InterContinental Hotels Group PLC (IHG) 2010 Q3 法說會逐字稿

Good morning and good afternoon, thank you for standing by. At this time all participants are in a 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. Now I will turn the meeting over to Ms. Heather Wood. Please go ahead.

Hi, good morning, everyone. This is Heather Wood, I'm head of investor relations. As always, before we start with a discussion of our 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 Financial Officer and Head of Commercial Development, Richard Solomons.

Thank you, Heather. So I'll start by making a few remarks on the third quarter results and the trading environment as we see it, and then we'll open up the call for your questions.

So the RevPAR recovery which started in March of this year gained momentum through the third quarter. Global RevPAR growth of 0.2% in the first quarter improved to growth of 7.4% in the second and 8.1% in the third, driven by resilient summer leisure travel and strong business demand. Room nights booked by corporate transient business were up nearly 18% in the US year to date. Group nights were up 11%.

The recovery, which started initially in Asia-Pacific, is now well established globally with nearly 10% RevPAR growth across the Europe, Middle East and Africa region and over 6% growth in the Americas. For the first time since the first quarter of 2009, we had global rate growth across the quarter. Rates are now growing in all three regions, benefiting from the higher mix of business travel and some real rate increases. The rate feature is strongest in Asia-Pacific, where rates are up 4% in the quarter.

Looking at Europe and the UK, nearly two-thirds of our managed Holiday Inns have raised retail rates in the third quarter. In the US in the third quarter, rate turned positive in around half of our markets compared to less than 10% in the first quarter as we pushed to improve mix in rate. We also introduced a new tool, price optimization, to assist our hotels' rate decisions. This is now in over 1700 hotels across the Americas and has been proven to deliver a significant RevPAR premium.

As we predicted, the strength in the luxury and upscale segments earlier in the year is now filtering down to the mid-scale. The rate of RevPAR growth for our mid-scale Holiday Inn brands in the US and UK almost doubled from the second to the third quarter. October RevPAR growth of 8.1% demonstrates continued momentum with rate growth of 1.9 percentage points, and the outlook for rate growth is positive.

Our group occupancy rates of 68% are getting close to our previous peak of 72% back in 2007, having finished 2009 at below 60%. Our hotels are increasingly full midweek, providing more opportunities to drive rates up. Looking into November, nearly 90% of our US hotels have raised their best retail rates.

Of course, our forward visibility remains limited. However, it does seem that the business traveler is back as companies look to drive their top lines. There's nothing in our forward indicators at this stage that suggest this is going to change in the near future, and while industry supply growth forecasts for 2011 and 2012 remain muted, the outlook is favorable.

Turning now to financial performance and focusing on constant currency figures, you can see that franchise hotel revenue grew 10% and operating profit grew 8% through RevPAR growth of 7% and rooms growth of 2%. Year-to-date profits in the franchise business are up 6% and margins are up almost 1.5 percentage points. Managed hotel revenue grew 20%, and operating profit grew 9% excluding the $12 million guarantee payment to one owner, HPT, in 2009, and a small payment in EMEA this quarter.

On a year-to-date basis, excluding payments to HPT in 2009, profits are up 14%. Across the group the percentage of hotels paying incentive fees is slowly rising and is now around half, a figure which rises to over 80% in Asia-Pacific. In our owned hotels, strong RevPAR growth in London, Paris, Hong Kong and New York drove operating profit growth of over 22% excluding the impact of the disposal of the InterContinental Buckhead Atlanta. Year-to-date operating profit is up 30%, and margins are up almost 3 percentage points as hotels retain the cost discipline from last year and stay focused on revenue conversion.

This strong performance across each business on revenues, profits and margins is somewhere ahead of our expectations at the start of this year, which has implications for performance-based incentive costs after paying no annual bonus at all to our staff last year. For the full year, these are now expected to be higher than we anticipated in August by around $10 million, but this figure will ultimately, of course, depend on fourth-quarter performance.

Remember that we paid no annual bonus last year. Over half of our regional and central costs are people related, and these costs relate to over 5200 people working in our offices around the world. Excluding the impact of these incentive costs, regional and central costs would be flat on 2009 as we protect the sustainable savings that we made last year.

So turning now to the pipeline, the strength of our system and brands continues to attract new owners to IHG. We signed 88 hotels, nearly 14,000 rooms in the quarter, more than each of our major public competitors, as we continue to drive up in our share of the global new build pipeline. Financing for new hotel development remains constrained, and this will continue to impact on our signings and openings pace going forwards with only modest growth in system size expected this year and next. However, we are seeing some early indicators of more positive trends. Year to date we've now signed 218 hotels, nearly 33,000 rooms. Signings outside the US are actually in line with last year's levels.

Signs of life in the hotel transaction markets are driving an increasing number of inquiries for rebranding, and we are focusing our resources and efforts towards this with some success. The mix of rebranding activity is starting to rise in the US with 40% of all signings year to date being rebrandings compared to 35% at this time last year. We continued to drive up the overall quality of the hotels in our system. We opened 51 hotels, or 7149 rooms in the quarter, and year to date we have opened nearly 200 hotels, over 26,000 rooms.

By the end of this year we remain confident of opening close to 40,000 rooms and removing some 35,000 as we head into the final stages of the Holiday Inn relaunch. This means that 20,000 rooms will exit our system in the fourth quarter, 18,000 of which will come out of the Americas franchise business. This will, of course, have an impact on our comparators for next year, as we will have received virtually a full year's royalty stream from these hotels in 2010. Over 80% of hotels worldwide are operating under the new relaunch standards. Over the course of the three-year program we will have opened over 700 new Holiday Inn brand family hotels, exited some 635 underperforming hotels, and our owners will have invested in the remaining 2500 hotels to bring them up to the new standards. This complete refresh of the Holiday Inn system is delivering results. Over 850 hotels in the US that have been relaunched for more than one year, are delivering 8% RevPAR growth, almost 6 percentage points ahead of the non-relaunched hotels. These hotels stood at significant RevPAR premiums to their industry segments, much of which is occupancy driven. In October alone, Holiday Inn occupancy of 64% in the US compared to just 55% for the segment as a whole.

I recently spent three days with our Americas region owners and franchisees, and the feedback on the relaunch is overwhelmingly positive.

So finally, turning to the balance sheet, net debt at the end of September stands at $801 million. This represents a reduction of almost $300 million since the start of this year, demonstrating our strong free cash flow generation and the ability to sell assets at attractive valuations, most notably the InterContinental Atlanta, which we sold for $105 million, 28% above book value.

Through 2010 there has been a growing appetite around the world from real estate investors in premium hotel assets. A small but increasing number of hotels are changing hands at attractive valuations, and more seem to be coming to the market. We remain committed to releasing significant sums of capital over the coming years from our remaining hotel real estate portfolio. The four flagship hotels in New York, Hong Kong, Paris and London have a combined book value of $1.2 billion. These hotels would attract very strong investor interest if marketed, and our expectation is that together they would generate a considerable premium to book value if sold.

Since the end of 2008 we have followed a deliberate strategy to focus on our cash generation as bank lending tightened and the economy struggled through a recession, allowing us to reduce debt by over $500 million and leaving us in a strong financial decision. Our level of debt is now low. The business continues to generate strong operating cash flows, and we expect over time to release considerable value from our owned hotels. This will give us substantial resources to invest behind our first priority of growing the business, where the returns are attractive, and where cash is deemed surplus we will return it to shareholders, as we have in the past.

Though our visibility remains limited, the outlook appears positive. Returning business confidence and corporate profitability are driving growth in demand for travel. Industry forecasts of lower supply growth will support RevPAR growth, and the brand revitalization and quality journey we have been on positions all of our brands well to outperform the competition and to drive a rising share of overall industry revenues.

We remain focused on building the strength of our system, growing revenues faster than the industry and investing behind growth whilst driving our margins. So thank you. With that, I will now take your questions. Operator?

(Operator instructions) Harry Curtis.

Just a couple of quick questions -- if you go back to the last recovery, and let's define that as 2004 to 2007, I'm wondering what kind of flow-through you saw at the operating profit line versus the RevPAR line. In the third quarter the operating leverage was closer to 1-to-1, and as I recall in the last recovery it was better than that. Given your cost cutting that you have accomplished over the past couple of years, do you think that you can get there, or are there any structural issues that we're unaware of?

Right. No; I don't have the '04 to '07 numbers in front of me. Obviously, the business was configured a bit differently back then, RevPARs were different, our geographic mix was different. So it would be interesting to go back and have a look; actually, maybe we'll do that.

But no; structurally, I don't think there's anything in the business that will mean it will be different. Clearly, there is some, always, noise in the quarter that one has. So I think the sensitivity we've talked about, which works for the year, doesn't really work in the quarter. But we always said, none of it is going to work in a particular quarter of 1% RevPAR movement to $30 million is the sort of leverage that we have seen through this upturn. And we'll obviously look at that again next year.

But no; we should have decent leverage. Our whole philosophy is about driving operating margins up in the fee business. Take out the [underneaths] for a second and they move a little bit differently. But in the fee business we have been driving margins, we will drive them again this year even with all of the incentive charges, certainly, against 2008. And that's what we are going to be about. So there will be some leverage.

Do you have any -- do you want to hazard a guess as to what that flow-through might look like in the coming couple of years? Is it closer to 1.2 times? Is it 1.5 times?

I've never really looked at it that way. At the moment it's 1%, is $13 million. That's the way I sort of look at it.

You guys, you talk about the generation of excess cash. With your net debt at around $800 million, is any additional debt reduction a priority?

No, not per se. I think, I was obviously very comfortable where we're at, and I think we've always talked consistently, all the years I've been talking I think have moved to position that sort of investment grade for UK PLC is where we are at, which is around 2.5 times or so. So we are obviously below that on (inaudible) 12-months basis. So I think that's sort of done, effectively.

I think the issue then is the balance of reinvesting in the business and driving growth and driving the brand and returning surplus cash to shareholders and the timing of that. So I think, philosophically, we are in the place we've always been. We have returned very large sums of money to shareholders in the past, as you know. And I think we'll obviously talk a bit more about that in the future, but I haven't got any specific update on that today.

When you think about investing in the business, we've thought of some number under $100 million to use for maintenance CapEx and investment in your technology systems. Is that still a reasonable number to use?

Yes; it should be about right. And then that's effectively maintenance being in line with depreciation, so that should hold. We've been below that, actually, this year and last year. So there may be a little bit of catch-up. I actually haven't signed off the final numbers for next year yet, so we are still in the process of that. But broadly over time, that should hold.

And then for growth capital, true growth capital, then we will look to fund that as far as possible other recycling. (multiple speakers) coterminous necessarily, but obviously that has been our philosophy as we've, overall, reduced the capital intensity of the business.

So the last question is, do you see yourself having to invest in specific projects to gain management fees going forward?

I guess it's a great question. I think where our management business is strong, which, unlike our competitors, obviously we don't have a large management business in North America. But in the Middle East and Asia we've invested very, very little, virtually nothing behind growing that management business. And we are very comfortable how that is moving and the sort of fees we are getting. I wouldn't say we would never do it, but all the growth has really been capital free.

And I think what you're seeing from some of our competitors who have maybe been behind us or behind the game in terms of international growth, they have had to put right a lot of money behind to try and play catch-up against those of us who have been there a longer time. I think there will be opportunities, though. We're looking at a couple of things now which aren't massive. So I'm not signaling anything here, but where there are some joint ventures or some owners who may be want us to put a bit of skin in the game, or we can just help them get over a little bit of a hump to drive something meaningful in a particular market or for a particular brand, I think we've done that in the past and we'll look to do that in the future. But what that quantum will be is hard to guess, which is why we try and think about it in terms of, over a time frame, recycling what we've already got in there.

So I think, if you think of the pipeline today, we've got nearly 200,000 rooms in the pipeline. Less than 10, maybe (inaudible) have any of our capital behind them right now. (multiple speakers) that franchise. And I think what we don't want to do is, while we see some opportunity and where we see some high growth, we don't want to miss opportunities because we've got a philosophical objection to investing, because I don't think we have that. But we've got to be for the right reasons, and obviously we are careful to look at the returns we get from it.

[David Loeb].

Richard, there was a perception in the market, at least according to a headline that I saw and from the way your stock traded, that your results missed expectations. Today, do you attribute that just mostly to a misunderstanding of what the G&A charge, particularly related to the LTIP, was?

If you are saying, did I not manage the market very well? That might be a fair comment. But I think on an underlying basis I think the business performed very well. And I think we've seen some accelerating growth. We've seen the (inaudible) moving. We maintained our sustainable cost savings that we talked about, which I think is a creditable performance. And we've seen that continue through until October. I think the issue around the incentive schemes is just to try to highlight just in the preamble. About half of our costs relate to people. And if you think back to where we were at the beginning of the year and where consensus has moved, say, since March, it's up 20%. So we have seen some quite considerable outperformance against market expectations and now our own internal expectations. So yes; we have a bit of an additional accrual against incentives.

And we have quite, I guess, not atypical incentive schemes. We paid, actually, nothing last year because, clearly, we underperformed expectations. We are outperforming this year, so we are looking to pay bonuses. But what I would say is the annual bonus goes to over 5000 people in the Company, and obviously the numbers are some way ahead. So that has really been, I think I'm the only difference against what our expectations were.

And was that about $15 million this quarter? Was that the right number?

It was about $10 million. What we had -- it's a bit noisy in the numbers because of the quarter. So last year we had a $10 million release on our long-term scheme. This year we had a $15 million charge in our long-term scheme, which was catch-up. And then the additional accrual, effectively, that maybe we haven't flagged, is the $10 million on the annual bonus.

And that $10 million, you are saying, is likely to come n the fourth quarter?

No. We have accrued it now in the third quarter, in which it's a catch-up here. And for the full year, I think it's important to look at it for the full year, because, again, it's a particularly noisy quarter for us because of what happened last year, is that we are in line to achieve our sustainable savings against 2009. And certainly, in terms of the overall picture, we aren't expecting consensus views to change particularly.

So there's not an additional charge particularly expected in the fourth quarter at this point?

Not in the fourth quarter, no. (Multiple speakers) caught up in the third quarter.

That helps. That certainly makes it clear because it looked like the underlying performance, as you said, was actually very good --

Yes.

-- and perhaps a little in excess of consensus.

Yes, we were pleased with it. I think when you look across the piece, you look at the way RevPAR has grown, and I think, again, I've commented on it. But I think we always said that we thought mid-scale performance would lag behind the upscale and luxury, which obviously fell much further and had much further to come back, and it's good to see that. And, obviously, that's a big piece of our business, so that is certainly helping us.

Can you talk a little bit about RevPAR penetration across the brand portfolio? Are you seeing that increase, in particular -- maybe you could start with Holiday Inn post relaunch, what kind of RevPAR penetration changes you are seeing.

It varies, as you might expect, I'm sure you know, by brand, by markets. What I think we are seeing with Holiday Inn, obviously, is significant outperformance of the relaunched hotels which are touched on, which is encouraging. And obviously there's some underperformance from the non-relaunched, which obviously is one of the things we expected to see from the program.

One of the issues you get at this point in the cycle is that where occupancy is rising, as I pointed out, we already have significantly higher occupancy in this segment. Although we've continued to grow RevPAR very well against the segment I think, as was pointed out on the call this morning, some people have performed, from a percentage perspective, slightly higher than Holiday Inn. And the reason for that is, where we are already running effectively full at some days of the week, that some of the weaker brands that may be running very low occupancies and certainly much lower rate will pick up some of that overflow. And hence, their actual percentage RevPAR off a much smaller base can be a little higher in quarter on quarter. But when you look back, certainly, over the two years, then the Holiday Inn brand has actually continued to gain share. And clearly, our objective is it continues to do that going forward. You don't just necessarily see that every single quarter.

In most markets, in most parts of the world that we are maintaining or growing our share, and that is something we look at, as you'd expect, very seriously, our scale and given what we do with the brands, you would expect that.

That makes sense. Your peer public brand companies have given a view on where they think RevPAR globally across their portfolio is likely to go. Can you give us some view on where you think 2011 RevPAR will be?

We just don't give guidance, typically, for UK businesses. I think the market expectation, if you look at Smith Travel or PWC or PKF, is between 5% and 7% for the US next year. There isn't any really good guidance globally. I think Marriott came out at 6% to 8%, we came out at (inaudible) of 7% to 9%. You've got mix differences, you've got geographic differences. But I certainly would expect that we will, at worst, maintain share next year. And obviously, we will look to grow it. So I don't give formal guidance, but I think a lot of people are broadly in roughly the same place for expectations for next year. But we'll see what happens.

That's fair. Last one, I promise -- how about corporate rate negotiations? Can you give us a little color on what that dynamic is like and what your expectations are for how that process unfolds over the next, I guess, weeks?

Yes. It's an interesting one. I think for us, we think it's slightly early to be very specific about what we're seeing in the corporate rate negotiations because actually, for us, it's relatively early days, and though this a big operation with RFPs going around the place and a lot having been agreed. So I'm not quite sure how all this is going to be quite so confident.

I think a couple of things I would pull out. Obviously, as occupancy rises and as supply growth slows -- and we are clearly in a good environment for driving rate growth. We know that. Corporate buyers know that and it will become the usual dance. We are actually moving reasonably aggressive to put our corporate accounts onto dynamic pricing, which obviously links much more directly to how the markets and the hotels are performing. By the end of this year we expect to have around 20% on that, and we'll push more for that next year.

But almost more importantly, as a brand owner, as somebody -- an organization running the whole system, what we have been very focused on this year and we've seen quite a lot of success in is actually gaining share from our big accounts as opposed to necessarily just pushing rate. Now, they are not mutually exclusive, but if we look at our top 25 accounts, we see year to date room nights up about 30% which we estimate is quite reasonable, at least a point if not more of share gain. So if we look across our system, that was an important thing. So it is a balance between getting volume at a good rate and driving rate for its own sake, particularly when you've got a system of our size.

So I think we remain reasonably positive about next year, but hard to be definitive. A bit of a long answer, but that gives you maybe some color.

No; it's actually a very good answer. And by the way, I don't think your peers are confident, but I think they are, rather, negotiating over the (multiple speakers).

There may be some of that. We prefer to do it one-on-one.

Patrick Scholes.

A question here for you -- in light of the incentive plan charge in the third quarter, how should we think about the run rate of your central cost for next year?

I think we have basically managed inflation out for the last couple of years. So I think, looking ahead, we'll see. It wouldn't be unreasonable to assume there might be some inflation or some growth in the numbers. I think, clearly what we, as with any company, we budget these costs at effectively a target payout. And this is just a slightly extreme year because of the movement against nothing last year and so on. So the $10 million, which is a sort of almost payment over and above a target level, will drop out, and then we will obviously look to manage our costs.

But the way we think about it, which I think is right in as far as relatively fast moving environment where we've got some fast growth markets, is really to focus on driving up corporate margin. So we will make sure that our costs grow slower than our revenues do so we can drive our margin up. And that's how we're looking at it. We can talk in more detail maybe (multiple speakers).

And then, just to make sure I'm thinking about this correctly, a quick follow-up question, so it would we reasonable to expect that there wouldn't be a similar $10 million charge in the third quarter of next year, assuming that it looks like consensus EBIT numbers for next year imply about a 10% to 15% growth rate so that that's correct, that we should not model in basically $10 million for third quarter next year?

Yes, I think that's probably fair. I would look at the year picture and look at sort of normal facing across the year.

And would you characterize this charge as sort of one-time in nature, or is this something we should be on the outlook or looking for as possibly reoccurring if your stock earnings performance continues to outperform like it had done over the last year?

At the risk of making a dangerous comment (multiple speakers) I think that we see in our business bonuses go up and down. I think the point to be clear about is that when we effectively set our target, we have come of the year, obviously, of severely declining profits and expectations that trading was going to remain very, very tough. And, if you remember when all of us (inaudible) would have announced our results in February, nobody was predicting it was going to be a stellar year. By the time we did Q1, everybody was quite positive.

So you have to look back at the base we are from and the leverage that we've had coming down in 2009 and coming back in 2010. And you are not going to get that sort of leverage in a normal year. So it's not a one-off in the sense it could never happen again because like any bonus scheme they're structured that way. But I think we'll obviously be having very different expectations for the out term for 2011 than we had, effectively, when we went into 2010.

Stocks tripling in a year and a half or two years is not usual.

No, no, but it's not driven by the stock price; this is annual bonus driven by EBIT.

By the EBIT; correct?

Yes. Yes. And I think, you know, without going on about it, I think for us, because people cost quite a big chunk of our P&L because of the nature of the particular franchise operation. It does tend to distort a little bit. But it is what it is, and we will see more normal behavior in future years.

Okay, very good, I appreciate the detailed color.

(Operator instructions).

Okay, thank you, operator. Thank you, everybody. I appreciate the questions, appreciate the time. And obviously, if you have any more questions or issues, give us a call. Thank you very much.

Thank you for participating in today's conference call. At this time you may disconnect the lines. Thank you.