the moment.

Great. Thank you. Next question, just concerns in your pipeline, new builds versus conversion. How is that trending for you, that breakdown? And when you are doing conversions, what brands are you typically converting from?

As far as I can tell you today, I think our new build ratio is somewhere over 85% in the pipeline, closer to 90% which is something we're very pleased about as well because obviously the quality of what we're going to open the next three years is going to be (technical difficulty).

The main conversion brands that we have in our pipeline at the moment are Indigo, a small but obviously a good conversion play; Crowne Plaza in America, which has been our main upscale conversion play for the last few years and continues to be a good option and InterContinentals in some of the priority estates.

Last year, we converted Courtyard by Marriott's to Holiday Inn in the UK, but we haven't had a mass conversion for Holiday Inn this year so far. So those are really the brands. Holiday Inn and Holiday Inn Express are not -- they're not all new builds, but virtually all new builds in the pipeline which is excellent news. And I think we've got more Holiday Inns in our pipeline now in total than our nearest competitor has totally globally in the world in all brands. So that's good.

And what are we converting from? I'm looking over the table for some support. We're taking from a broad reach of people. Particularly in the downturn, we find that independents like to buddy up with a big brand house because of the system delivery that we can provide, and that's certainly true at the moment. Any other thing you can say on that?

It's a wide mix right across the peak from all the brands you would expect.

I think InterContinental particularly has done a particularly good job over the last two or three years. We've repositioned that brand and we've been able to persuade quite a few owners to come over to the InterContinental brand from some of our more high-profile publicly listed companies who have competitive brands. But we have managed to I think take a fair share of that forward pipeline to ours.

Great. One last question here. When I'm looking at your financial statements, it looks like you bought about 7.5 million shares in the second quarter. However, diluted share count increased by 1 million. The increase, was that due primarily to the timing of your repurchases or option dilution or was there something else in there?

Paul?

It's a mix of both, Patrick. So we bought some later in the period. Then, we've got some options are exercised. And there's some movement around the employee share [trust] as well.

What was your ending diluted share count?

I think that's in the packet, isn't it?

Okay.

296.

Okay. Very good. Thank you.

At this time, sir, there are no further questions.

Okay. Thank you very much everyone for coming online. Obviously quite a sad day within IHG and within the industry. But many thanks for your attendance today on the call, and we look forward to seeing you in person very soon. Thank you very much.

Thank you for participating in today's conference. You may now disconnect your lines.