InterContinental Hotels Group PLC (IHG) 2008 Q3 法說會逐字稿

Good morning, good afternoon and thank you for standing by. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time. I will now hand the meeting over to Mr. Andy Cosslett.

This announcement contains certain forward-looking statements as defined under US law Section 21-E 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 risks and uncertainty.

There are a number of factors that could cause 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.

Good morning everybody. Thanks very much for joining us. This is Andy Cosslett, Chief Executive of IHG. Richard Solomons, our Finance Director, who is usually here with me, has to send his apologies today. As you know, Richard has a second job at the moment as interim President of our Americas region. And he has an important prior commitment in that role in New York. So I do apologize. He is available later if people wish to speak with him directly.

Paul Edgecliffe-Johnson is with me. And Paul is the head of Corporate Finance at IHG.

Our third quarter results demonstrate the continued capacity of IHG's business to deliver growth ahead of the industry and add rooms to our system. Despite weakening occupancy and rates, we grew global RevPAR by 1.6% in quarter three on a constant currency basis.

The EMEA region, which is Europe, Middle East and Africa, showed the strongest gains at 4.2%, driven by growth of 24% in the Middle East.

In the Americas RevPAR grew 0.6% in the quarter, with all brands outperforming their respective market segments. Continuing revenues and operating profits grew by 5%, even after excluding $11 million worth of receipts we gained from two significant liquidated damages.

In a generally strong picture, profits in our managed business in Europe, Middle East and Africa declined by $2 million in the quarter. This was driven by a reduction in profits earned from one portfolio of 61 managed hotels in the UK, where we are no longer earning an incentive fee.

I thought it might be just worthwhile to say a couple of words about our managed business in general at this point. Of all the fee revenues generated by our managed and franchise business, some 80% of them are related to either royalty fee income or base management fees. The remaining 20% are other fees linked to our franchise business or they are managed incentive fees.

In a volatile market like this these fees tend to be more variable than base management or royalty fees. As a rough guide, a 1% decline in RevPAR across our managed business generates around a $7 million decline in managed profits.

If we move on to overheads for the quarter, central and regional costs grew below inflation, holding our margins at 29%, as we continued to carefully balance investment to support our growth with the need for cost efficiency.

In quarter 3 over 25,000 rooms joined our development pipeline from new deals signed. Although 13% below 2007 levels, this is still above 2006 levels, and takes the total signed this year to almost 74,000 rooms. Given the general lending environment, this is a good performance. And it takes our total pipeline now to almost 245,000 rooms. That is 40% of our existing system size.

We opened over 19,000 rooms in the quarter. This is a new record for the Company. After removals the system grew by over 10,000 rooms net, taking it to 608,000 rooms, up 7% on the third quarter of last year.

Just a word on the removals. We saw 8,900 rooms exit the system during the third quarter. That is up on quarter three 2007, and it mainly reflects the loss of 21 hotels in the UK, which were owned by the Mitchells & Butlers Group, and was sold on to Whitbread who owned Premier Inn, which is a competitive of ours in the midscale and upper economy segments of the market. That transaction took place in the period.

We also lost one big Crowne Plaza hotel in Queensland, Australia. And all-up those two events accounted for an additional 1,500 rooms over the previous year.

We refinanced our debt in May of this year. And at the period end our net debt of $1.35 billion was down from $1.66 billion at the start of the year.

So this was a solid quarter for the business. However, the picture changed five weeks ago when October opened with trading substantially down. It remained sharply down for the whole of the month, although importantly, the trends did not worsen as the month progressed. Our preliminary data for October shows that our global RevPAR declined 4.5%, with a decline of 5.7% in the US.

Forward booking are down versus last year. And while our visibility is limited, it is clear that the environment will be tougher now for some time to come.

We are continuing to outperform the industry. And the midscale where IHG has almost 75% of its rooms, is again proving to be the least affected segment, which is a pattern we have seen in previous downturns.

Given the tighter lending environment, new deals are now taking longer to sign. And it is also taking a little longer to get these hotels open. That said, in October we still opened 48 hotels and we signed 50 hotels. So it is all relative.

Attrition from our pipeline has increased since the half-year, but it is still forecast to be no higher in 2008 than the historic trend of around 10% of the opening pipeline. Looking further out, rates of attrition from the pipeline will be heavily dependent on when the lending markets reopen.

To be clear, if and when hotel deals do fall out of our pipeline, it is not doing to a change in the long-term demand forecast which supported the original plan for hotel investment, it will, and is instead, the more basic issue of access to cash.

Around 90,000 rooms are currently under construction, and over half of these are expected to open in 2009. We continued to break ground on new projects, including 29 hotels in October in the US alone. This gives us a good level of assurance over our openings pace for 2009.

Now we have been managing our costs and our capital very carefully throughout 2008. Given the near-term trading outlook, we are now focusing even more on the cost line, and we intend to hold costs in 2009 below the 2008 levels.

We're mindful though of not losing sight of our longer-term ambitions. And we do intent to continue to invest in the right areas of the business to support our growth.

We have decided to hold back from completing our share buyback program at this time as we focus on prudent management for the balance sheet, and given the lack of visibility on the economy and of our streets of trading.

In summary, this was a good quarter for the business, but since its end, we have seen a sharp deterioration in trading conditions. We retain though a robust pipeline, the right business model for the climate, a strong balance sheet, great brands, and particular strength in those market segments which look best placed to weather the current storm.

We continue to have confidence in the outlook for the business, and are keen to identify future opportunities to grow. Thanks for your attention. With that, I would be happy to take any questions you may have.

(Operator Instructions). Patrick Scholes.

I have couple of questions here. First, talking about RevPAR, certainly a trend that I have noticed over the last several weeks is the midscale brands domestically here in the United States definitely outperforming I suppose on a relative basis the upper upscale and luxury brands. What is your take on why that is? Is it because of the recent decrease in gas prices?

I think it is something we have observed in previous downturns. There's no question I think that what we saw in October was the arrival of more penal sort of travel policies being put into place by companies. We are all part of companies and we probably all receive the same memos.

It is about people being asked to travel a bit less. People being asked to consider what class of business -- or class of airline seat they're flying in. What class of hotel they're going to stay in.

And we have seen from other times of downturn that value for money becomes a very, very big driver of the decision. And in that market, Holiday Inn is a fabulous brand to select, because it is an outstanding product, particularly at the moment with the relaunch underway. It is a very well-known trusted brand in the market and in the industry. And it is an easy decision for people to move to.

Yes, I think the midscale, and Holiday Inn in particular, does well in a downturn, because people just rather than stop traveling, which is the last thing you do, particularly in business, before you hang up the for sale sign on the front door, the last thing you do is to stop traveling. So people do continue to travel. They just make different choices about where they travel and how they travel. I think the midscale benefits from that.

I appreciate the color on that. Turning to your pipeline of new rooms, it looks like really your strongest growth was in the Asia-Pacific managed new rooms coming online. As it pertains to managed rooms, how is incentive management fees structured with your agent-managed rooms as opposed to your US domestic incentive management fees? What is the structure of that and how does it compare?

It is very -- there is no real differences between what we do there and other parts of the world, except that in Asia we have virtually no priority returns in Asia. And for the rest it is pretty much a straightforward base fee and incentive.

But very straightforward. We make all our -- virtually all our business deals in Asia are management contracts, as you know, usually for very large hotels. And, as I say, no priority returns as such in the Asia market. That is really the only difference.

The last question pertain to your debt. It is your target debt ratio remaining at 2.5 to 3 times?

Yes, it is. It is obviously something we are looking at very hard. We're still quite comfortable with that as a guide. But we're at the lower end at present and we like -- given free choice, we would like to stay there, or even drop it a little bit further down.

But we're quite comfortable where we are at the moment. We think we are in good shape. And having refinanced the business back in May, we're quite comfortable on that front.

My last question concerns, you mentioned in your report that you refinanced $2.1 million of long-term debt facilities. Can I get a little more color on that as far as the new maturity date on those, as well as what is the underlying interest rate?

Let me pass that to Paul.

There is two tranches on that. There is a three-year and a five-year piece. And the shorter date is $500 million and the longer date is $1.6 billion. And we don't comment on the margin that is on that debt, but it is at -- it was really refinanced before the market really fell off, so we have got a much better deal than we would be able to get today. Let's put it that way.

Good. Definitely fortunate. I think that is all my questions for now. Thank you.

David Katz.

Just following up on the leverage and financing issue, it appears that you may be in a position where you're generating a fair amount of free cash. I noticed in the quarter you didn't repurchase any shares, which for obviously there are some thought processes there. But if you good update us on what you plan to do with any free cash you generate. Do we allow the leverage to just keep going down? What are we thinking there?

We -- probably that is where we would be, if we don't find anything better to do with it. I think certainly for now, share buybacks as we said in the note are being suspended. I think that is the right thing to do. We have always said that if we could find the right opportunities to drive our growth then they would look very favorably on those. But right now there's nothing to really report on that front.

We will just -- we will drift the leverage down, which gives us more room to maneuver going forward, and just in case anything does come along. But if stellar opportunities were around we would look at them. But I think at the moment it is a good time to be thoughtful and just take a conservative view of all of this.

Is there any prospect that you would allocate any capital toward, perhaps funding some of your unit growth? Given the challenges in the financing environment, are there some favorable terms that would make sense at this point where you could, not necessarily investing in management contracts, but perhaps, but also assisting in some of the franchise growth that is out there

It is interesting. We have actually seen faster growth in the last 18 months with proportionally less investment on our side. I think it is one of those kind of great win-wins. As you make your brand and your system stronger, you actually reduce the need to invest behind getting new deals. And we have definitely seen that.

Whether it is at the top end with InterContinental or Crowne, or even Holiday Inns, we have just -- we found this year we reserved a lot more capital than we actually have taken up, so our capital expenditure this year is less. Not because we have sort of clamped down necessarily [in a sense], but the regions haven't needed it. So that has been a real interesting feature of the last 20 -- 18, 24 months.

Although the market is tough at the moment and lending is more difficult, we've got a huge pipeline that we have to get open now. We've got quite a period before we have to start worrying about the amount of new deals that we're signing. The fact was in October we actually signed 50 deals in the month. So in the height of this crisis we actually got 50 deals signed in October, which was pretty amazing.

We are still getting stuff going into the pipeline on all our brands. I think the only thing we would really want to consider to change this is if we thought there was a step change in the profile of one of our brands. We have already got an investment going in behind Indigo in San Diego where we are building a hotel on our dollar.

As we said before, we might choose to extend that practice into new markets like Europe, if we felt we had to, and we might. But at this stage we're fairly sort of conservative in our outlook. And frankly, we're not having people knock on our door asking us to be anything different.

Perfect. Just a couple of details from the quarter. You had some liquidated damages. And I did listen to some of the explanation earlier. And you also had some write-downs of management contracts. And I did hear Richard's explanation on the earlier call.

But could you just talk about the liquidated damages a bit more? Where were they, and what was that for? And just some color on the notion that for someone, somewhere it was more appealing for them to pay to get out rather than move forward, and what the circumstances were.

They were just one-offs really. We see no general trend in LDs, so let me just talk about these as far as I know them. The first was 21 hotels in the UK. As I said, these were small hotels. They were Expresses basically in the car parks and pubs, which we where quite happy to see the back of, because they don't properly represent the Express brand. They were probably 30, 40 room places. And they were run by the bloke who ran the pub. So they honestly weren't necessarily things we were wanting to hang onto.

What happened was they were owned by Mitchells & Butlers, which as you recall, was the sister company to IHG before the separation in 2003, which is why we have the arrangement in the first place. We wouldn't do it now, that's for sure.

These hotels in public pub car parks were bought by Whitbread, who in the hotel business themselves in the UK with the Premier Inn brand, which is an economy brand, which is where they belong. And Mitchells & Butlers sold them to Whitbread as part of their strategy of getting away from any sort of lodging and accommodation in their lineup. They are a pub company. So Whitbread now have those and they are refashioning Premier Inn. So that was an acquisition deal between two third-parties.

On the Crowne Plaza in Australia this was a deal that came to us about 18 months ago with Morgan Stanley when we did the deal on the [A&A] portfolio and on the InterContinentals in Europe -- I'm sorry, on the InterContinentals in Europe. And that it has been sold by Morgan Stanley to a -- the new owner -- now, I know this -- the new owner is just determined to make an independent. It is something like they are driving [CRACV], I think, which is their version of the Automobile Association in Australia.

And they have bought it and they want to brand it as a members club, and run it accordingly. So they were happy to pay considerable damages having -- we have only been in their two years and done very well.

They are just exceptional singularities. There is no pattern or trend here. And they threw out a fair amount of money in the period. The UK LDs were $7 million, and the Australian one on its own was $4 million.

Just going back to the write-downs for a second, this appears to be related to UK accounting convention, because we really haven't seen much of this from any of your US competitors at all. Is this something we should be looking out for on ongoing basis?

Let me ask Paul to respond to that.

It is something under IFRS. When we sold some of our big portfolios of hotels, because there was an ongoing income stream from it, we had to capitalize an element of that. So it never went through the P&L. It is just a balance sheet accounting item. And we're not now receiving the incentive fees on that contracts, so under accounting standards we just write it off. So I don't think it is a big deal really.

No. I mean, there doesn't appear to be any cash involved.

No, quite.

Now I did hear some explanation earlier this morning about a breakdown that Andy gave on your fee streams, 80% of which I believe were either base or straight royalty, and then the remaining 20% was either initial franchising fees or incentive. I think somewhere in there we got to about 10% of your fees are roughly incentive. Could you just circle back on that? I want to make sure I have that breakdown straight.

I will just repeat what I said, and then Paul can fill in with more color to the extent that we are able and happy to give it. What we are really saying is that -- let me just get the actual phraseology correct here.

We have got 20% of the fees generated by our managed and franchised business, which are not linked to straight royalty fee income from the franchise business or to base management fees. So they are linked to other franchising fees, such as front-end fees, changes of use, changes of contract, change of ownership, or they are connected to management incentive fees. Those are the two main buckets, which make up that 20% of our total fee business.

Did you split that -- are you able to split that 20% between (multiple speakers)?

About 75% of that 20% is incentive fees and the remaining 25% is the other fees Andy was talking about. So the signing on fees, the change of ownership, those sorts of things.

It sounds like roughly 5% of the total are the initial fees, and then -- so 15%, I guess, 15% of all of your fees are incentive?

Yes.

Is that about right? One last one, and then we will give somebody else a chance at it. Have you talked at all about group business? And I did here some commentary about the corporate negotiating season. But how much group business do you do, and what are you seeing out of that?

Yes, we actually do the group business. It is not as much as other companies. It is a lot smaller then some of our bigger American businesses, but it is probably 20% plus. We don't have the big boxes that they do, so we don't really attract that sort of similar meetings business.

But it is there. It is definitely down. We have seen a drop-off in our forward bookings in our group business, generally since October as part of the overall down shift. But nothing more than sort of in line.

It is a bit hard to call. What we are trying to disseminate here is whether or not we're just seeing people book later, because obviously we've got our visibility to the degree we have it on 30, 60, 90 days forward bookings. But what is clear at the moment is that not necessarily the people just aren't eventually taking the rooms, but they just are not booking them well ahead. Which I think is just a feature of any market that is in a downturn. People don't feel the same pressure to prebook and forward book, so they just book later. And they are certainly shopping around.

As it relates to the corporate buying season, yes, it is going to be a longer season this year. I think the buyers are using it to their own advantage to see how the market is going to unfold. And that is, again, in their position I would do the same. I do think we're well-positioned within it.

And whilst they are going to be quite hard on the RevPAR levels they are prepared to discuss, I think companies like ours are particularly well-placed because we have got the geographical coverage they need. We've got the midscale brand strength, which they really see as a way out for them in how they can reduce their overall corporate travel budgets year-on-year. Because they can move a large number of their executives away from the five and four-star and into the Holiday Inn Estate, for example, which is a worldwide opportunity.

Giving us a greater share of the available rooms business that they do every year in the bigger global accounts is definitely not just an opportunity, it is becoming real. We have had a couple of good wins recently on that front. So whilst we expect the individual conversations to be pretty tough, we actually feel quite confident with where we will come out at the end of it.

At this time we have no further questions.

Thank you very much everybody for coming online. I look forward to seeing you and updating you again in the new year. Thanks ever so much.

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