InterContinental Hotels Group PLC (IHG) 2009 Q1 法說會逐字稿

Good afternoon and thank you for standing by. (Operator Instructions). Today's conference is being recorded and if you have any objections, you may disconnect at this time.

Now I will turn the meeting over to one of your hosts today, Ms. Heather Wood.

Good morning everybody. 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 am now going to hand the call over to our Chief Executive, Andy Cosslett.

Good morning everybody. Thanks for coming on the call. I hope this finds you well. This is Andy Cosslett, Chief Executive of IHG, and I am here with Richard Solomons, our Finance Director.

Well, as expected, quarter one was one of the toughest on record, as the recession severely impacted both trading and hotel developments around the globe. Our revenue and profits were both well down in the quarter, but we did continue to grow market share through a combination of RevPAR outperformance and new hotel openings.

We also started to see the benefits coming through from our cost savings program, as we really get to grips with our -- making better use of our global scale. So looking at the details for the quarter, global RevPAR declined 13.6% on a constant currency basis, which was driven by a rate decline of 4.1% and an occupancy decline of 6.1 points.

Our brands outperformed the market pretty much across the board. In the US, where we are biased as you know towards the more resilient midscale sector, our RevPAR ended 3.5 percentage points better than the market, which is up from 2 percentage points better in the last quarter of 2008.

In Greater China, where a surge of new supply drove overall industry RevPAR down by some 30%, our brands were down 20%.

Continuing revenues for the quarter declined 22% and continuing operating profit declined 41%. This figure excludes $10 million worth of net adverse impact from material one-off liquidated damages.

In our owned and leased hotels continuing revenues fell 29%. But we were able to limit the drop-through impact on the bottom line by taking strong cost action in hotels.

For managed hotels, excluding the liquidated damages impact, revenues fell 26% and profits by 56%. Profitability of the managed business was skewed in the period by the phasing of operating guarantee commitments in the Americas. These payments are phased in equal amounts through the year, and as such the payment figure in Q1 was higher than would otherwise be the case were they weighted more according to normal seasonality of trading.

In our franchise business the contribution from new rooms helped offset some of the RevPAR decline and a reduction in fees from new signings. Operating margins fell just 3 percentage points.

Overall our first-quarter results reflect the general sensitivity guidance that we gave in February, which to remind you, was that on an annual basis a 1% decline in RevPAR impacts group profits by $16 million. That is $7 million in the managed business, $4 million in the owned business, and $5 million in franchise.

Moving on to signings and room openings, well really little has changed in the lending markets that we can see since we reported in February. Financing for hotel projects remains scarce, and this is impacting our ability to sign deals. How long this situation will persist remains to be seen, of course, but it is difficult to imagine we will see much improvement this year.

That said, we did sign up 76 hotels in the quarter, bringing a further 10,500 rooms into the pipeline. While this is (inaudible) down on last year's Q1 figure, I rate it as a good achievement, given the state of the lending market.

Our pipeline now stands at 236,000 rooms, 90,000 of which are under construction, and of which 50,000 rooms we expect to open this year. In the quarter just under 7,000 rooms were removed from the pipeline for various reasons. And the level of attrition we are seeing continues to remain within the historic range, albeit elevated.

We opened over 12,000 new rooms in the quarter, 12% more than in the same period last year, which was then itself a quarter one record. At the same time we removed just over 10,500 rooms due to noncompliance with our new level of brand standards. And we now expect a further 25,000 rooms to be removed over the balance of this year.

With the prospect of slower openings and some higher removals, we expect our rates of net rooms growth to slow somewhat over the next couple of years. The good news though is that as a result of our continued focus on hotel quality, we are now starting to see rising guest satisfaction scores coming through. This over time will flow through to stronger RevPAR performance, and that ultimately will result in higher levels of system growth in future years as more deals come our way and levels of removals start to drop off.

Now in this challenging time the main focus of the business is to continue to support our hotel owners. Our system is very powerful, probably the most powerful in the industry, and we are using it to deliver guests to hotels and to drive up our share of industry demand.

Despite the decline in total revenue in the first quarter, the amount booked through our channels increased another point to 47% of all revenues in the quarter. And at a time when other companies are scaling back somewhat, we are actively investing behind key parts of the business. We have increased resources in the sales area, a key battleground for us, as the largest corporate customers reassess their supplier base and start to bias their spending towards the companies with the largest midscale hotel brand portfolio.

We have been increasing the number of marketing programs we have running to drive awareness and activity of our brands, and we are driving enrollments behind Priority Club Rewards.

But our top priority remains the relaunch of Holiday Inn. Now market conditions are certainly more challenging than when we set out on this journey with this important initiative. Because of this, and not surprisingly perhaps, the rate of conversions is somewhat slower than we originally planned for. But some 700 hotels have by now relaunched and several hundred more are preparing to do so.

Challenging though these times are, this is exactly the right moment to drive ahead with the reinvigoration of our biggest brand. And we remain committed to completing the Holiday Inn program by the end of 2010.

The really encouraging news is that we can now point even more so to the evidence that investing in the relaunch does pay off. An expanded group of relaunched hotels are now showing an average RevPAR performance of over 5% in comparison with the control group. And this data is now over a 10-month period so it is very robust. This is a great incentive for owners yet to convert their hotels to sign up and do so.

Looking now at our cost base, in February we committed to bring regional and central costs for 2009 down by $30 million over 2008. That was on an underlying basis and at constant currency. We can now report today that we will beat this target. As a result of additional savings, in particular lower anticipated levels of variable incentive payments, and due to the impact of a stronger US dollar, we now expect reported regional and central costs for the year to come in some $70 million below 2008 levels.

Looking quickly at cash and debt, during the quarter we generated $32 million of cash from operating activities, which meant that despite a weak trading environment, we maintained net debt flat on the year-end position at $1.3 billion. Our financing arrangements continue to fully meet our needs. Our $1.6 billion facility expires in May 2013, and our net debt is well below this level.

Let me close with a few comments on current trading. In April we saw constant currency RevPAR declines of 19.8%, which reflects the adverse impact of the shift in the timing of Easter. Our visibility remains low, but forward bookings show no further deterioration in the level of demand declines. Room rates though do remain under pressure.

We opened 42 hotels during the month, double the number of openings in April 2008. And we managed to sign up a further 16 hotels into our pipeline.

The impact of swine flu that has dominated the news of late has at this stage been minimal, with cancellations and declines in hotel demand restricted to Mexico. We do not expect any material impact on the group performance from this event.

So to sum up, the outlook remains challenging, but our brands are strong and we enjoy an advantaged global position in the midscale segment where the market is proving more resilient. Our model allows us to focus the business to drive our market share and to make better use of our scale going forward. The rest of the year will remain tough, but we are pursuing a clear strategy, and are taking the necessary actions to ensure that we come out of this in good shape.

Thanks very much for your attention. Richard and I are happy now to take any questions you might have. Thanks, operator.

(Operator Instructions). Patrick Scholes.

You talked in your press release here about your brands outperforming the industry. And it sounds like you may be taking some market share. What type of brands are you -- or what is your typical competitor that you may be taking some market share from?

Well, it is pretty much -- it depends in which market you're looking. But we have been doing well right across the board in each segment, so it is not just a question of us having a benefit from the midscale skew that we have in our portfolio. Obviously that is a part of how we get outperformance in this market as the midscale stays more resilient. But it is beyond that. It is each brand in each sector.

The weaker brands, particularly, are losing out. I think if you look across the board the stronger the brand, the better they will be doing at this point. I wouldn't say we are taking that much off our strongest competitors in their strongest markets. But certainly the independents in the smaller company area, we know they are struggling. And with the customers looking for security and value in their purchase, they are coming into the big chain systems, which is a common feature of downturns. We have seen it before, and we are certainly seeing it again this time.

Just a couple of more questions here. I note on your results in EMEA it looked like your room count was slightly below where it ended up in the fourth quarter. Can you just comment on -- is that seasonality of openings or are you being more aggressive there with taking rooms out of the system?

I think, Patrick, just in the EMEA, and actually in Asia as well in the quarter, we just had a couple of big removals. Once you get bigger hotels and you lose one or two, it has an impact, and maybe a few slower openings. So I don't think you can read anything into that, really it is just a feature of the quarter.

Now a specific question on your New York owned hotel property. I don't know if you can provide some detail on how initial bookings are looking -- especially with the groups -- are looking for 2010.

I wouldn't have visibility to share with you at this point on that. Anything outside of -- I mean, there are obviously clearly group bookings -- but anything that is going much beyond a couple of months at this point is quite rare. And that hotel is not a big groups -- we don't have big meeting facilities in that hotel, so we have a fairly limited amount of our business coming in through that channel.

The hotel has actually been trading more strongly of late. We have been getting much better occupancies -- 70%s, 80%s, 90% on some weeks. We are just trying to manage our rate position. Obviously, New York has been one of the most dramatically affected in terms of rate pressure, and the hotels have to join in to manage its position. So we are just trying to work through that. But the good news is that we are actually getting busier. And as I say, if we can just bring the rate back up, that would be great.

It doesn't have an awful lot of meeting space that hotel, so it isn't one of our major group houses.

Any progress -- I think a couple of months ago you had discussed a new InterCon opening. I think it was in the Times Square area in the next couple of years. Any progress on that?

It continues to be built. It is a hotel we are building with [Fishman], who as you know, is one of the foundation builders in New York. It is one of the few projects that is continuing to go ahead, and we expect it to open in the latter half of 2010.

Then one last technical question here. Your tax rate was about -- it looked about 24%, 25% in the quarter. I know that in the past you have mentioned that you expect it to continue to trend up in the high 20%s, possibly low 30%s, is that still the expectation?

Yes, it is.

: Great. I appreciate the color. Thank you.

Michael Millman.

Following up on the last series of questions, I know Marriott always seems to be able to quantify their premiums compared to their competitive set. Can you do that for us, and also give us some indication of whether those premiums are coming in or increasing?

Our premiums generally -- again, it depends on the segment you're looking at, and we do indeed keep track of the level of rate premium that we generate against the market and the market segment, and that is obviously tracking just continuous data surveys as well.

At the moment we are making gains pretty much across the board. So in any segment you look at our brands are, if anything, nudging ahead with premiums over the market. But it depends on the brand, it depends on the segment, it depends on the country you're looking at.

Can you give us a few examples, some of the more important data points that you follow?

Have we got a Holiday Inn figure here we can just update? Let's see if we can find that for you and come back to you on that. Just on the call (multiple speakers).

And a very broad question --

We operate generally between 15% to 20% premium on the segment in midscale. Generally Express is a little higher than Holiday Inn. So that is typically where we are at. We have seen that raise just a bit recently.

But let me just see if I've got some up-to-date information on the table and come back to you in the next couple of minutes. Any other questions you have there?

Yes, this is about a 50,000 foot question. Is the hotel industry overcapacitied? Do we have too many hotels? Are hotels being built for -- to get that couple of days when they might have 80% or 90% occupancy, rather than being built for average occupancies closer to 60%?

Well, it is a cyclical market. And it is cyclical because you do sometimes get a bit of supply and demand imbalance. The latest forecasts on supply are actually that it is moderating down, which is a typical feature of a downturn.

In the long term, or even middle to long term, what we see is that the growth of the hotel industry is in line with population growth and GDP. If you look going back 50 years, it has been a very, very strong correlation. So as we look out to the next five years or more, and if you think about the planning and building process of a major hotel, by the time you've got through your financing, particularly at the moment, you could be in a five-year cycle of development and building.

You are looking that far out to where demand is going to be, and there is no question that the amount of hotel rooms required in five years' time, if any of the pundits are right, is going to be greater than it is today. That has been the pattern for 50 years. We see no reason, recession or not, at the moment why that is going to be any different going forward.

For us, the biggest trend in the market that we follow is not just the organic growth of the overall market, is the shift into branded hotels. What you're seeing in the world over the last 10 or 15 years is a rapid acceleration in the marketshare taken by branded hotels. And yet that marketshare is still only around about 40% of the overall total hotel market worldwide. That is different in the States, but worldwide -- on a worldwide basis, less than half, well less than half of the hotel rooms in the world are branded, which gives us a tremendous upside.

So we are working with positive tailwinds as an industry. We are working with a shift towards brands, which is also positive. So on any given day supply might be slightly ahead of demand, but over the long term it has been a good relationship with the brands getting stronger and some of the smaller, weaker brands falling out inevitably, just as it would in any market. I hope that answers your question.

Just one follow-up to that. Is there a significant difference in assumptions on occupancy or different brands to make the numbers work?

It depends, again, if you're looking at it from a hotel management relationship, they are very different. Running a small midscale without food and beverage hotel, and the economics of that are entirely different from running a 500 room InterContinental with meetings and five restaurants in the middle of Beijing. So, yes, they are quite different animals.

I don't think you can generalize on that. You really need to have an individual look at the economics for each individual hotel. And at the moment, of course, the biggest driver of profitability for any given hotel is the level of debt that the owner has on the property, and how much they had to leverage up over the last few years. And that we are seeing is the biggest differentiator between different owners and how they are feeling and how they are managing their way through the recession.

The great news for us at the moment is that very few people, very few of our owners and in the market generally, and the industry generally, have felt it necessary to go under, to hand in their keys and to cease ownership of hotels. So tough though the conditions are, the vast majority of owners are finding a way of dealing with it.

[Maria Slavin].

We just have a couple of questions. First, can you talk about the guarantee payments that were made in the Americas? Are they associated with the portfolio of hotels owned by HPT? And any additional information you can provide on these would be helpful.

And second, regarding your views on capital decisions, we were just wondering if you would be -- if you would consider buying a luxury hotel that is listed in the market and rebranding it into an InterContinental hotel? As an example, Strategic recently listed the Fairmont in Chicago. So would you consider something like that for your InterContinental portfolio?

I will take the last question, and maybe Richard can deal with the first. The question of asset ownership is something we consider. Obviously, our business model is asset-lite. We do invest occasionally in hotels, if we think it drives the brand in a particular direction. We are actually building at the moment an Indigo hotel in San Diego on our dollar. And that is a very specific decision we took to give -- to put our skin in the game behind our newest brand.

So we are not averse to doing it. Our commitment is being asset-lite and lowering our capital intensity over time, which is what we have been managing to do for three or four years.

We don't feel the need -- we don't see the need at this point for buying up additional assets or other assets. We are very well-represented in all the major markets. There is one or two holes, but right now we are obviously very thoughtful about capital and debt. So it is not something we are -- we have high on our priority list.

If an extraordinary deal came along, and an extraordinary destination with an extraordinary partner, well then we might look at it. But at the moment we don't have too many of those in our radar. And in truth it is really not the business model we are following. I would never say never, but it is unlikely in the current situation.

On the guarantee, as you say, it does relate to some of the portfolios of HPT. We actually have four portfolios, and some of them actually are performing under the owner's priority. You can go and look at the other side of the deal, I guess, in HPT's announcement, but essentially they have an owner's priority return. So the way the deal works at HPT is they are very happy to share the upside. They are pretty generous on the upside but they like downside protection, which is where we are at now.

We are paying out on some of those portfolios. But the issue that we do highlight in the announcement is the payment is actually skewed in quarter one because essentially the priority percentage is spread evenly over the year, whereas trading is seasonal, as Andy mentioned in his preamble. So we are a bit skewed in the quarter. So that is pretty much all of the payments that you are seeing in that quarter one in that managed business.

The sensitivity number that we have talked about, again that Andy mentioned, of 1 percentage point in RevPAR driving $7 million profit impact in managed, most of that is in the US, and that is an annual number. So the impact that you're seeing in Q1, was, say, skewed to the quarter, but that tentatively still works on an annual basis.

Just one last follow-up. On your central overheads and regional overheads reduction, how does that $70 million reduction break down between the regionals versus the central?

Richard?

It is about two-thirds central, one-third regional.

David Loeb.

I wonder if you could just talk a little bit about big picture, about how the relaunch is going? Particularly, I am particularly interested in whether you're getting pushback from owners, just given how hard it is for them to come up with capital? Their owners generally are limiting their CapEx. Can you talk about how that process is going, whether you think you're going to have to use a substantial amount of your resources more than you have in the past to facilitate that?

Sure. In the circumstances, we are actually very pleased with the way this is going. As I said in my remarks, we remain really foursquare behind the relaunching and seeing it through.

We have even been saying earlier today that we are expecting a higher level of removals this year and next year because of that, because we are prepared to take a bit more pain to make sure that we get this job done and completed, rather than letting the economic environment get in the way of us finishing the job.

So we have looked at that hard, and we do expect probably over the next -- this year and next year some -- between 15,000 and 25,000 additional removals probably as a result of the program.

Yes, it is more difficult than it otherwise would have been for most owners to commit to the program. But we have a couple of things to say. We estimated losing quite a few rooms in the first place. We got over 1,100 hotels in our pipeline, which we'll be opening up over the next two or three years. And of course, all of those are going to come out in their new suits of clothes. So that is a great critical mass to begin with.

We've got over 700 done so far, which is bigger than most hotel chains in the world as it stands. And for the rest we've got many more sort of preparing to go, having done the quality evaluation that is a precursor to the actual move. We did have some technical issues around signage, which we have now resolved, so we would expect to see an acceleration in the trend.

There are some people, but it is not that many, there are some people who are in a fairly difficult situation from a cash point of view, and we are working with those owners to try and find a way through this. We obviously have to retain some integrity and discipline in our process of how we are managing people through the chain of events that they have to go through. But we have a reputation for working closely with owners. We want to protect that reputation and make sure we're helping everybody who wants to come on the journey with us over the longer term to do so.

What that does not include though at this point is any notion of us funding the exercise ourselves beyond what we have already said we would fund to, which was $60 million over the course of the relaunch.

So it is taking longer. It is tougher. We expect to lose a few more on the way than we originally planned. But in the context of our overall pipeline, and the size of our overall estate with over 600,000 rooms, we believe we can absorb that. And the key thing for us is to get the job finished.

This relaunch has been 25 years in the making. This is our one moment to sort the brand out, deal with the tail of the issue in the Americas, where the only issue really exists of quality and consistency in the brand. Get stuck into a deal with it and move the brand on.

By the time we get to say 2011, '12, we will have effectively over a 10-year period replaced the whole brand around the world pretty much, through a combination of new product launches and replacements, and accepting the pain of a lot of removals. But we are committed to doing that, and we are prepared to do that to make sure that we get the brand where it needs to be for the next two decades.

That's very helpful. Thank you.

Guy Hardwick.

I missed the start of the call, so just apologies. I think previously you had said that 1 percentage of RevPAR was about $18 million to the operating profit. So on an annualized basis, say 14% off RevPAR, like you did in Q1, would be about $250 million off operating profit. And so on a quarter about $62 million, $63 million. But your EBIT dropped, I think, $55 million, so I guess the difference is the cost savings is my -- the $7 million you achieved -- is my math correct?

Reasonably, but your memory is not. Apologies. It is $16 million to the point.

Okay, I must have noted that down wrongly. So that may imply that you actually dropped a little bit worse -- your operating leverage is perhaps a little bit worse than expected?

Yes, but there is a liquidated damages element, which is about $10 million that you would need to take into your consideration. And the rest of it, what we have been able to do on cost savings.

It is a small quarter, Guy, so it tends to skew a bit.

But you would still stick with that sort of formula, and that includes incentive fees, signing fees and liquidated damages?

Yes.

At this time I have no further questions. I will hand the call back over to you.

Thanks very much everybody for coming on the line. I appreciate your time this morning and look forward to seeing you again soon. Thanks again. Bye-bye.

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