InterContinental Hotels Group PLC (IHG) 2010 Q2 法說會逐字稿

Good morning or good afternoon. Thank you for standing by. At this time, all participants are in listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will turn the meeting over to Ms. Heather Wood. Please go ahead. Thank you.

Good morning, everyone. As always before we get into the detail of the results, I need to remind you that, 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 turn the call over to IHG's Chief Executive, Andy Cosslett.

Good morning, everybody. Thank you for joining us. I'm here in London today with Richard Solomons, our Chief Financial Officer and head of Commercial Development. I'm going to start by making the usual few comments on the results and the general trading environment before we then open the call up to your questions.

Well, obviously we've seen a remarkable improvement in trading through the first half of this year. Global RevPAR has grown by 0.2% in the first quarter, and that turned into growth of 7.4% in the second. We have now, therefore, clearly got signs of recovery visible.

Global occupancy trends have been in positive territory for seven straight months now, and the recovery started in Asia has since spread to most of Europe and recently to the US. The business traveler has clearly returned with both group and our corporate key account business up some 10% in the half. Rates, too, have started stabilizing, and in some markets but not all, they are rising as the higher mix of business travel feeds through. Group occupancy is still 4 to 5 points lower than 2007, and we do need to see this gap close before the recovery in rates really takes hold.

Just looking regionally, in the US all our brands outperformed their segments and RevPAR in the Americas as a whole grew 2.2% in the half and 5.8% in Q2. Our mid-scale brands continued to outperform the market even though they already hold significant premiums.

Holiday Inn outperformed by 1.4 percentage points and Express by 0.4 percentage points with both brands reporting RevPAR growth compared to their market segments, which were in decline and flat, respectively. This means, of course, that we are continuing to deliver better relative returns to hotel owners.

The Holiday Inn relaunch is now 75% complete, and the outperformance of the relaunched hotels continues to track towards the top end of our original estimate. To support this initiative from owners has been really very encouraging, and their commitment to the program despite their cash flow challenges speaks volumes for the residual power of the brand and the goodwill that it continues to enjoy with the owner community.

RevPAR in our Europe, Middle East and Africa region grew 4% in the half and 7.2% in the second quarter. Good growth across transcontinental Europe and in London was offset by declines in the UK region and in the Middle East. In the UK we outperformed the industry in London but did not in the regions, where lower-rate business contracted during the downturn is giving us occupancy at the moment but now at the expense of rate.

Asia was the strongest region for our business with RevPAR growth of 13% in the half and 16.1% in Q2. China was the standout with 29.4% RevPAR growth, driven by strong domestic business demand combined with the boost in Shanghai from the Expo that's on there. All of this drove total group RevPAR growth in the half of 4%, which, together with 4% rooms growth, drove our first-half revenues up 6% and operating profits up 25%.

I'm stating these figures on a constant-currency basis and excluding $3 million of significant liquidated damages from the prior year. On the same basis and excluding the impact of HPT in both years, profits were up 13%.

Even though trading is clearly now improving, we are continuing to keep a sharp eye on our costs, retaining the internal disciplines that we put in place over the last two years. Regional and central costs were up $9 million in the half on a constant currency basis, and this uplift was entirely due to short-term incentive compensation costs. We remain on track to lock in the $75 million of sustainable savings that we made in 2009. Our focus on cash has helped us grow margins in our core fee business, which are up 3 percentage points to 37% on an underlying basis since 2008.

After slightly higher interest and tax, EPS increased 13% to $0.47. Over this period, we have been focused very clearly on maximizing cash and keeping tight control of capital expenditure. Free cash flow more than doubled in the half, and net debt reduced by $100 million to around $1 billion. Since the period end, net debt has reduced further with the sale of the InterContinental Buckhead for $105 million. This is $23 million above book value, and with the proceeds we negotiated a 40-year valuable management agreement with a great new partner, Pebblebrook. This is really a great example of our capital strategy in action. We built the hotel in Buckhead in 2004 as a much-needed flagship for the InterContinental brand in the US. Since its opening we signed 21 InterContinental deals into our development pipeline in the Americas and have now secured a sale with a really good long-term partner with whom we can feel we can do a lot more.

We remain committed to this capital strategy. Now, as you know, today we have placed great store in the retention of our own flagship InterContinental Hotels in New York, Paris, London and Hong Kong. But, as the InterContinental brand gets stronger and we have secondary distribution in these key gateway cities, we will have the opportunity to reassess ownership of these core assets. Now, we have no pressure to move hastily here and we have got nothing to announce imminently, but it's right that we have reaffirm to you consistently our intentions on this capital strategy and to make further progress against it over the next year or two.

Turning to our pipeline, little has changed in the development environment since we last spoke in May. Financing for new hotel developments remains constrained, and where finance is available it's being channeled towards acquisitions, refinancing and renovation rather than two new builds. This continues to have an impact on our signings and opening space. That said, the strength of our brands and the power of our system delivery continues to attract owners to IHG, and we are still signing a lot of deals, nearly one a day and more than anyone else. We signed 19,000-plus rooms in the half, or 130 hotels. We now enjoy around 17% of the global new build supply pipeline, and that compares, obviously, with just 3% of the open supply.

We opened 19,000 rooms in the half for 148 hotels. The quality of all these hotels is excellent, and each one of them will help us in our drive to bolster the image of our brands into the future. To further drive the quality image of our brands, we continued with our removal program, removing some 9000 rooms in the half. We still expect to remove around 40,000 rooms in total this year as we complete the Holiday Inn relaunch. Overall, we are expecting modest system growth this year and next as the supply environment tightens and the Holiday Inn relaunch finally completes.

Now, the flipside of this lower supply group, of course, is a boost to RevPAR, and with all the efforts that we've put into our brands over recent years, we feel we are very well positioned to make the most of this competitively. So the outlook is much more positive now than it was back in May, and market momentum appears to be well-established. There are some risks and uncertainties in the global economy, and we do have a continued lack of visibility as people continue to book late. So we are still not prepared to be wildly optimistic. But with July RevPAR growth of 8%, the recent trends do look set to continue.

The brand revitalization and quality journey we have been on positions us very well to outperform the competition and to continue to drive revenues faster than the industry in general. We're looking hard now for opportunities to drive the business even faster going forward and are ready to invest behind growth and development where we can find those opportunities.

Finally, with trading improving and with growing confidence in the prospects of the business, the Board has decided to increase the interim dividend by 5%.

That's a summary of our position. I'm sure you've all read the documents. Richard and I would now be more than happy to take any questions you may have. Operator, can we open the line, please?

(Operator instructions) Patrick Scholes.

Just a quick question here -- when I think about calculating your free cash flow, are there any upcoming renovations at any of your own properties that one should be aware of?

No, Patrick -- it's Richard here, hi; no, not this year. I think, obviously, in those big hotels, there is always some capital required, but nothing out of the ordinary now. I think if you look at capital, we're talking about $80 million of maintenance for the year. [There is] quite a lot of that to get away in the second half, so we'll see. But a lot of it relates to a series of IT budgets that we've initiated, so that will be spread over the rest of this year.

Okay, good. And while I think about it, I wonder if you could just give me an update on your sense of your use and priorities for your free cash flow. What are your current thoughts on that?

Well, we've been focused on just managing our debt position, clearly, over the last couple of years, Patrick, and with the controls we've got in place, we can expect good cash flow generation in the coming years. We're looking very hard, as I said in the notes. I think we'd like to find ways of investing some of this back into the business. We've built this great platform now. We've restored a lot of brands into the health that we want them to be in, and we know we can add more. We've got a relatively small brand portfolio compared to some of our major competitors. We think there might be opportunities there to expand on that over the coming months or years. And we're looking, at the moment about how we might go about that. There may be other things we want to do.

So now that we are climbing out of the trough, we are obviously starting to cast our eyes onto the horizons and thinking about that, but there are three uses. We've always said we can either invest in the business, we can drop debt or we can return it to the shareholders. All of those options remain on the table.

(Operator instructions) Andrew Whitman.

I just wanted to talk a little bit more about the pipeline. Basically, it looks like it has held pretty steady here; I just wanted to know what your thoughts are. Going forward with trends picking up kind of globally, and especially in Asia, what do you think the pipeline can do over the next year, year and a half? Do you think that more deals will start getting signed, or do you feel like the recent contraction continues? What's just your overall sense there?

I think -- obviously hard to call because we are so dependent on the financing climate, which at the moment in the states, as you all know, it's very, very tough still. But I think it's important to note that so far this year our signings in Europe, Middle East and Africa and in Asia are holding up pretty well. And, if anything, our outlook in those two regions is probably more positive in the second half. So I think we've got important parts of the world which are picking up a bit. And obviously, China now increasingly takes a bigger part of our pipeline, and as we continue to staff up there and put more resources in, we would be optimistic of signing more deals going forward.

So, yes, I think, in that respect, we should see some decent signings pace. The Americas is where we are off the pace, clearly, because the climate is not conducive. We are getting more than, I think, our fair share as the forward supply share information would tell us. But it's remaining a very difficult market. And we know -- and we've been speaking to owners recently about the difficulty of them getting re-financing of their current loans at commercially sensible terms, never mind new projects being funded. And, we also know that there's one or two lenders in the market who are now underwriting deals, but only for a very small number of hotel companies and some specifically saying no new builds. So it is tough, and the Americas is the toughest place of all, by what we can see. And we'd obviously hope that that starts to thaw out as we turn into 2011 and the banks feel more confident to lend.

The attrition in the pipeline has stepped up. It used to be around 8% to 10%. I think last year, it was 13%. The pace is about that this year. And these, again, these are typically good projects, but where the owner has decided that the financing situation is not conducive and has made other arrangements. But to remind you to remove yourself from our pipeline, there is a non-refundable deposit at stake which is lost to them.

So it's painful, and therefore we think our pipeline is probably more robust than most. So, hard to say. Clearly, it's coming down because we are opening up more at the moment than we are putting back in. But we've still got a pipeline that's twice the size of anybody else. And our share is greater than anybody else's. So whatever is out there, we will be taking a good proportion of.

Do you feel like your capital is well used to today to help support that pipeline, maybe more than it was two years ago? And, are you finding opportunities and terms that make sense with future owners that want to do more deals?

We are only doing minimal amounts of capital inducement and support for these deals. In the areas where we are getting good, strong traction on deal pace in Asia, frankly, they don't need our capital. China is the standout example of that. We can get as many deals as we like without any capital involvement from ourselves. In other parts of the world there are a few projects where we've supported, to some degree, but really a lot less than we've had in previous years and certainly three or four years ago. We continue to review it. We think our model operates without tremendous amounts of capital injection from our side. And yes, that's where we are.

Richard, anything to add on it?

Yes. No; I think there always are opportunities. We're always a bit nervous when the brands come in and fund deals that the capital markets or owners aren't prepared to; it can be dangerous. So we are cautious with it. But in certain circumstances, if you've got very important locations, then it is something we'll look at. But as Andy said, we haven't seen a big step up in that at this point.

Okay, I think that's it for me, thank you.

Thank you, we have no further questions.

Okay. Well, thanks, everybody. We're very pleased you could come on the line. We know we're the last in the series of reports, but I hope that is giving you some insight into our business and how it's faring. And we look forward to catching up with you on the road very soon. Thanks very much.

Thank you.