InterContinental Hotels Group PLC (IHG) 2011 Q3 法說會逐字稿

Good morning, everybody and really appreciate you dialing in to our third-quarter results conference call. So, although I will be hosting the call today it gives me great pleasure to introduce to you Tom Singer, who some of you may know already. Tom joined the business on 26 September as CFO, and since then he's spent much of his time traveling traveling the world, getting to know our business and our people. So Tom is with me today, and he will join me in answering your questions later.

But before that, I will just make a few remarks on our results and the trading environment as we see it.

In August I outlined IHG's strong foundations, which will deliver

Deliver high-quality growth into the future. These include what we've done to improve the guest experience across our brands and to build a leading share of the global pipeline in the new hotels.

These strong foundations are demonstrated by the excellent third-quarter results we've reported today, beating market expectations. Global RevPAR growth of 6.4% converted into operating profit growth of 26%, reflecting good use of our scale and ongoing positive impact from our efficiency programs.

The trends we saw in the first half continued through the third quarter. Leisure and business travel remained largely unaffected by weaker global macroeconomic sentiment.

Global room demand exceeded 2008 pre-recession levels, and in the US, room demand in each of July, August and September broke new records. This strong demand environment coupled with low supply growth in many of our major markets, means rate gains continued to improve, almost 3% in quarter three, compared to 2.4% in the quarter two.

Occupancy levels have now hit 71% with the group, just over 1 percentage point down from the previous peak in 2007.

Asia-Pacific RevPAR grew 5.7%, only 9% excluding our 32 hotels in Japan which were impacted by the March earthquake and its aftermath.

China leads the way, with RevPAR growth of over 10%, almost 4 times faster than the market growth, underlining the strength of our brands in the region and our operational expertise.

It's worth noting that outside Shanghai -- which is still trading against the tougher comparables from the Expo last year -- China RevPAR grew 22%, demonstrating the favorable demand trends in that country as a whole. We are best placed to continue to take advantage of this into the future. We are not only the biggest existing hotel system, but also the largest pipeline of new internationally branded hotels.

RevPAR in our Europe/Middle East and Africa region grew 3.6%, or 4.5% excluding Egypt and Bahrain. Other key Middle East markets were resilient, with RevPAR up around 10% in both Saudi Arabia and the UAE.

For the quarter as a whole, RevPAR trends across Europe were broadly similar to those in the second quarter. Within this, August was negatively impacted in some countries due to the earlier timing of Ramadan, with stronger growth in September.

The Americas was our strongest region, with RevPAR growth of 7.6%. In the US, comparable RevPAR grew 8%. Total RevPAR, including the benefit of new hotels, grew 9.5%. And this figure is prepared on the same basis as the Smith Travel data, and is significantly ahead of their 7.9% growth for the US industry as a whole over this same period. So we've now consistently outperformed the industry by over one percentage point of RevPAR growth throughout 2011.

Holiday Inn and Holiday Inn Express have been big contributors to this outperformance. The relaunch completed at the end of last year continues to drive share gains for IHG and its owners and franchisees. Their total RevPAR grew 10.4% and to 9.2%, respectively, compared to 8.8% growth in the upper midscale segment.

In fact, this year in the US all of our brands outperformed their segments, bar Crowne Plaza. I spoke in depth about our plans for Crowne Plaza at the half-year results, and Tom and I have just returned from our annual Americas conference for owners where we shared more details about our global repositioning program for that brand. We are using all the learnings from the successful Holiday Inn relaunch to inform our thinking. Work is well underway on the first stage, raising product quality and consistency and driving revenue and performance across the portfolio. This will continue into 2012 as we move into the second phase, which will begin to focus Crowne Plaza on a new customer and look to improve the brand distribution in key markets.

The third phase of the program should be complete by 2015 and we'll see the introduction of a brand-new set of hallmarks specifically designed for our target consumer segment, clearly differentiating Crowne Plaza from the sea of sameness in the upscale hotel segment.

And I'm happy to report that our owners welcome the plans and are keen to get started, and we will have more news through 2012.

So turning now to our financial performance in the quarter, on a constant-currency basis and excluding $6 million of liquidated damages, total group revenues grew 7% and operating profit grew 26%.

Franchise hotel revenue grew 7%, driven largely by RevPAR growth and a small increase in the effective royalty rate.

Operating profit grew 10% as continued tight cost control contributed to a 2 percentage point increase in margins.

Managed hotel revenue grew 13%, and operating profit grew 23% excluding the liquidated damages receipt. A $4 million benefit from the settlement of a guaranty in the Americas, and good underlying profit growth driven by 5.6% RevPAR growth more than offset a $2 million drag from the events in the Middle East, Japan and New Zealand.

In our owned hotels, excluding the impact of hotel disposals last year, revenues grew 5% and operating profit grew 26% to $29 million, taking margins up by 3 percentage points. This was driven by 10.2% RevPAR growth, just over 8 points of which was rate growth.

Regional and central costs were down $3 million at constant currency. For the full year, based on current trading expectations and on a constant-currency basis, we still expect these costs to be in the region of $260 million.

It's worth noting that year-to-date reported regional and central costs are $6 million higher than constant-currency costs. At current exchange rates this currency impact should be broadly neutral in the fourth quarter. After flat interest and tax rate, total adjusted earnings per share increased 34%.

So let's look now at the pipeline.

Financing for new hotel construction remains constrained in some of our biggest markets. We don't anticipate much change in the short term. That said, the strength of our brands continues to bring new owners and more deals to IHG. We signed 18,700 rooms into our development pipeline in the quarter, once again outperforming each of our major competitors. Against the prior year there was a particularly strong performance in Asia-Pacific, including almost 4,800 rooms in China.

In the Americas we signed and opened 25 hotels that we manage on behalf of the US Army, taking the total number of rooms we operate for them to over 8,000 or almost 50 hotels.

Our signings also demonstrate the wider benefits of the Holiday Inn relaunch. On a year-to-date basis, we've now signed around 2,500 more Holiday Inn-brand family rooms globally than we did in 2010. These signings include the 1,200-room Holiday Inn Macau with Las Vegas Sands, a real coup for the brand in the competitive location.

Our high-quality pipeline is feeding new hotel openings. Almost 13,000 rooms in the third quarter, with net system size growth currently up over 1% year on year, we are well on track to deliver our guidance of modest growth in 2011.

In the medium term, we are confident in delivering our targeted annual net system size growth of between 3% and 5%. We continue to see good growth in the emerging markets and across Europe. However, in the US we've not yet seen any pickup in the pace of ground breaks, particularly as the economic sentiment has weakened through the year. And although we are seeing a small increase in conversion signings, the general lack of available financing means this is relatively slow burn.

This means that for 2012 we are now more likely to come in at the bottom end of our range, and even delivering that level of growth could be challenging. However, we are taking a larger proportion of the rooms that are opening and our share of the active global pipeline leads the industry at 16%. And we are also ahead in the US with a 21% share.

Ultimately, it's important to remember that our revenues are based on total industry revenues, and total industry revenues are driven by the level of demand. So as long as we are growing our room supply and our RevPAR faster than the industry, we will be gaining market share.

So turning now to the balance sheet, net debt at the end of September stands at $644 million, down $99 million on the year-end position and $174 million lower on the position at the half-year. The business continues to generate substantial free cash flow, and $148 million of disposable receipts have more than funded growth capital expenditure of $88 million.

Only yesterday, we successfully completed the refinancing of our debt facilities, 18 months ahead of their expiry and a prudent move, given that the corporate lending markets continue to be challenging. Our new $1.1 billion, five-year facility demonstrates the confidence our syndicate of banks have in IHG and complements the 250 million Sterling Bond that we issued in 2009.

So let's look ahead now to the very end of the year and into 2012.

First, I wanted to give you an update on where we are with the sale of the InterContinental New York Barclay. We've put the hotel on the market at the time of our preliminary results in February, and we've seen good interest in the asset. We are in active discussions with a number of interested parties. However, given where are today it's now unlikely that we will actually close a deal this year.

And we will only sell the hotel if it will create shareholder value to do so; so if the transaction environment gets worse then we are prepared to take the hotel off the market. Our intention over time remains to sell that asset and overall reduce the asset intensity of the business.

Turning to trading, our October RevPAR grew 4.7%. At 5.3% growth, Asia-Pacific was bang in line with Q3 trends. The US increased just over 6%, slightly softer than the Q3 trend, due to the impact from the change in timing of Jewish holidays at the beginning of the month. Weekly RevPAR, though, saw an improvement through October, from 4% in the first week to over 10% by the last week. Demand trends remain at record levels in the US, booking pace shows no sign of slow down, travel intentions remain firm, and cancellation rates are stable.

Our Europe/Middle East and Africa region was, however, softer than recent trends at 0.3% growth. Because of the current concerns in the euro zone I thought it might be helpful to give some more color.

To a degree, the slower growth across Europe can be attributed to a particularly strong comparator for some markets. Looking out our booking pace for our key countries in November, they would at this stage suggest an improvement in growth.

It's also important to remember that this is just one month data, and it is far too early to call a trend. We are, however, keeping a watchful eye and it's possible that the uncertainty in the euro zone could affect demand going forwards, even though there are no signs of this yet.

Looking at other forward booking data points, I'm sure you'll want me to comment on the corporate rate negotiations process. We are still in the early stages, but we are confident that we will achieve growth in corporate rates for next year. These centrally negotiated corporate rates are, however, only around 15% of our rooms revenues. Our focus remains on growing our overall share of corporate business through our successful dynamic pricing initiative. We now have over 30% of rates on this system and are targeting over [48%] by the end of next year.

So it's important to note that our forward visibility is short and the hotel industry tends to lag the wider economy. What we do know is that industry supply growth is expected to stay below historic levels in many markets for the next few years, which will help support RevPAR. We also know that the brand revitalization and quality journey we are on positions us well to outperform the competition and drive a rising share of overall industry revenues.

So, to sum up, I set my priorities out in August and we are delivering on all fronts. Our industry RevPAR outperformance demonstrates we are driving market share by using our in-depth insight to develop our brands. We are delivering consistent and sustainable growth in our fee-based margin, which on a year-to-date basis is up over three percentage points, however, accelerating growth and raising the awareness of our brands funded by free cash flow, seen in our Hotel indigo India joint venture investments earlier this year.

The wider economy is uncertain, but at this point there's nothing to change our confident outlook. We have proven the resilience of our business model as we've maintained dividends and margins through the last downturn, and we are also delivering strong results in a positive trading environment.

So thank you, and with that Tom and I will now be happy to take your questions.

Operator?

Thank you, sir. (Operator Instructions).

Are there any questions?

We do have a question, sir. The first question is from the line of Patrick Scholes.

Good morning, Richard. I want to drill down a little bit more on the October result out of the [EMEA] section. Can you give us a bit more color as far as the results in Europe, as opposed to the Middle East or Africa -- what was the performance? And then, I have some more questions after that.

Yes, I'm happy to do that.

The Middle East was about 3% up, numbers -- about 4% up, with Africa. In other words, we still have a bit of noise in the Middle East from the Arab Spring.

But you know, it was an interesting month, and like you we are keeping a weather eye out to see what's it telling us and what's going on. So, in Europe October is a big month for meetings in Europe, so that always can cause some boluses in year-on-year trends. And there's definitely an issue as I mentioned to strong comparatives and comparable data, comparative data in some of the key markets. So for example, InterContinental Park Lane a year ago was up 36%; Paris a year ago was up 33%, which is driven by, by the Auto Show.

So you've got, you've got that issue going on in there. So what we saw across the piece was the UK was up just under 1% as a whole. Probably London was a little bit ahead of the region. Germany was pretty much flat, where we actually saw a decline of about 3% in France, which was actually more positive outside of Paris than in Paris because of the impact of that Auto Show, a little bit negative in Italy and Spain, too.

So as we look at it and talk to our operations guys and look at our managed estate, we have more visibility, obviously, in our managed estate than we do in our franchise. Then booking pace trends seem to be relatively positive for November and into December.

So, I think what I would say is that like it looks like a blip, current trends as far as we can see look okay. But and clearly in a difficult euro zone where every headline you pick up in a British or European newspapers is negative, and clearly there's a lot of understandable concerns around the state of the euro zone, in particular now Italy which is a very large economy.

Does that help?

Yes, it does, and I've -- just another question on -- this is interesting because it's really the first data point that we've heard from anybody out of Europe, European results in October.

When you look at basically flattish RevPAR growth, I mean, are you still trying to push pricing? Is it resistance in some of the markets that don't have the difficult comparisons? Are you getting the resistance to pricing? How is pricing growth (multiple speakers) --?

It's too early to say, too early to say, Patrick. I mean, I think, you know, you don't change your pricing strategy at a macro level for one month, and I think in the month, rate was actually up 2.6%. So it was really an occupancy issue, and occupancy has been at quite high levels.

So I think they -- you know, they are obviously great questions, I think it's just a month, and -- (multiple speakers) keep an eye out. So I'm trying to just give you the facts as we see them, as opposed to trying to extrapolate too much. But looking ahead doesn't look too difficult but if Italy blows up tomorrow, who knows?

You know, I think the point I'll make is that, as we know over the medium term, hotel industry is all about GDP growth. In the short term it's about disposable income and corporate profitability.

If there is an economic downturn -- if there is actually a recession, the hotel industry will not be immune. But what you'll find is that there will be winners and losers in that, and historically we've shown that our business is very strong, obviously a strong balance sheet but we also have a very strong business model. We've continued to outperform over the last year as we did in the last downturn.

So, it's not that we are in any way complacent about it, but I think we are well placed as a company to deal with this and I'm pretty confident we will continue to gain market share. In good and bad times.

Okay, I thank you; I appreciate the color. And then just one last modeling-related question here. I noticed in your release that you've refinanced your, it looks like your credit facility here. Can you give us a little color on what were the terms of refinancing, such as the LIBOR spread, and etc.?

Let me ask Tom Singer to give that up, given that in these last few weeks he's helped lead the refinancing.

All right, hi, Patrick. Well, as we said in the release, we've just put in place a new, five-year, $1.1 billion facility. And in terms of the pricing of that facility, it works off a ratchet, and at the bottom end of the ratchet we would pay 75 basis points over LIBOR, rising up to 170 basis points over LIBOR.

So in terms of what that looks like in terms of pricing compared to the old facility, it's about 50 basis points of additional interest costs right across the ratchet.

The other thing to plug up to is that we will be required to write off $2 million of unamortized fees in connection with the old facility, in Q4. So that will come through that interest-cost line.

Okay, thank you. And then, I guess Richard, one last question here -- (multiple speakers).

Another last question, Patrick. (laughter).

Okay, just, you know, we heard that financing is very challenging. Where are most of your Holiday Inn/Holiday Inn Express brands finding financing right now?

Well, there's no question, there's a lot of owners putting more equity in. And then, it's basically local banks where they have relationships.

You know, I think financing in -- for existing assets, is obviously much, much easier than new build. And -- but they're still at loan-to-value margins and require personal guarantees on small loans and it's much more than it was before. So I think what financing is available, you know, we know we've got a very good chance with our brands of getting it, but there's no question it's tighter.

Gentlemen, thank you for taking all my questions.

We have no further questions at the moment, sir.

Okay, well, look, thank you, everybody. Appreciate your listening in, and obviously, if you do have questions please give one of us a call and we will do our best to answer them.

Thanks very much.

Thanks, Operator, we are done.

Thank you for participating in today's conference. You may all disconnect now. Thank you.