InterContinental Hotels Group PLC (IHG) 2010 Q1 法說會逐字稿

Thank you very much for standing by. I'll now hand the meeting to Heather Wood.

Hi everyone. 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 the actual results to differ materially from any such forward-looking statements.

I'll now turn over the call to Richard Solomons, our Chief Financial Officer and Head of Commercial Development.

Thanks very much, Heather. Good morning, everybody. Thanks for joining us. So I'll start by making a few remarks on the first-quarter results and the trading environment as we see it, and then open the call up for your questions.

So looking first at RevPAR, global RevPAR grew 0.2% in the quarter, which included growth of 4% in March, when RevPAR turned positive for the first time since August 2008.

Occupancy improved throughout the quarter, and rate declines showed initial signs of easing as business travelers began to return in greater numbers.

These improving trends were most apparent in Asia. We continue to outperform the industry there with RevPAR growth of 10% in the quarter and 12% in March. China was particularly strong with 22% RevPAR growth, driven primarily by domestic business travel.

And we expect to open more than 40 hotels in Asia this year, growing our system size by over 10% as we continue to build on our leading position in this fast-growing region.

RevPAR in our Europe, Middle East, and Africa region grew 0.5% in the quarter and almost 3% in March. Good RevPAR growth across continental Europe and in London was offset by declines in the UK regions and the Middle East.

Some Middle East markets, such as Egypt and Saudi Arabia, are growing strongly, but Dubai and Abu Dhabi have yet to recover.

The Americas region was the last to return to growth, with RevPAR declining 1.9% in the quarter but growing 3% in March.

The US market is where we can most clearly see the current industry dynamics playing out. You'll remember that the catalyst of the recent downturn in this industry was the collapse of Lehman Brothers back in September 2008 and the global financial crisis that unfolded. Business travel, particularly high-end corporate business travel, declined significantly, causing sharp reductions in RevPAR for the luxury and upscale segments, while midscale travel remained relatively resilient.

Across 2009 as a whole, the US industry declined 17%, but within that the luxury segment declined 24%. In absolute terms RevPARs in the luxury segment fell by $50, compared to just $8 for the midscale.

As business travel starts to recover, the early beneficiaries are those segments which fell first and hardest, gradually returning the market to its normal equilibrium. So with our midscale buyers, we are not seeing the same volatility in RevPAR as some of our more upscale peers. And the early recovery is also being driven by stronger growth in large group business, which predominantly impacts upscale and luxury hotels.

In the first quarter of this year, the US industry declined by 2%, with 3% growth in luxury but a 5% decline in midscale. It is testament to the relative strength of the Holiday Inn brand that we reported a RevPAR decline of just 2.6% in the quarter, and I'll touch more on this later.

Globally across our brands, InterContinental and Crowne Plaza RevPAR grew 2% in the quarter, compared to small declines for our midscale Holiday Inn brands.

More recently, our global RevPAR in April grew 5%, slightly ahead of March trends. Occupancy was still the primary driver, although rates showed signs of stabilizing in Asia and continental Europe.

The luxury and upscale remain the strongest segments, but if business travel continues to improve, we would expect this benefit to start to filter down to the midscale.

Considering the year as a whole, third-party industry forecasters are still expecting US RevPAR to decline in 2010, with the most recent April forecast from Smith Travel pointing to a 0.5% decline.

In the wider economy unemployment remains high, and confidence indicators for small businesses in the US are still falling, while the availability of credit is tight. These small businesses are an important driver of the midscale segment.

Our booking windows remain short, and it is very difficult to see further out with any certainty. Don't forget that none of us who reported in February were able to predict the boost in trading in March. With this limited visibility we retained some caution. But overall we are encouraged by the early signs of improvement, but at this stage it is a little early to call a sustained recovery.

What we can talk about confidently, though, is how we continue to invest in our business, building our brands, opening new hotels, signing new deals and driving superior returns for our owners. I'll touch on the progress we made in these areas, but first I'll review our financial performance in the quarter.

On a constant currency basis and excluding $3 million of material liquidation damages and the $11 million payment to HBT in the first quarter of 2009, total group revenues grew 1% and operating profits grew 4%.

Franchise hotels revenue declined 3%, and operating profit was broadly flat.

RevPAR declined 1%, and additional franchise fees fell $3.5 million, but good cost control improved margins by 2 percentage points.

Managed hotels revenue grew 8%, and operating profit grew 5%, excluding the $11 million HBT payment.

Asia-Pacific was particular strong with 11% RevPAR growth and the contribution from 10% rooms growth.

In our owned hotels revenues grew 4% and operating profit grew 57% or $4 million to $11 million.

Our InterContinental Hotels in London, Paris, Hong Kong and Boston delivered double-digit RevPAR growth as business travel resumed in those gateway cities.

Operating margins grew 3 percentage points as hotel performance benefited from the more efficient cost structures implemented in 2009.

Regional and central costs are up just $2 million in the quarter and $14 million lower than 2008 at constant currency.

We remain on track to sustain the $75 million of savings that we made in 2009.

Looking now at the pipeline, little has changed in the development environment since we last spoke in February. Financing for new hotel developments remains constrained. Where finance is available, it is being channeled towards acquisitions, refinancing and renovation rather than new build development.

This will continue to have an impact on our signings and openings pace, but that said, the strength of our brands and the power of our systems delivery attract owners to IHG, and we continue to sign deals.

We signed 8,160 rooms in the first quarter, as we continue to build our share of the supply pipeline. We now have around 16% of the global new build supply pipeline, compared with just 3% to 4% of the existing supply.

We opened 9,872 rooms or 82 hotels in the quarter, and we are on track to open around 300 hotels this year.

We remain focused on driving quality. And we removed 4,721 rooms in the quarter, but we still expect to remove around 40,000 rooms in total this year, as we complete the Holiday Inn relaunch.

And that relaunch remains our biggest focus, and the momentum is accelerating. Two thirds or 2,300 Holiday Inn hotels globally are now operating under the new standards. 613 of these hotels were completed this year so far. And in total 86% of hotels have passed the initial stages of the relaunch, compared to the 77% we spoke about in February.

We recently launched a $100 million global advertising campaign -- Stay You -- which is the largest ever for the Holiday Inn brand. And it's an important component in the delivery of the 3% to 7% RevPAR outperformance that we expect from the program once completed.

Relaunched hotels are on average delivering outperformance within this range, and as we gain critical mass, we're seeing the benefits of the program in our RevPAR growth relative to the industry.

In the US in the first quarter, Holiday Inn and Holiday Inn Express outperformed their respective midscale segments by 2.3 and 1.3 percentage points.

So to sum up, the industry is seeing the first signs of recovery as business travelers return to our hotels. The signs are currently clearest in Asia and in the luxury and upper upscale segments globally. We expect to benefit from the return of the business travel in the larger midscale segment as we move through 2010.

It's still early days, we only have a short window of visibility, and key indicators in the wider economy, such as unemployment, are not yet improving. Our midscale bias and fee-based business model has proved itself through the downturn by producing a less volatile and higher-quality income stream than an upper tier hotel operator. The benefits of this were seen last year as we generated cash and protected margin through the downturn.

Throughout the downturn we continued to invest in the things we believe made the biggest difference -- our brands, our scale, our system, our people, and our owners. And as a result, we are in a great position to capitalize on the market upturn and to continue to grow our market share.

So with that, I'll now take your questions. Operator, we'll take questions.

(Operator Instructions). David Loeb.

I just want to make sure I'm doing the math right here. You're still expecting an additional 30,000 openings for the rest of the year, bringing your gross openings to about 40,000. So net for the year, still looking at about flat; is that correct?

Yes. Yes. I think that's right. It's hard to predict exactly, but obviously as we push through the end of the relaunch, we will see a lot of hotels leave. So it will depend a bit on the conversion activity in the market. But what we will have obviously is a much higher quality estate. And I think we have to look at a multiyear program, so we've actually taken out, or will have done, 1200 Holiday Inns, and replaced them with 1500 new ones. So we've got a much -- a big increase in quality, and this year is obviously just -- we're going to be broadly flat as we finish the program.

And on that score -- because I think that's a very good point -- can you just give us a little bit of an update on the RevPAR premium for the relaunched hotels over the hotels that have not been relaunched? I know that's a number that Andy has cited in the past.

Yes. We talked about the 3% to 7%, and we are certainly well into that range. Obviously it varies a bit as they roll through in different countries, but we are well in that range.

As I'm looking at the fee stream then, as you send 40,000 rooms out of the system, it seems like the remaining hotels are going to be contributing 3% to 7% more fees than the ones that -- than they had prior to relaunch. So it sounds like this is still a pretty big net positive, even in the short term, and that if --

I think over time it will be. Don't forget that we -- when we talk about 3% to 7%, we are (technical difficulty) [talking] about hotels that have had some opportunity to ramp up. So it will take time to work through the whole system.

But yes, absolutely. The objective of the program was to keep what was our core business relevant, and one needs to invest in one's core business, and ultimately to drive RevPAR faster, above the market, and that's what we have been doing. So I think you will definitely see it over time.

And one more on the pipeline, if I can. I was very impressed with the numbers on the global supply pipeline, that you were 16% of the global supply pipeline, with just 3% of the global existing supply. Clearly your openings are faster than you are adding hotels to the pipeline now. Is that likely to stay that way until we see a better development financing market? When do you think that might be -- might level off a bit?

No, I think it will. I wish I could tell you it was going to level off. I think we are certainly seeing the financing market is still tight and there are no immediate signs of that changing.

So I think a couple of points probably to make is, one, probably the deals that we are signing are better quality deals than we were signing maybe a couple of years ago, because if you are actually signing a deal today, you're an experienced operator and you're very certain that you can get the funding or already have the funding.

I think the second thing is that we've started to see a small uptick in conversion activity, definitely a lot of conversations. But that again will be helped when there's more transaction activity when there is change of ownership and so on. So that will help.

And of course, you know the equation as well as I do. As supply growth slows, if demand is still growing, then we will definitely see relatively stronger RevPAR performance. So there is an equation there. If there's new supply and new builds, we would get more than our fair share of it. If there isn't, then effectively we are going to have to put the demand through our existing hotels.

That makes perfect sense. I have more, but I'll let other people get in.

Thanks David.

Harry Curtis. (Operator Instructions).

Quick question. Kind of following up on the last train of thought, so if you could give us a sense of -- as you pull 40,000 rooms out of the system and put 40,000 rooms into the system, they are not equivalent rooms and they are not equivalent -- aren't most of the ones coming out franchised hotels, older, less productive franchise hotels, and you're replacing them with sparkling new hotel rooms that not only have a management fee -- or a royalty fee but also a management fee? What is -- can you give us a sense of what the economic differential or impact is to you?

Well, if you look across the piece, I think in the US that's exactly right. We are effectively taking out older hotels -- bigger, older hotels and adding smaller, new hotels. That's certainly true.

But within that 40,000 we've also got a bunch of openings in other parts of the world, which are going -- more likely to be managed in the Middle East and in Asia. I think, as I said on the call, we'll open more than 40 hotels in Asia this year. So you've got a mixture of types of hotels, RevPAR, and obviously as you know, a new hotel takes time to ramp up. So you don't get an instant replacement. They are not literally market for market chronologically exactly like that.

But over time -- I think the logic of David's question and where you're coming from is that we are going to have better rooms, newer hotels, and we are clearly going to more than replace the fees that we lose. That's really the logic of what we've been doing.

Is there any way that you can quantify the notion of you generating more than you lose from the point of view of if you lose $1 of operating profit from the hotel rooms that you're closing, are you gaining at least -- or perhaps over a two-year period, are you gaining $2 of operating profit, or $3?

No, it won't be that sort of multiple. If you think about the RevPAR uplift that we are looking at, and a hotel takes anywhere between 12 and 36 months to ramp up, you can sort of look at it that way.

Now I think obviously over time we've got a more attractive portfolio and more attractive brand. The big, $100 million advertising relaunch, that's all about attracting guests as well as attracting owners. So over time we should be increasing our share of the marketplace, and we should be increasing the performance.

But you won't get anything like a 1 to 2. It won't go from 1 to 2 overnight. What it will go is from 1 to some sort of RevPAR uplift on top of that as the hotels ramp up. Effectively you can sort of see it happening already in our reported Americas numbers, which is what we referred [just ahead] on the program.

Shifting gears to the HBT payment, if you see continued improvement in the domestic market, how much additional cash flow will go to HBT in 2010?

It's hard to predict exactly. But if you look, we have the $65 million provision, we effectively charged $20 million to it this quarter, as disclosed in the numbers. So I think it's almost anybody's guess, so it's your view on RevPAR what we'll burn through this year. But it's going to end of 2010, some way into 2011. At this sort of rate we'll burn through it. If RevPAR recovers quicker, then it will take longer. But the maximum cash outflow that you'll see is effectively now an additional $45 million, so it's not that material to the Group.

How much would RevPAR have to increase to stem that negative use of cash?

Well, if you look at how far RevPAR has come down, it's got to go back to where it was in sort of 2008 really. So it varies a bit by brand, but you're talking about double-digit growth in RevPAR for that to happen.

And I think the reason -- under IFRS accounting the reason we had to provide was because it was deemed to be an onerous lease, because in the time frame we were looking at, it didn't look like it was going to reverse. Now, at some point obviously -- and we -- we talk anyway regularly with HBT, but at some point we will get to the end of the guarantee payments and there will be a discussion with them as to where we go from there. But our liability and our obligation is effectively what we have provided.

So as a practical matter, it's probably reasonable to assume that the remaining $45 million will be paid over some reasonable period of 12 to 18 months.

Yes. Yes. (multiple speakers) I think that's a fair assumption.

That's what I was getting at, thank you.

Patrick Scholes. (Operator Instructions).

A question on the new builds coming into your system. When you talk to the owners of these properties, primarily where are they getting -- what are the sources for their financing, their lending? And what type of loan to values or LTVs are these new builds getting? Thank you.

I think (inaudible) the very specific new builds, but if we just talk generally (multiple speakers) what you're talking about generally is you're 50% to 60%, rather than 75% to 80%, in terms of loan-to-value. And of course it's loan-to-value, not loan to build cost. So there are quite tough views on that.

I think other sources, they're -- some of the owners have sort of [widely corporate] resources, some of them have family resources, and they have additional hotels that generate cash flow. So there's a bunch of ways they get the cash. But obviously for a lot of what we are adding in America, those are smaller hotels that are owned by individuals or small family businesses. It's not like high-end hotels that historically were very high LTV, which is how these things are still getting financed.

Outside America, particularly again in Middle East and Asia, then there is much more normal financing available, and we've got a mixture there of corporates and high net worth individuals. So there really isn't a capital constraint at all, once you get into the east, compared say to continental Europe and definitely the US.

Have you -- focused on the Americas, have you noticed any improvement in the lending environment say over the last three months?

Not really, no.

Thank you.

David Loeb.

Just wanted to come back to owned real estate for a minute. I think on the UK call you had given some RevPAR trends for the four major market owned hotels. Can you just repeat those?

I did actually.

I thought you said something about double-digit growth in New York and London and Hong Kong. (multiple speakers)

In the owned hotels, that's exactly right. I didn't go -- I didn't break it down from that.

So it was double-digit in each of those markets?

Yes, yes. But of course they (multiple speakers) yes. And as ever, certainly weak comps in that first quarter -- no question.

So do you think against more difficult comps that those are likely to slow a bit (multiple speakers)

I think there are different dynamics for each of them. I know it's an awkward question when you're looking at sort of modeling it out, but in London our hotel benefited from having The Savoy close and the Four Seasons close, that are right opposite, and we don't know when those are going to open. But clearly when those open, that would have an impact.

So within each market you've got different dynamics. So the hotels are doing well, and they're generally gaining market share. I think it's hard to extrapolate the first quarter out like that for the full year.

And then on asset sales, there are still some assets that are held for sale. What is your thinking now, particularly when there seems to be some excitement among buyers looking for acquisitions?

Oh, just to be clear, from a -- again, an IFRS accounting, none of our assets are held for sale now. It doesn't mean they're not necessarily for sale, but they are not held for sale. So whereas we formerly had them held for sale, we had to take them off from an accounting perspective because they haven't sold.

I think the position is we sold one hotel in the quarter, which was a -- just for a few million dollars, a Holiday Inn in Lexington. So we're pleased to get that done. I think our position is unchanged, really, which is that over time we are likely to sell some or all of the assets over time.

I think if we get an approach now, and we do get -- have conversations with people, that it is a sensible valuation based upon the current hold value and what we think the asset can generate for us, then we will certainly take it seriously.

We are not under any pressure to sell. We financed the balance sheet strongly, and we are under no pressure to do that. I don't think we're -- we are not going to try and play the cycle, we're not going to try and call the next peak of the market, we are not going to try and necessarily earn what we would've earned on a sale at the peak in '07, but we are going -- we would look for a sensible valuation, and if we realize cash, then probably in the short term we would pay down debt. But we would look to reinvest it back in the business.

But nothing imminent. But I certainly wouldn't rule it out.

I guess I asked that very poorly. I'm really trying to figure out why for accounting purposes they came out of assets held for sale, and are they just as available -- are you just as interested as you were in previous quarters?

Yes. Yes, we are. Because under IFRS accounting rules, effectively if you're not in effect confident that you'll sell something over the next 12 months, you can't hold it for sale. And when it's held for sale, it doesn't get depreciated. So if you're not confident, you have to put it back and start depreciating it again.

It's all accounting. And we obviously just have to abide by the rules. And obviously when we effectively remove them from being held for sale, they've been held for sale for more than 12 months, and one couldn't predict, because of the financing environment and the accompanying environment that they would be sold quickly. So that was the only reason. It's not that we changed our mind.

But clearly there aren't many transactions going on right now. And I think you've got an interesting dynamic where there's actually quite a lot of demand for assets but very little supply. But maybe no meeting of minds on valuation. So when that changes and maybe when the banks become a little more helpful, we might see a few transactions, and we may well participate. But nothing imminent.

So the right way to look at your owned estate over the long term is that of the 16, really only four, maybe five, are long-term keepers, and the rest you will look at opportunities to sell?

Yes, I think -- no, I think even the big four hotels -- rule out Boston. That's a financed lease, that's not really sellable. Even the big hotels, we said that as long as they are trading at a level that they ought to be, we have additional representation in the market and we can get good value for them, then we would consider selling them. We may well re- -- again, reinvest our money back into the business, but we certainly would consider selling them.

Right now obviously the conditions aren't great for that. But I wouldn't say never.

But in a better -- so that means even in a -- even New York for example, with the new hotel opening, the new InterContinental at Times Square opening, you'd be open to selling Barclay in a better environment where you could get a great price for that?

Absolutely. Yes. And thanks for reminding me, the new InterContinental opens in New York in July, I think it is, so we are looking forward to that, and that certainly is -- was part of the plan that we set out a few years ago to add hotels in the markets. We signed another deal in London. That won't open until 2011, I think. It's a smaller one. But we are continuing to look to do that.

That's great, thank you very much.

No further reaction so far.

Okay. Well, thank you Patricia. If there's no more questions, we will call it a day. Thank you everybody. Appreciate you listening in and the questions. And speak to you again soon.

Thank you very much to all of you for joining today's conference call. You may now disconnect your line.