InterContinental Hotels Group PLC (IHG) 2011 Q2 法說會逐字稿

Good morning, good afternoon, thank you for standing by. At this time all participants are in a listen-only mode. After the presentation we'll conduct a Q&A 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 meaning over to Heather Wood. Please go ahead.

Good morning, everyone; this is Heather Wood, Head of Investor Relations for IHG. I'm joined this morning by Richard Solomons, our Chief Executive. Before I hand over to him, however, for a review of our 2011 first-half results, I do need to remind you that in the following discussions 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 statement. I will now turn the call over to Richard Solomons.

Thanks, Heather, and good morning, everyone. I'm delighted to be on this call today as Chief Executive of IHG. Although as our new CFO, Tom Singer, doesn't join us until 26th of September, I'll be wearing both my CEO and CFO hats today.

The strong result in the first half, which has come in ahead of expectations, demonstrates how the work we've been doing to make our brands more attractive to guests continues to bear fruit, driving global constant currency RevPAR up 6.7%. This would have been around 1 percentage point higher excluding the impact from Egypt, Bahrain and Japan.

As total industry room demand once again broke new records in the US, confidence continued to build. Absolute occupancy levels have improved along with a slowdown in new supply growth such that we are seeing an increasing proportion of RevPAR driven by rate growth, 2.1 percentage points in the first half including 2.4% in the second quarter.

Our brands are also out-performing the competition. In our largest market, the US, our total first-half RevPAR growth of 10.1% out-performed the US industry at 8.5%. In China, as expected, RevPAR growth slowed to 8% in quarter two. Excluding Shanghai, quarter two RevPAR grew 16%, underlining both the strength of our stand-alone business in China, 128 of our 154 hotels are outside Shanghai, and also the strong demand trends in that country as a whole.

Group first-half RevPAR growth of almost 7% combined with a 1.5% increase in the number of rooms open under our brands took our total gross revenues up 9% as we continue to increase our market share. Despite the tough financing environment we once again signed more hotels into our pipeline than any of our major competitors and we signed more hotels than in the first half of last year, a clear indication of the increasing attractiveness of IHG brands to owners.

Strong revenue growth, the benefits of scale and ongoing positive impacts from efficiency programs converted into an operating profit increase of 17% to $269 million and growth in our sustainable fee-based margin of almost 1 percentage points. Reflecting the increased profits offset by slightly higher interest and share count, adjusted earnings per share grew 26% to $0.592.

Considering these good results, and the need to rebalance the weighting between the interim and final dividend towards approximately the historic 30-70 ratio, the Board has proposed an interim dividend of $0.16, growth of 25% on last year.

I've now been in place as CEO for five weeks and one of my immediate priorities was ensuring we have the right leaders and the right structure to deliver competitive out-performance, resulting in a number of changes to the executive committee which we've announced over the last few weeks. I'm confident these changes provide IHG with an executive management team who will lead us into the next phase of growth.

Looking back on that journey IHG has been on since de-merger, there are three very distinct phases. First restructuring -- between 2003 and 2007 we disposed of some 200 hotels and returned almost $6 billion to shareholders on the road to an asset light model. Between 2008 and 2010 we traded through the recession and the early months of recovery. We proved the resilience of the business, demonstrated IHG has one of the highest quality income streams and cash flows in the industry and, unlike many of our peers, we maintained our margins and our dividend.

We're now in a position to move into the third phase of our IHG's story, high-quality growth, which will focus on the following priorities -- driving market share by using real innovation to develop our brands and create new brands; delivering consistent and sustainable growth in our margin and higher return on investment for our (technical difficulty); and using our free cash flow to further accelerate growth and raise the awareness of our brands.

Taking each of these priorities in turn, to successfully drive meaningful increases in market share we have to make our brands work harder for us. The Holiday Inn re-launch continues to deliver results at both IHG and our owners. Holiday Inn was only last month named the 2011 J.D. Power award winner for best guest satisfaction in the mid-scale full-service category. This is a coveted award and it demonstrates the success of the re-launch. RevPAR premiums to the upper mid-scale segment are growing and as relative returns to our owners improve we're seeing the benefits in new hotel signings which are up on last year.

Following the success of Holiday Inn, Crowne Plaza is our highest brand priority particularly in the Americas. As a whole the brand is in good shape with solid foundations for future growth. It generates $3.5 billion of gross revenues globally. An investment for 30 years has grown to become the fourth largest upscale hotel brand in the world.

However, there is a significant performance gap between the brand in the Americas and the rest of the world. It's clear to me that the work we've done so far is not enough to close this gap and a [scan] of the project means this will be a multi-year journey.

We won't be announcing significant changes to the brand hallmarks for at least another year, but in the meantime we will be taking a number of actions to drive performance. For the Americas and Europe we will implement a short-term revenue enhancement plan, this includes investment in promotions, small resource for the dedicated Crowne Plaza sales team and additional guest experience training.

We'll begin tackling the variability and brand quality and consistency and start removing up to 40 hotels we've identified that are below expected standards. And we'll look for opportunities to put our own capital to work to make sure we get Crowne Plaza into the right locations with the right assets to build brand awareness.

These initial actions will start the process of aligning performance globally. So there is a significant organic growth opportunity with our existing brands. To maintain that (inaudible) growth opportunity long-term we also need to innovate and add new brands. Throughout IHG's history we've been securing this long-term growth by launching new brands -- Crowne Plaza in 1983, Holiday Inn Express in 1991, Staybridge Suites in 1997 and most recently Hotel Indigo in 2004.

These brands represent a large and growing part of our business, over 40% of our total gross revenues and nearly 60% of our pipeline. We currently have new brands under development for the mid-scale segment in the US and the upper upscale segment in China. And we'll have more news on China later this year.

My second priority is to grow margins. Market share growth will not come at the expense of profitability and returns. Our scalable model has delivered consistent and sustainable improvement in margins and our plan is that it will continue to do so.

My final priority is to invest for growth. I talked in some depth in February about how we deploy our free cash flow in a manner which drives growth and maximizes value for shareholders. Our priorities for cash are to invest behind growth followed by paying a sustainable and growing ordinary dividend and then return any excess funds to shareholders.

We have grown very effectively over the past few years using limited amounts of our own cash. We'll continue to sign these sorts of asset light deals where the use of IHG's cash can accelerate growth or take us into markets or locations that would otherwise be difficult or slow to enter.

The result of this in the first half include securing the development of 19 Holiday Inn Express hotels in India with Duet and investing in a flagship hotel (inaudible) lower east side of Manhattan with Brack Capital. We are committed to sustainable growth in the ordinary dividend, a progressive dividend policy where the dividend grows in real terms over time.

We already return significant sums of cash to shareholders every year through the ordinary dividends. In 2011 the cash dividend payment will total close to $150 million. And in the last seven years since 2005 we would have returned $900 million just through the ordinary dividend.

Finally, additional capital returns. We have a very good record on this and we will consider further capital returns particularly in the event of a future one-off inflow of cash back to the major hotel disposal. But we will consider this within the context of the immediate opportunities we see to invest to drive growth and the overall macroeconomic conditions at the time.

So turning finally to the outlook, there is clearly uncertainty in the wider economic environment with sovereign debt concerns first in Europe and now the US and the as yet unknown impact of government austerity measures on consumer spending and economic growth. We're monitoring current trading closely for any impact this economic uncertainty may be having, but at this point there are no obvious signs. The global hotel industry and our business continue to perform well.

July RevPAR was up almost 6% with a further improvement in rate growth to 2.7%. US RevPAR was up almost 7% with more than half of the growth driven by rate. On a total basis our US RevPAR grew over 8% once again out-performing the Smith Travel industry data.

In terms of system size, we still expect modest growth this year. Even after the expected exit in the second half of almost 7,000 rooms relating to the HPT management contract. In future years the level of removals should revert to historic norms and this in turn should mean annual net system growth of between 3% and 5% over the medium term.

So to sum up, the wider economy is uncertain, but at this point there's nothing to change our confident outlook. We have a resilient model which is delivering strong results in a positive trading environment and has proved its resilience through the recent downturn as we have maintained our margin and our dividend.

In my first few weeks as Chief Executive I've ensured that we have a strong and experienced management team who are well placed to lead IHG on its next phase of high-quality growth. This is a business built on strong foundations and I believe we have the right business model and the right priorities to continue our record of market share growth. Thank you. And with that I will now be happy to take any questions.

(Operator Instructions). David Loeb.

Good afternoon, Richard. Thank you for -- as usual, for hosting this with us. I wondered -- I appreciate the comments in the presentation about group in particular and better pricing power. I wonder if you could just give us a view on current trends really since the beginning of July. Are you seeing any signs of global slowdown or any regions that are slowing and anything that makes you concerned about potential economic impact on the trading in the business?

In a word, no. It's been -- obviously you saw the recent noise; we're looking but we're seeing no impact. So in July we grew RevPAR by 5.6% and rate was just over half of that, or just about half of that -- 6.6% in the Americas, 5.5% in Asia, 3% in EMEA. So demand remains very strong and we haven't got the data for July yet obviously. But internally we expect July to be another record demand month for the US.

So -- and at the moment I think we're seeing good momentum and we've been looking carefully for any signs of anything. And clearly we're lapping tougher RevPAR comparatives. But, no, at the moment things look fine, albeit we're clearly keeping a close eye given some of the macroeconomic factors.

That makes perfect sense. And that's what everybody else is saying too, it's just a little puzzling. In terms of the six remaining owned assets and I guess particularly the marketing process for New York, do you think the current capital markets environment, particularly what's going on with the Banks, has any impact on the likelihood of your ability to get New York sold or will you consider other asset sales beyond that? You've only got a few left.

Yes, it's a good question. It's actually 12 we own, David, though obviously the big four InterContinental where most of value it. I think with New York that's quite a long process anyway, the nature of the asset and the fact that we're demanding a very big property improvement program there with a minimum of $100 million. So it's not a process we're rushing.

Interestingly a lot of the interest comes from outside the US and certainly some of the people we're talking to wouldn't necessarily need to raise the debt in order to see the transactions. So I think we'll see -- very, very, very hard to say. It's early days and I think we're not under pressure to sell the asset, we've got a strong balance sheet. So if there are disconnects in the market, I mean we can't get a sensible value for it, then so be it. But at the moment the process is moving well.

Thank you. I appreciate the correction; I think I was looking at a regional table. And then just in terms of your branding and development momentum in China, Starwood's talked a lot about how aggressive they've been there. Clearly it's a very large market, room for both of you. But can you just talk a little bit about market share and how you're faring? Obviously shanghai comparisons are going to be really tough. But what do you see for your future in that market?

(inaudible) Starwood obviously do talk a lot about China. Obviously we were there before them and our business is significantly larger than theirs. So we have 150 hotels open and 150 in the pipeline. So I think -- yes, you're right, there's room for both of us. It's an interesting market.

Clearly the level of economic growth there has been very strong and that's what's driven demand for the hotels. Having been there sort of longer than anybody, I think we have -- not only do we have a lot of experience and a great team on the ground, sort of getting over 300 people in that Shanghai office now, but we also have effectively created a domestic business there. And getting over 80% of our customers in China are domestic, and that Holiday Inn is our -- one of our very fast-growing brands, as is Crowne Plaza.

So I think what we continue to see is a lot of activity there. We actually signed five deals last week alone in China. And we announced yesterday that we've just signed a franchise agreement for a 1,200 room Holiday Inn in Macau with Las Vegas Sands, obviously we recently did a deal with in Vegas.

So I think for us China remains obviously a very important market, it's a big chunk of growth. It seems to be pretty resilient and I think we've talked before about the travel and tourism sector now being part or one of the five pillars of economic growth in China.

So, there is more competition than there has been but then there's more supply. And I guess the last thing I'd say and I could talk a long time about China, but the last thing I'd say is that this phase of growth that we're talking about now is about high-quality growth. And there are an awful lot of deals being signed not just in China but other emerging markets which we would choose not to do. We turn down more than we sign.

I think it's easy to sign transactions, I think it's quite difficult to create sustainable long-term business which is what we're focused on doing. But we're not going for market share there, what we're going for is long-term sustainable revenue growth, which is the policy we're following.

Very interesting. One final follow-up on China. As you look at that domestic business, the 80% of your customers that are domestic travelers, when do you -- are you starting to see any trends either from the Priority Club data or other ways you capture that data, of those travelers starting to travel abroad and staying with the brand outside of China -- with the brands outside of China?

Anecdotally, yes. I don't have any stats that would support it at this point. I think the scale of the domestic market is so much bigger than the outbound. But all the data that you see about outbound, and I think WTTC was talking about 100 million by 2020, something like that for about 10 or 15 million now. So the growth is going to be huge. We will definitely see it, there's no question.

Consumer behavior, particularly when you go into new markets, is almost always adopting brands that you know. Where do you stay when you go to China? You probably stay in one of our brands, I hope, David. But that's what (technical difficulty) you see. Because our brands are so domestically well-known and are perceived to be domestic brands I think we'll definitely see that.

And of course we've talked before about the new brand we're launching in China or working on that will launch in the not too distant future. And ultimately our plan will be obviously to take that outside of China into other Asian markets if not European markets too. So I think we'll see that and probably we'll talk more about those sort of consumer trends as they grow in the future, but nothing detailed right now.

Very good, thank you very much.

Thank you, David.

Steven Kent.

Hi, a couple questions. First, could you just comment on franchisee financing, so any discussion about what you're seeing from the franchisee groups trying to grow more units?

Also, I think you mentioned that you might want to get more brands in the US and I'm trying to understand what the rationale would be since Holiday Inn Express, Holiday Inn Crowne Plaza, InterContinental seem to touch the markets that seem the most powerful.

And finally, just for the -- you mentioned earlier about that there were some deals that you would pass on. What would you pass on? Are there specific regions, specific countries that you would pass on if you had your choice?

Okay, thanks, Steve, great questions. As far as franchisee financing is concerned, we don't have a lot of direct visibility to what's going on there. But we do spend a lot of time with our owners, particularly through our owners association which we uniquely have.

So I think the franchisees are clearly benefiting from growing RevPAR and growing profitability. But there are clearly a lot of owners who have CMBS financing that's coming up or they have other debt to refinance and they will be dependent upon those markets being available and the banks being there. So we're very focused on doing what we can to assist them by driving the top line. That's really important.

So I think we'll have to see how that unfolds and whether the recent events, the macroeconomic events around the US do restrict financing, which would not be helpful. But the reality is that as a brand owner, if you're delivering revenue into hotels and you can't get refinancing or it forces a change of ownership, the chances are you'll keep your brand on the hotel is something we're very conscious about. But hopefully from what we do in terms of driving revenue into the hotels we will be fine.

You asked about brand in the US. Well, I think as we look at it we've got in the Americas 3,500 hotels nearly 450,000 rooms, which is mainly North America, you see a little bit in Canada, a little bit in Mexico, but the vast majority, 90% of that is North America. And we've got another 800 hotels and another 87,000 rooms in the pipeline.

So what we've been talking about is another mid-scale brand. So if you think with Holiday Inn Express we have 2,600 rooms open and we have another over 500 -- 550 in the pipeline. So there comes a point where you can't squeeze anymore into a market, we've obviously got quite a lot of growth still with those brands.

So we see if demand continues to grow that there definitely is opportunity for any other mid-scale brand which is sufficiently differentiated to appeal to consumers and that's something we're working on, nothing imminent to talk about. But there are some interesting opportunities from a positioning perspective that would make sense.

So (inaudible) not the luxury end, not the economy end, we're very happy with where we're at in terms of upper upscale/luxury at InterContinental mainstream and upscale with our other brands. But we do see opportunity.

And of course I mentioned in my words and that we've launched brands before, it does take a long time to design and launch a new brand and get any way near scale. So it's something that you want to be working on even while you've still got sufficient organic growth in your existing business. That's the thinking around brands. And your last question?

Which (multiple speakers)? Yes.

Yes. A number of things really. Yes, we have pretty clear on where we make money for ourselves and where we can make money for owners. And that's by country or even by city or by co-location. Some of it's more scientific than others. So in the US you have a very scientific -- well, systems actually that define where demand drivers are, where we can put our properties, and obviously outside the US it tends to be a little less scientific.

But my point really is that if we have a hotel in a location we want it to be, if possible, the best location in that marketplace because that will guarantee or make it much more likely you're going to get decent revenues into the hotel, much more likely the hotel will be profitable and much more likely it will generate cash flow to refresh itself and keep itself in good shape.

The other thing we look to is the owner, because we're very reliant obviously on having the right owners who again are going to be true to the brand and support the hotel. There are a lot of people out there who are just looking for a deal, who aren't interested in the brand or long-term investing in their assets.

And a number of our competitors either have brands that are weak so they have to discount to get deals, or we have some competitors that are ramping up growth for other reasons, who are looking to their future and looking to sell out or IPO, whatever it might be. And they'll sign a lot of deals in order to get numbers on the board. But we don't believe that's the way to drive sustainable long-term growth.

So for us it's -- we're signing a lot of deals. You can see that, we've got the biggest pipeline in the world. But we aren't just going for volume over quality.

Okay, thank you.

Thank you.

Andre, are there any more questions?

At this time there are no further questions showing.

Well, thanks, Andre. Thank you everybody, appreciate you taking the time and listening in to us. And we'll talk to you again in the near future. Thank you. Thank you, operator, we'll call that a day.

Thank you for participating in today's conference call. You may disconnect your line now.