InterContinental Hotels Group PLC (IHG) 2009 Q2 法說會逐字稿

Good morning and 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 would now like to hand the meeting over to Mr. Andy Cosslett. Please, sir, go ahead.

I will actually start. It is Heather Wood here, the head of Investor Relations for IHG. Just to read out first, 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 hand the call over to IHG's Chief Executive, Andy Cosslett.

Thank you, Heather, and good morning, everybody. Thanks for joining us today. You will be all more than aware that the first six months of 2009 have been pretty tough. Significant falls in RevPAR have been the norm pretty much around the world. Our RevPAR fell 16.2% at constant currency in the first half, including a second-quarter decline of 18.6%.

Importantly, though, our brands continue to outperform in each of our three regions and by nearly 3 percentage points in our largest region, the US.

Revenues of $726 million were down 20% at constant currency and excluding significant liquidated damages receipts. On the same basis, operating profits of $179 million were down 38%. In our owned hotels, revenues fell 24%, but we were able to limit the impacts on profit by taking strong cost action at the hotel level. For managed hotels, excluding the liquidated damages impact, revenues fell 25% and profits 54%.

Looking at the results of our managed business excluding the Americas, a 29% decline in revenue translated to a profit decline of 32% with a drop in margins of just 2 percentage points. This again reflects good cost control and the lower level of guaranteed financial support there.

The main driver behind our first-half loss in the Americas managed business was the funding of shortfalls on management contracts we have with Hospitality Properties Trust, HPT. These payments relate to IHG topping up an agreed minimum owners priority return which we have guaranteed subject to a cap. The annual impact of funding these shortfalls plus the handful of other performance guarantees we are paying out on is built into the RevPAR sensitivity guidance we've talked about before. That is a 1% decline in RevPAR impacts group managed profits by $7 million, of which around $4 million of that is in the Americas.

In our franchise business, the contribution for new rooms helps offset some RevPAR decline and a $13 million reduction in fees from new signings. Operating margins fell just 2 percentage points.

After lower interest and tax, the 38% operating profit decline translated into an EPS decline of 29% at $0.415.

Looking at cash and net debt, our cash generative business model, combined with our focus on cost and CapEx control, allowed us to keep net debt broadly flat on a December year-end at $1.3 billion. We remain well placed in terms of our banking facilities with a $1.6 billion revolving credit facility, which expires in May 2013 and a $0.5 billion loan expiring 2010 in November. Reflecting our sound financial position but acknowledging the tough trading environment and a continuing lack of visibility, we have maintained the interim dividend at $0.122 per share.

Turning quickly to our business operations, as the financial crisis really took hold towards the end of last year, I set three main priorities for the business. I'm pleased to say we are making good progress against these.

The first of these priorities was to make much better use of our scale to allow us to drive efficiency, reduce our cost base and conserve cash. Taking cost out of the businesses is relatively easy. The skill is in staying on course while you are doing it and retaining your capacity to grow. We believe we are managing this balance pretty well. Next year -- sorry, we now expect to exceed the targets we announced in February to the extent that in the first half regional and central costs were $51 million below 2008 levels, which at constant currency is a $31 million or a 21% decline.

In the full year, our reported regional and central costs will be around $80 million below 2008 levels, around half of which will be sustainable. Our expectation is that regional and central costs for 2010 will now come in some $65 million to $70 million below the 2008 level on a constant and sustainable basis. This represents a 20% reduction in our corporate overhead, and the savings will be and are after underlying inflation has been taken into account and after some selective reinvestment back into the business.

Our second priority was to support the short-term financial performance at the hotels across our system by driving revenue and reducing net costs.

Now the share of total rooms booked through IHG's reservation systems and websites has now reached 60%. That is up 4% percentage points on the same period last year. We have increased our resource in our sales teams by around 25% at a time when many of our competitors are reducing theirs. Priority Club Rewards members are now contributing close to 41% of all our revenues, again up 4 percentage points on the same period last year. And in the first half, revenues generated by our increased investment in online marketing came to over $0.5 billion. That is an increase of nearly 20% year on year. These revenue driving activities have helped shore up the topline performance in hotels, and they have been very well received by our hotel owners. But these owners have also been pleased by how we have been given them to manage their hotel operating costs as well.

At the outset of this crisis, we initiated a complete review of our brand standards and agree through the owners associations temporary relaxation of a number of these standards. We are also now receiving excellent response to our Green Engage program, which is an online energy saving tool which now has 800 hotels signed up for the program and another 100 in the queue. And to remind you, in an average size hotel, that program can save up to $75,000 a year in energy costs. The third priority of the business has a longer-term focus on land, and that is looking at improving consistently the quality of the hotels in our system.

Now our system size in the first half grew 5% year on year with gross openings of 27,000 rooms and removals of 17,000 rooms. We expect in the region of 35,000 rooms to lead the system this year and the same source of number again in 2010 as we continue to press on with the removal of hotels which sit at the lower end of our quality spectrum.

Much of our quality focus is, of course, centered around the relaunch of Holiday Inn. This work is progressing well. We now have 1040 hotels through the relaunch, and that is close to one third of the entire Holiday Inn estate. We expect to be about halfway through the estate by the end of this year and are continually confident that we will bring this project in as planned around the end of 2010.

We continue to see positive performance data from hotels that have been operating for almost a year now as a relaunched hotel, and average RevPARs for those hotels are holding at about 5% better than the control group against which we are measuring.

Finally, a few comments on the outlook. It is true that over the past few months there have been some encouraging signs of occupancy stabilizing. The pricing remains under pressure, visibility is poor, and our bookings pace still shows no real sign of improvement. Based on current trends, leisure travel would seem to be the more resilient sector, and that is something that will certainly have helped our July RevPAR data, which declined 14.4% globally, 14.2% in the Americas. The business traveler remains elusive, and it is this that is affecting our ability to yield room inventory, and it is hurting our banqueting revenues in our upscale hotels.

On the pipeline we have 90,000 rooms under construction out of a total pipeline of 226,000 rooms. The lack of available financing remains an issue for developers and is slowing the pace of movement through the pipeline. And until this improves, we believe we will continue to see an impact on future room openings.

So 2009 to this date has been challenging for the industry and for us, and we see little respite in the forward data. That said, we are very encouraged by the progress we're making internally, and with a substantially reduced cost base, a fundamentally higher-quality estate to look forward to, and refreshed brands, we believe that we will be very well-positioned when the upturn comes.

I'm here with Richard Solomons now, and he and I will be very happy to take any questions you may have. Thank you, operator.

(Operator Instructions). Patrick Scholes.

Recently one of your competitors who reported results discussed a noticeable uptick in conversion activity or applications for conversions during the second quarter. Have you seen any uptick on applications for conversions of late?

Not dramatic, Patrick. I think I know who you are referring to. And given the number of removals we are making from our system, it would be surprising if they were not announcing a few more conversions.

We are not in that game, as you know. We are interested in and are talking at length to a number of operators around the world in the smaller end of the league who may wish to come under the shelter of our system, and that is taking some time. We have had some success here and there but no real big headline news to talk to at this point.

I think the longer the situation goes on, though, and the more our system delivery continues to demonstrate its performance, then I think those sort of conversations will develop. Richard?

Yes, I guess I would just add with Crowne Plaza and with Indigo those brands have always been -- Indigo is designed to be a conversion brand. We have some new builds but a lot of conversions in Crowne Plaza. The grades that you've seen particularly in the US has been from a lot of conversions. So I think we have always had that level going on. But we have had inquiries, but I'm not sure we have really seen that translate through into any significant add to the system yet.

Okay. Thank you. That is all.

David Katz.

I wanted to follow that up. We are observing Holiday Inns leaving the system at the same time we are seeing some of the other brands go up. Is there an amount of transferring -- are you capturing some of the Holiday Inn rooms that are exiting the system with some of your other brands?

No, I think what we are seeing really, David, is a sort of cleansing of the estate, which we have been on now for some time. Many of the new Holiday Inns that are opening, if you think about the size of our pipeline, we have something like 1200 Holiday Inns and Expresses in our pipeline, which are in the process of opening. And they are to a large degree replacing and more the ones that are coming out.

So the the way I would characterize it is we are really replacing and rejuvenating the overall average Holiday Inn estate quality as a result of this. So we are getting that system growth as a result, but we are obviously more focused on the removals piece as much as anything else just so we can once and for all deal with this quality issue that the brand used to suffer from. So we are getting some conversions, but we are not really seeing much migration from being a Holiday Inn into, for example, being a Crowne Plaza. In fact, I'm trying to think of any examples that I know of that then, and I really cannot.

Are there -- well, maybe the follow-up then is, should you or could you capture some of these rooms that would be an exiting your system with some other brand? I think we have observed that with other systems where they will literally reflag their own hotel.

We have talked about it. Obviously it would be a very simple thing to do. We don't believe it is the right thing for us. I think the way the business model works and the enterprise values within our system worked against a certain understanding of what you're trying to do on the quality levels of your hotels, it is very hard to be -- we find it is very hard to be schizophrenic in this. It is very hard to have quality standards at a certain level and file our safety standards at a certain level and then in the same breath in another part of your business have an entirely different set of operating principles in place.

And we have had those conversations down the years. We have made a decision, a strategic decision, that we will operate in the premium, wherever the market is, the segment you're looking at, the premium end of those segments, which is one reason we have never entered the budget segment. It just does not fit the values of the business or the profile of the business or the system enterprise drivers we have got.

So we look at it from time to time. Thus far, we feel quite happy we are not involved in there. Although clearly it is a bit galling when we try to do the right thing for the industry in terms of quality management and then others maybe pick up some of those to their benefit. So I understand that, but over the long haul, we believe that the quality difference that we are making will uptrade the whole industry and uptrade the consumer at the same time.

Got it. One of the things we observe in your management business in the Americas is the issue of paying owners' guarantees. And I see that that had an impact on the management business in the Americas in the quarter, significantly so. Presumably we could be talking about groups of hotels that are with HPT. Whether that is the direct situation or it is a similar one, what we have observed in other cases are branded hotel companies that have decided not to continue paying those guarantees and to perhaps duke it out a little bit rather than just go ahead and pay. And there has been a couple of those instances, and I know we may have talked about it last quarter. But can you sort of share your thoughts in terms of your reasoning for continuing to pay and what strategies you may have going forward with that?

Well, I will try to direct you, but I guess my instant response is I don't know. I think I know what you are talking about, but I don't know obviously the detail of their agreements and contracts. But we obviously know ours, and this Company will obviously always fulfill its obligations by the word of the contracts that we have signed up for. But let me ask Richard for a comment seeing as he will know the content better than I will.

Yes, David, I mean I think we are talking in the Americas about HPT. We do have the odd other hotel that we have guaranteed, but it is only in very rare occasions that we will enter into guarantees for very specific reasons. So we have the odd Intercontinental, which are very important strategic assets, and we have HPT as one of the bigger arrangements we have got.

And I think it is worth pointing out with HPT that it has been a very profitable arrangement for us over the years, and it has certainly helped us significantly grow our Staybridge Suites business, and we effectively grew Candlewood Suites along side them. Both of those are now very big brands.

So it has been a very good arrangement for us, and the nature of the guarantee we have with them is obviously contractual, and as Andy says, we do meet our contractual obligations. But also the structure of the deal with them actually enables us to very generously share the upside when it comes, which is why it has been a good agreement historically.

And the other side of that, though, is we to some extent protect the downside by the very long-term contracts. The guarantee is capped, and we are obviously burning through that cap slowly, and we look at the long-term benefits of the arrangements. It does not mean we obviously are not going to have conversations with them over time to make sure that we are each getting the best that we can from the transactions, but certainly in the short to medium term, that is the deal we have got.

So when you say that these are capped, does that mean that the effect or the dynamic that we saw in the second quarter can go on for -- just to make up a number -- a couple of more quarters after which it would stop potentially?

Well, we have got four different portfolios there, so it gets quite complex. I can't go through all that now. But no, I think if RevPAR stays at this level or goes lower, then we are talking about longer than a few quarters of paying out on the guarantees. But I mean the total cap, and I think it is in the HPT accounts, is no secret. It was originally $125 million. It currently stands at about $97 million. So on the basis that we will see some recovery at some point, I don't think we will burn through that total in a hurry.

I have a couple of more if that is okay.

Can you give me them both, and then we will answer them together.

Okay. Very good. There was a write-down in the quarter in the managed business, and I guess I was looking for a little further color on what that is and how that works. And then I wanted to ask about you have a term loan, a $500 million term loan, that matures in the fourth quarter of next year. Is that something we should expect you to deal with during 2009? And that is all I have.

Okay. Thanks, David. Maybe, Richard, you could probably --

Yes, on the write-downs, you will have seen the (inaudible) accounts we go in through some detail. The vast majority of it is obviously non-cash, as well as the managed business for the two pieces of that. One is a $57 million write-down of purchased goodwill, which is actually most of the goodwill relating to the acquisition that I think it was Bass would have done back in 2000 for Bristol Hotels. So it's just a UK GAAP, and now IFRS, that goodwill sits on the balance sheet. But given where the trading currently is in the managed business, then one would have to look at the impairment of that goodwill. So that is what that is.

And then the $32 million intangible asset write-down relates, if you recall under international accounting standards, we had to create an intangible asset when we sold some hotels years ago and wrote management contracts on them. And that intangible asset sort of recognized the value in the management contracts, again with a level of trading in the Americas than we have written off that intangible asset. So again, that is a pure accounting non-cash item.

Perfect. And then on the term loan, the $500 million term loan?

On the term loan, we obviously will look at that. I mean currently we've got $1.3 billion of debt outstanding. $200 million of that relates to the capitalized value of the Boston lease. So our actual bank borrowing is about $1.1 billion. It has been pretty constant as you have seen since the year end.

So we are actually significantly below the $1.6 billion commitment on the revolver. So, in effect, we don't need that $500 million piece. But obviously we will look at putting some longer-term financing in place over time. I cannot promise when, but we will clearly look at that.

Andrew Wittmann.

I just had a question on flags, I guess, and how the distress in the operating environment today may challenge the flags on the hotels. Can you talk about the non-disturbance agreements that you may or may not have just generally in your portfolio?

Well, we also did not agree on the different management contracts; we said we cannot go into them all. But generally what history has shown, and certainly I think we are seeing it now, is that if you've got the right brand on an asset and you are delivering, which clearly Andy talked through what our brands are delivering. Then in many cases if an asset does change hands or gets into financial difficulty, then the chances are that you will keep the flag, and that is certainly what we have seen historically, and there is no reason to believe that is going to change.

Are there specific performance hurdles that need to be met to keep those flags in place?

Rarely. Certainly not on the franchise side at all, and it does vary on the management contracts but not very much.

Interesting, okay. And then just again in that distressed relates to the pipeline, with financing becoming more challenging or continuing to remain challenging, can you just talk about whether your capital outlay towards getting some of these projects out of the ground is maybe higher now than, say, a year ago or even six months ago, and maybe what the capital outlay for pipeline projects, whether it is equity interest or maybe mezz financing? Can you just talk about what that looks like for this year?

Yes, it is Andy again. We get literally involved in the capital investment part of this pipeline now. I think out of 1800 hotels there is probably 1750 hotels we've got left in there. We might have some sort of capital involvement and it does not if that. It is very small, and we have been fortunate over the last few years to build the brand and system strength to the point where we can do these deals without any capital inducement or involvement really except in some very special circumstances.

So it is not our issue in that respect. I think you're right to identify in the market the financing situation is tough. No question. People are finding it difficult to get financing for some of these projects. It is okay probably still up to around about $12 million to $14 million. We can still see owners getting reasonable terms on their loans up to projects at that level, but above that, it becomes much more difficult, and we are seeing some lengthening of the speed or movement through the pipeline.

And we have seen some higher attrition rates. But as we said in our conference that was this morning we are probably looking at attrition rates at around 13% to 15%, and that is at the elevated range, the higher range of our historical norms, but it is still within our historical norms. So while it is elevated and we are focused this far into the crisis, we are pretty confident that we will get through.

But, you know, the financing situation at some point has to ease up, or we are going to start to see probably further attrition rates and further rise in attrition rates going forward. But hopefully that will ease up as we go through the back end of this year.

So it sounds like you are willing to allow the attrition rather than put any more of your balance sheet at risk? Is that a fair characterization?

Yes, I think so. We have chosen our business model, and in all but the most exceptional circumstances, we will let it ride. And given the size of our pipeline -- I think this is the important point -- we have never had as a business ever in the Company's history of pipelines in the .25 million area, and even though we are seeing some attrition and we are obviously opening the pipeline -- we've got over 400 hotels this year -- it is still very healthy and twice the size of our nearest competitor.

So we have actually got some headroom. If attrition did rise a little bit, okay, we could certainly cover that for a while.

That is all very helpful. Thank you very much.

Michael Millman.

I guess I have a question about maybe the philosophy of the Company and maybe of the industry and opening hotels. When we look at the airlines and we look at the rental car companies, their strategies currently are to reduce capacity, take capacity out of the system in trying to augment their pricing. Why does the Company and the industry think that the other approach makes sense that is continuing to add capacity?

Well, I think it would be an interesting conversation we could probably spend a bit of time on, but let me just give you a couple of thoughts in response.

One would be obviously that the business model operates in a way that takes some of the decisions about the overall supply issue away from the brand owners because it is fragmented and distributed through several thousand independent companies and owners across the system. And obviously it is there -- in many instances, it is their livelihood. And you would rather run a half-empty hotel at breakeven than close it and put your family sort of on the bread line. So I think that is probably one answer.

The second is that the variable cost basis of operating a hotel is fundamentally different than flying an aircraft where you cannot get from A to B without actually filling a petrol tank up to a certain level. We can do that with hotels, not infinitely, but we are much more variable in our cost management in hotels such that you can close floors and turn the lights off, you can drop the temperatures. There's a lot of actions that you can take that don't fundamentally change the customer experience but do actually have a dramatic impact on your cost base. And as long as you can do that, then you can operate hotels at fairly low occupancies for some time before you really do start to run into trouble.

So I think that perhaps explains and perhaps explains why very few hotels actually fall out of the bottom of the market even in these strained times. But I think a good conversation for another time maybe with some different philosophies at play. But I think those would be the main points.

So related to that is, you have some control in awarding -- if that is the right word -- the franchises to owners. Why isn't there in this market an attempt to slow that down but maybe slow it dramatically?

Well, again I think if I can answer on behalf of our Company and the brand owners, if you are in the business model that we are, we are obviously influenced in terms of our income by the RevPAR that exists. But we are also impacted by the size of our system, the number of rooms we have open. And in many respects, it is actually better for us to continue to open rooms and hotels even if those hotels are not operating at full capacity or even half capacity. We still take an income stream of that revenue into our top line.

So for us it is a combination of RevPAR performance, multiplied by the number of rooms in our system. So, as a brand owner and as a franchisor, what you want is more hotels in your system, not less. That also drives your system funds which drives your marketing support which makes your brand profile stronger. And, therefore, it would be a very, very difficult decision for a Company like ours to take a view that said we should restrict the expansion of system distribution.

I would just add that having said that, clearly we will not sign a hotel we do not think is viable. Because we are not looking to sign owners who cannot make a go of it because that clearly is not a good long-term impact on your brand. It certainly does not mean that if we think there is -- that it is viable that we won't want to sign it.

So it is conceivable that to some extent there is a little bit of disconnect between the goals of the brand and the owners as a generalization maybe?

Well, I think it's got a dynamic tension. You know, because of different parts of the cycle, one side of the table is benefiting maybe slightly more or less than the other. But over the course of the whole cycle, as long as you are working well together, there is a high level of value creation that you can both share in. And I think what we have seen in the last 12 months is a very good strengthening of the relationship between the owners and the brand owners such that we are all working together now on cost initiatives, on revenue driving initiatives, and all of those things rely on scale. And the scale requires the system to be growing and to be vibrant and healthy.

So it is a trade-off, of course, and at any given time, the owners may feel slightly put upon, or we may feel that we are not getting enough of the value back out of the system, particularly when RevPAR is rocketing ahead. But that is the nature of the industry that we're in and the business model we are operating. And I think overall the fact that only a handful of owners in our system -- of the many, many, many hundreds that we operate, only a handful have to this point felt it necessary to hand in the keys or give up tells me that the system actually works quite well.

At this time we are showing no further questions.

Okay. Well, thanks for your attention, everybody. Good to talk to you as always, and we will be in touch very soon. Thank you. Thanks, operator.