InterContinental Hotels Group PLC (IHG) 2009 Q3 法說會逐字稿

Good morning, good afternoon. Thank you for standing by. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Alex Shorland-Ball. Please go ahead.

Good morning. 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 over to Richard.

Thank you, Alex. Good morning, everybody, and thanks for joining us. I'm Richard Solomons, Chief Financial Officer and Head of Commercial Development at IHG. Andy Cosslett, our Chief Executive, isn't with me today as he is hosting our US Owners Conference in Washington. So I will start by making a few remarks on the third-quarter results and then open up the call for any questions you may have.

The trading environment has remained tough in the quarter, and there is still considerable pressure on room rates in all of our markets. The overall demand picture improved compared to the first half of the year as leisure travelers took advantage of lower prices, particularly over the summer months. This drove a moderation in occupancy declines, but tight travel budgets do generally continue to constrain the corporate business traveler. Against this backdrop, we continue to take decisive actions to execute against the priorities we outlined at our first-half results presentation. We are on track with our cost saving targets, our operating system is driving an increased proportion of revenue into our hotels, and the Holiday Inn relaunch is proceeding at a rapid pace.

Looking first at the results for the quarter in more detail, global RevPAR declined 15.2% on a constant currency basis, driven by a 9.7% rate decline and an occupancy decline of 4.2 points. We continue to outperform the US market, and our fastest-growing region, Asia-Pacific, outperformed by 4.5 percentage points and grew occupancy in the quarter. We reinforced our strong position in China where although the market remains tough we outperformed by around 10 points of RevPAR. We grew our system size by over 5% versus the prior year, taking it to over 641,000 rooms.

We also signed almost 100 hotels into our development pipeline. Whilst this is encouraging, it is around 40% below the same period last year as the whole industry continues to be impacted by the ongoing scarcity of finance for hotel development.

Moving on to our financial performance in the quarter, excluding $11 million of material liquidated damages received for the same period in 2008, revenues declined by 17% and operating profits by 13%. Central overhead benefited by $10 million as a result of a reassessment of the likely level of payments under certain long-term incentive plans.

In our owned hotels, revenues fell 20%, but our continued success in cost management meant that last less than half of this dropped through to the profit line. Managed hotels revenues fell by a similar amount. There were some bright spots such as Asia-Pacific where managed profits increased in the quarter, primarily due to cost reductions. However, overall we saw a 56% fall in the profitability of our managed business.

As we have said before, this part of the business continues to be impacted by payments under guarantees to some shortfalls to agree to owner priority returns. In particular, trading across our managed US Candlewood suites portfolio was weaker than we originally anticipated with a disproportionate number of these rooms located in challenging markets such as Vegas, New Jersey and Detroit.

As a reminder, we rarely guarantee hotel performance, and where we do this is subject to a cap barring one immaterial historical exception. Excluding guaranteed payments, profits would have been down slightly less than revenues.

The biggest part of IHG, our franchise business, continued to show its resilience. A 14.7% RevPAR decline was partially offset by a 5% increase in new rooms. This led to royalty revenues being down just 12%, although revenues and fees associated with initial franchising realized (inaudible) and terminations continue to be around half the level of last year. These results are in line with our previously stated RevPAR sensitivity guidance.

Moving on to cash flow and net debt, growth capital expenditure of $81 million in the quarter included $65 million paid on completion of the Hotel Indigo San Diego, which opened in July. We are managing our maintenance capital expenditure very tightly. This was just $15 million in the quarter, and we remain on track to meet the full-year figure of $75 million, a 25% reduction on 2008.

Despite the difficult trading environment, we reduced net debt at quarter-end to $1.2 billion from $1.3 billion at the half-year. This figure is helped by a number of cash tax refunds received in the quarter as a result of which we now expect our full-year tax cash flow to be broadly neutral for the year.

At the announcement of our half-year results in August, we talked in detail about three key priorities that we set for the business when the financial crisis first took hold. We are making good progress against these, the first of which is to make better use of our scale to drive efficiency, reduce costs and generate cash. This has delivered tangible results in the quarter. Regional and central costs were down $39 million, including the $10 million credit I mentioned earlier. We remain on track to reach our target of at least $40 million of sustainable savings for the full year, and total savings will be in the region of $80 million.

In 2010 we are still expecting to deliver sustainable savings of at least $65 million to $70 million versus 2008 levels at constant currency.

We are starting to see the benefits of our cost-saving actions across the entire Company. I have already mentioned our strong cost performance in our owned and leased hotels, and this is also the case in our managed and franchise businesses where excluding the guarantee payments, margins have generally held up well on falling revenues. This focus on costs and the cash generative nature of our business model through the cycle have been driving factors towards our ability to continue to reduce net debt.

Our second priority is supporting the performance of our hotels. This involves using the power of our system and scale to drive revenue into the hotels and help them manage costs. As a result of our continued focus in this area, the amount of revenue booked in the quarter through our reservation channels or by Priority Club Rewards members direct to the hotel was up 4 percentage points from the same period last year to 68%. We now have 47 million Priority Club Rewards members, up from 44 million at the half-year, and these guests delivered 12% more revenue into our hotels in the third quarter than the same period last year.

Building the size and quality of our hotel system is the third key priority. As I mentioned earlier, financing for new hotel developments remains constrained, and little has changed since we last spoke to you in August. Greater China is the one region where we have started to see the benefits from economic stimulus packages filtering through to hotel real estate.

In the third quarter, we signed 17 new deals in China versus 10 in the first half of the year. Elsewhere, particularly in the US, there are no signs that the current restrictions on financing will improve in the short term, and this will continue to have an impact on our signings and openings pace.

That said, the strength of our brands and the power of our system delivery continued to attract owners to IHG, and despite being well below 2008 levels, we are still signing around one deal a day.

You may have seen that we announced the signing of a new InterContinental in London last month. This new hotel located in Westminster is due to open late in 2011 and is in line with our strategy of developing additional locations in key cities for the InterContinental brand.

Our worldwide pipeline now stands at around 220,000 rooms, 80,000 of which are currently under construction. We opened 15,500 new rooms in the quarter with over 42,000 rooms opened in the year-to-date, and we remain on track to open at least 50,000 new rooms in the year. Our drive for quality continues, however, and we removed just over 4,000 rooms in the quarter. We still expect to remove around 70,000 rooms this year and next, but we now anticipate more of these will leave our system in 2010 than in 2009.

The Holiday Inn relaunch is our biggest focus at the moment, and we have made good progress again this quarter. Over 40% of hotels have now relaunched, and I hope some of you have seen the billboards on the consumer marketing campaign we kicked off over the summer. It complements the actions we are taking at the hotels and is an important component in the delivery of the systemwide 3% to 7% RevPAR outperformance we expect from the program once it is completed.

The first relaunched hotel continued to show average RevPAR outperformance of 5% versus the control group. But, as I have said before, this is a small group of hotels which have a sensible period of trading post-relaunch and is ahead of our original expectations at this stage of the process.

I will close now with some comments on current trading. In October we saw constant currency RevPAR declines of 13.5% split between a rate decline of 8.5% and occupancy decline of 3.7%. These numbers do seem to reflect easier comparatives rather than any discernible change in demand. In some markets such as London trading is improving slightly.

To sum up, we are fighting hard and winning share in what continues to be a tough environment. We have the seen tentative signs of business returning in certain areas, but the hotel industry does tend to lag the performance of the general economy, and most indicators currently show that 2010 will be another challenging year. Against this backdrop, we are very focused on what we can control and will continue to drive cost savings, support the performance of our hotels and our owners, and build the size and quality of our system. We remain confident that these actions, along with our global scale, diverse brand portfolio, fee-based business model and our powerful system position us very well to benefit from the upturn when it comes.

With that, I will now take your questions. Operator?

(Operator Instructions).

Well, if we have got no questions, we are able to take any if anybody would like to ask. But if we have got none, then we will sign off. Operator, anything come through?

David Katz.

We got dialed in a moment or so late. We are on the road. But we had really a couple of questions. One, corporate was down quite a bit in the quarter, and Richard, you addressed that already. So if you could help us understand why the big drop and what the parts were there?

When you say corporate, do you mean business travel?

Yes. No, no. (multiple speakers). Corporate expense. I think we mean more like what you refer to as central overhead.

Okay, why it was down. Okay. Well, I think two reasons, one big reason, which I think we put out in the announcement is that we had a $10 million credit, which relates to effectively just a relook at the accruing against one of our long-term incentive schemes, which is unlikely to pay out. So we had to release that accrual. That was $10 million, which is, in effect, a one-off.

I think on the other side of things it is really about the savings we are planning to make and we've talked about making, and reiterating the sustainable savings next year of $65 million to $70 million maybe coming in a little bit earlier than maybe we expected, which I think is just real life. When people know what they are targeted with, they stop spending money.

All right. Now this may be an odd question alright, but (technical difficulty)-- you were all scared to death at offloading assets at a time when values -- trading values were so high. And now you sit with a very comfortable balance sheet or even more than a comfortable balance sheet when the rest of the world is arguably trying to position themselves as buyers of that. Is that something that you would consider on any scale of looking to own some assets again or be an acquirer?

I think our strategy remains the same, which is that primarily we are a brand owner and a manager and franchisor of hotels. At the margin we will invest in hotel assets as we have done before, and I think the last one I guess we invested in was we built and now own a brand-new hotel, Indigo in San Diego. And that was about launching the brand really into a great market or what was a great market when we kicked off the construction anyway on the West Coast.

So the logic of investing where it drives the brand or supports the brand is very much still there. But we certainly are not in the market to go out and buy assets for the sake of buying assets. It will have to be a very special case.

I know over time we clearly want to see the asset intensity of the business come down. So if we were to invest in effectively growth assets, then we will be looking also to realize other assets that we currently owned. So I think strategy remains the same, and certainly we do feel very comfortable with where our balance sheet is, and certainly compared to a number of our competitors, we are in very good shape. But, well, the outlook is uncertain, and I think that is a good place to be.

All right. And just if I may one more, which is we obviously have watched how the stocks have performed, and that is obviously our job and our challenge. But we also read or hear some of the incremental positives from the economy, and there is certainly a view out there that the economy has bounced and now has recovered. The recession is now over. And from the perspective of your business, is that a view that you hold? Is that a view that you share, or do you have a different one?

It is very difficult to say. I think what I would say is that it is still challenging out there, and I think 2010 is going to remain quite a tough year for us.

I think we feel very optimistic about our own business and where we are at. Because through all of this, we very deliberately pushed forward on the quality program. So we continue to remove a lot of hotels, which is clearly expensive in terms of lost fee income. We continue to do that.

We have also, as you know, taken out a lot of costs. We just talked about that. But we have actually really focused on taking the costs out through scale and efficiency in what I guess you could call back office and reinvested some of those savings back in the front line in terms of additional salespeople, additional quality people and so on.

So we feel very genuinely that we are very well positioned, and Andy Cosslett has commented in our press release that we are positioned to lead the industry when the upturn comes, we very much believe.

So I think we are in a cyclical industry, and we do get buffeted by that. But what we need to do is make sure that we are continuing to outperform, which we have been considerably across the world, really support our owners. You know, the people who obviously own the hotels that we brand, and we have done a lot on that front to help them with their costs and to help drive revenues. Not support them financially per se but to help them where we can. And that is really important.

And I guess the last thing on the outlook, we don't give formal guidance, as you know, but I do think some of our competitors and other industry forecasters are looking for RevPAR decline in 2010. I don't know what the shape of that will be first-half, second-half, but I think it will stay tough for us. We are a lag industry, and I think over the long run we tend to get driven by GDP growth and activity. In the shorter term, I think unemployment and corporate profitability are important drivers for us, and I think we will see how those indicators move in the course of 2010.

Alright. I lied. One more if I may. We look at some of the other industry participants who have similar balance sheets as being active for purchases of their own stock, and in other cases, they have been able (inaudible). Let's say they have been more gesture-based. They have been very clear what their belief is about their business based on their stock repurchase activity, and your behavior has been a little bit different of late. What is your updated view about buying back your own stock (multiple speakers) with the capabilities that you have?

Very clear. We certainly have not moved. We have three uses of surplus cash, which is managing the balance sheet, paying down debt if necessary, reinvest in the business where we see growth opportunities, and returning cash to shareholders. And I guess we have done more than gesture in the sense that when we sold our assets we returned well over GBP3 billion worth of funds to shareholders. I think in today's market, however strong your balance sheet is, we still have debt, and there is still quite a lot of uncertainty out there. So we are certainly going to look after the balance sheet until it is clear that we are through this downturn. And at that point, then we would definitely look again at what we do with our surplus cash. But it is certainly not off the agenda to continue turning cash, but I certainly don't envisage it in the short term. I think it is you are better served by protecting the balance sheet and making sure that you can respond to anything that does go on, either in terms of investment in the business or simply the economic picture.

(Operator Instructions).

Okay. Operator, it looks like we are done with David's four questions. Thank you very much, everybody. Appreciate you listening in, and I shall leave you to get back to your day. Thank you.

Thank you for participating in today's conference call. All lines will now be disconnected. Thank you.