InterContinental Hotels Group PLC (IHG) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the InterContinental Hotels Group quarter-three results call. My name is Dave, and I'll be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions.

(Operator Instructions)

I am now handing you over to Catherine Dolton to begin today's conference. Thank you.

Good morning, everyone. This is Catherine Dolton, Head of Investor Relations. I'm joined this morning by Richard Solomons, Chief Executive, and Tom Singer, Chief Financial Officer. Before I hand over to them for the discussion of our results and Q&A, 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 Richard Solomons.

Thank you, Catherine. Good morning, everybody, and thanks for joining us on our third-quarter results conference call. I'll start by making a few remarks on the results and the trading environment as we see it today. Then, Tom Singer, our CFO, and I will be happy to take your questions.

Before I start though, I would like to just say a few words about Hurricane Sandy. Our thoughts are with all of those who have been affected, and I'm relieved to say that our employees and guests are safe and all accounted for. We are very proud of the role that are hotels play in supporting the local communities in times of crisis. We formalized this last year when we launched our Shelter in a Storm program, which allows us to provide relief and vital assistance to those affected by a disaster. Through this initiative, we will be donating around $80,000 raised by our employees to the Sandy relief effort.

Turning now to our Q3 results. The business performed well in the quarter with resilient trading across all our regions, delivering global RevPAR growth of 3.9% and Group revenue up 4%. Good use of our scale and the efficiency of our business model converted this into operating profit growth of 14%. These figures are at constant currency, and they exclude the impact of $6 million of liquidated damages received in quarter-three 2011. Looking at RevPAR performance now in a little more detail at 3.9% growth, third- quarter RevPAR was some way below the 6.5% RevPAR growth in the first half. This reflects a number of industry-wide factors which I'll cover in more detail in a minute. Nevertheless, our brands do continue to outperform the industry in our largest markets.

The global industry continues to benefit from a favorable balance of supply and demand. Supply growth remains well below historic levels, and the industry has broken monthly records for room nights sold for each of the past 18 months. This favorable dynamic combined with Group occupancy just 1 point below the 2007 Q3 peak enabled us to grow rate by 3.4%, marking our ninth successive quarter of rate growth. Third-party forecasters expect this favorable supply and demand situation to continue into 2013, although the pace of group demand growth is expected to continue to moderate.

In the Americas and the US, RevPAR grew 4.6%, driven by rate up 4%. July was negatively impacted by the midweek timing at the July 4 holiday, and in September, RevPAR growth was affected by two Jewish holidays falling within the month, compared to just one last year. We continue to drive share gains in the US with our total RevPAR up 5.7%, more than 0.5 point better than the industry. This data includes the benefit from new hotels and is the more direct comparative for the Smith Travel industry data.

In greater China, the whole industry experienced significant deceleration in RevPAR growth during the quarter during to due to a combination of factors. These include the broader economic slowdown, the territorial island dispute between China and Japan, and the greater than expected drop-off in demand ahead of key national holidays and the political leadership change. I'll talk more about this later. In spite of these challenges, the strength and scale of our business in greater China drove 4% RevPAR growth, significantly better than the industry which experienced an 0.5% decline. Revenues grew an impressive 15%, a function of strong brand performance and growth in new rooms, up 11% year-on-year.

In Asia, Middle East, and Africa, RevPAR growth of 2.9% reflects a combination of continued strength across much of Southeast Asia, partly offset by the impact of tougher comparatives in Japan and the impact of slowing economic growth in Australia. In the Middle East, several countries continue to be impacted by political unrest, including Lebanon, where travel restrictions were introduced in the quarter, but others such as Saudi Arabia and the UAE remain strong. In Europe, RevPAR was up 2% in line with first-half trends. UK RevPAR growth of 3.9% reflects strong performance during the Olympic and Paralympic Games, broadly balanced out as expected by weaker trading in the periods before and after. In Germany, the strong trade fair schedule continued to drive good year-on-year growth with RevPAR up almost 9%.

Turning now to our financial performance in the quarter, we continued to drive strong operating profit growth across each of our business models. Franchise hotel revenue and operating profit were both up 8%, driven by 3.8% RevPAR growth, 2% year-on-year growth in system size, and a small increase in effective royalty rates. All these figures are quoted at constant currency. Underlying revenue in our managed business was flat and operating profit up 9%. This good profit growth was driven primarily by the increase in managed rooms in greater China, combined with the continuing ramp-up of hotels in that region. In our owned and leased hotels, operational excellence and diligent cost control resulted in 8% revenue growth being converted into 29% operating profit growth. This was driven by 6.9% RevPAR growth, all due to rate gains now that these hotels are at 83% absolute occupancy levels.

The scale of our business allows us to drive efficiencies and create capacity to reinvest behind future growth. For the full year, we remain on track to deliver sustainable growth in our fee-based margins. Looking now to system and pipeline, we are still driving significant development activity around openings and signing's, despite the continued economic uncertainty in many parts of the world. We have grown on that system size by 2.1% year to date and are well on track to meet our 2% to 3% guidance for the full year. We opened 8,600 rooms in the quarter, removed 3,200 rooms, and signed a further 13,300 into our development pipeline. To put this into perspective, this means that we signed on average some six hotels each weeks so far this year, further building on our strong foundation for growth. Our brands are gaining traction, building our presence in markets such as Bahrain and Qatar where Holiday Inn Express and Crowne Plaza made their respective brand debuts during the quarter. We're also entering new markets with Holiday Inn Express becoming the first signing for IHG in the Bahamas. Conversions continue to account for around 30% of our signing's and openings. In fact, just yesterday, we announced that three hotels in the UK have converted from Hampton by Hilton to Holiday Inn Express, demonstrating the attractiveness of our brands to owners.

There is significant demand for our newest brands, too, with eight signing's in the quarter for HUALAXE Hotels and Resorts, our new brand for Chinese consumers. This means that in the six months since launching that brand, we've signed 12 hotels into our development pipeline and have a further 14 letters of intent in place. In October, we signed up the first hotel under our new US brand, EVEN Hotels. This is a new build project in Manhattan, which is due to open at the end of 2014 and will operate under a management contract with small guarantee in place, but no capital investment from IHG. We're also in ongoing discussions around a number of other projects for the brand.

Our pipeline continues to be at the highest quality with around 40% under construction, and we estimate around 70% financed. Over 30% of our pipelines in greater China, and around two-thirds of these rooms are under construction. We continue to work with the best owners. There have been no significant holdups to projects since the handful of slight delays we reported at Q1. Our robust pipeline of 51,000 rooms, combined with the 60,000 rooms we already have open in the region, gives a significant confidence in our future growth and an extensive distribution unrivaled by any of our global peers. Looking elsewhere around the world, financing for new hotel construction does remain constrained in some of our biggest markets. However, we have started to see a very slight improvement in financing for certain projects, but this will take some time to translate through to any meaningful growth in industry supply. This low supply growth combined with the record levels of demand I referred to before will continue to be supported through RevPAR, and with 13% of the active global pipeline, compared to our 5% of open rooms, we will continue to win market share.

Moving on to the balance sheet. Net debt at the end of September stands at $472 million, down $172 million on quarter three last year and down $66 million on the year-end position. Obviously, this does not reflect the $500 million special dividend that we paid on the 22nd of October. We remain committed to our stated three uses of cash -- investing in growth, a sustainable ordinary dividend, and from time to time, returning surplus capital to our shareholders. At our half-year results, in addition to the special dividend I just mentioned, we also announced a $500 million share buyback program which we expect to commence shortly.

We've talked on several occasions about our strategy to invest behind the growth of our brands, existing and new, generally funded through recycled capital. Year-to-date, our growth capital expenditure is $10 million, and we now expect to spend around $25 million in the full year. We still see substantial growth and value-creating opportunities for the business, but this type of spend is unpredictable by nature, especially as we are generally investing alongside third parties. We continue to guide for around $100 million to $200 million of growth capital expenditure in 2013 with good progress on existing projects and a number of anticipated opportunities ahead. Key items of spend will include up to $150 million over three years behind the launch of EVEN Hotels in the US. We will also continue to invest behind existing brands such as Crowne Plaza in the Americas and the launch of Holiday Inn Express in India with our joint venture partner, Duet. The first of these hotels under this partnership is scheduled to open in Ahmedabad before the end of the month.

Turning to maintenance capital expenditure, we now expect this to total around $125 million in the full year, with $69 million spent year to date. Looking forward into 2013, our guidance is unchanged at around $150 million as we make further investments in our IT system and our owned hotels.

Finally, a quick update on InterContinental New York Barclay. Discussions regarding the disposal of this hotel continue, but are no longer exclusive and will now be opened up to a wider group of prospective buyers. Over the course of 2012, the property market in New York has, in fact, strengthened, and we are confident that we are in a good position to extract maximum value for shareholders. We will update you as and when we have more news. I've said on many occasions that in order for us to consider selling a major asset in a key city, we must have alternative representation for the brand or be certain that we will retain our flag over the asset with a management contract in place. Intercontinental Westminster London is scheduled to open at the end of the month, and so we will start to market Intercontinental Park Lane in 2013.

Turning now to current trading and outlook, softer performance in the third quarter was driven by a combination of events including timing effects, but also some factors which will continue to impact trading into Q4. Provisional October Group RevPAR growth of 4.8% indicates an improvement from the Q3 trend. In the Americas, RevPAR growth of 6.1% reflects a return to more normal underlying levels of trading after the noise around timing of holidays in Q3. However, there does remain a level of political and economic uncertainty going into today's election in the US, which should improve once there's greater clarity on future economic policy in the upcoming fiscal cliff. In Europe and Asia, Middle East, and Africa, October RevPAR growth of 2.3% and 3.4%, respectively, indicates the trends from the third quarter have continued.

In greater China, 0.3% RevPAR growth in October represents a slight improvement from the 0.9% decline in September, but reflects the ongoing industry-wide softness in demand due to a number of factors which I'll talk about now in a bit more detail. Through September and October, many businesses have suffered from the slowdown in manufacturing and the escalation of a dispute over the ownership of the Senkaku/Diaoyu Islands. We're seeing a significant reduction in the number of Japanese guests in our hotels in China, and although a small proportion of our total business, it is more meaningful for our Intercontinental Hotel in Hong Kong. We're hopeful that the impact of this dispute on businesses is now softening, but there can be no certainty of this until tensions between China and Japan lessen. On a more positive note, last week's official purchasing managers index data for China indicated a return to growth in the manufacturing sector.

China's political leadership change continues to impact the domestic business climate. We expect that some confidence will return now that the 18th National Party Congress has been scheduled to start on the 8th of November. However, it's unlikely that we will see a return to normal levels of trading until after the new president and premier are formally selected at the National People's Congress in March of next year. We do believe that these pressures in China are short-term headwinds impacting the whole industry, and we remain very positive about the underlying demand environment in the region.

Looking forward, leading indicators remain supportive. Booking pace is up for the Group as a whole with increases in both rooms on the books and rates for the rest of the year. Our forward visibility does remain short though, so this only represents a portion of the total rooms we expect to sell. Future travel intentions data collected from guests staying in our hotels in the quarter remains strong. 60% of guests are saying they will travel the same amount or more over the next 12 months for business, and this statistic rises to more than 80% for leisure. So, despite some of the short-term uncertainties in the global economy at the moment, in the long-term, our industry will continue to benefit from the positive population and demographic trends driving demand for hotel rooms around the world. You've heard me reference the considerable strengths of IHG's business on several occasions before. Our resilient, fee-based business model, together with preferred brands, a wide geographic footprint, and our focused strategy for high quality growth, give us confidence that we will continue to outperform.

Thank you, and with that, Tom and I will now be happy to take your questions. Operator, let's open it up for questions.

(Operator Instructions)

Steven Kent, Goldman Sachs. The line of Steven Kent is now open.

Yes, can you hear me

Hello, Steve.

Good morning. Sorry about that. Two questions for you. First, on the pricing of the InterCon in New York, I know you may not be able to obviously give specifics, but we've certainly seen some pretty big prices coming out of some of the hotels in New York. Is it your sense that by opening this back up, you might even get a higher return -- a higher price? And then, the second thing is, we just heard from the old Gaylord, or Reiman, they just said that their conference convention activity is low. Their advanced bookings are low. We heard that from some of the other hotel companies who have reported so far. Could you just again give us a little bit of a sense why you might feel a little bit differently than some of these other companies?

Thanks, Steve. I'll take the second one. Then, I'll ask Tom to talk about the Barclay sale. I think for us, certainly relative to Gaylord, and actually also relative to [Stuart's and Marriott's] and the other big American hotel companies, our conference and convention business is much smaller. We have fewer of those big-box hotels, certainly in the US, than they do. Certainly right now, as we look at it, we are not seeing that as a big driver of our numbers.

I talked about the travel intentions data, so in terms the leisure business and the -- leisure travel and transient business, we are certainly seeing some decent trends. Right now, nothing more specific that I'd probably want to say on that. Tom, do you want to talk about Barclay?

Yes, sure. Hello, Steve. Just on the Barclay, as you rightly observed, the New York hotel markets have strengthened over the last 12 months, and it might well be the case that we can do a better deal. And, because of the strong market, we have continued to have [unassisted] expressions of interest in the asset. So, we decided that given the length of time it was taking, we would start to engage with a wide degree for potential purchasers. Therefore, we are still continuing to talk to our preferred buyer but no longer on an exclusive basis. In the meantime, the hotel continues to trade well. Year-to-date RevPAR is up 3.5%, so we are confident that against a backdrop of a strengthening market, we will ultimately do a great deal for shareholders.

Okay, thanks.

Thanks, Steve.

Robert Higginbotham, SunTrust.

Thanks. I'm calling in for Patrick Scholes. Question also on the Barclay hotel. Does the delay in the sale of that property in any way affect the timing or magnitude of the share repurchase program? You obviously have not, to date, I guess, commenced it. But, still announced your continued commitment to that. I'm just wondering if the change in timing of that sale affects that plan at all? Thanks.

Yes, Robert, hello. Thank you for the question. The short answer is, no, it doesn't. Our statement of the interim is that we are going to return $1 billion was in no way contingent on the sale of the Barclay. As you all know, we've already returned $500 million by way of special dividend and the $500 million buyback program will start shortly later on this quarter. So, any ultimate sale proceeds that we derive from the disposal of the Barclay will be available either for reinvestments in the business or potentially to be returned to investors in due course, if they're deemed to be surplus to the requirements of the business.

Thank you.

David Loeb, Baird

Thank you. I want to beat the dead horse a little more. (laughter) Can you talk a little bit about when you do expect the assets to close? Obviously, there's a lot of uncertainty, but do you have an idea about when, given where the process is now, what the likely timing of the disposal of New York would be? And, what the likely timing of London would be, assuming you find a buyer for that as well?

Yes, looking -- in truth, David, as you'll appreciate, these are complex transactions. We don't want to be too specific as to likely timing. We continue to have conversations with our preferred bidder for the Barclay, and as we said, we'll open up the conversations to others from this point going forward.

As for London, where we've always talked about 2013 being the time frame, and I wouldn't want to be more specific than that. So, for us, it's not about doing the quickest deal for shareholders, it is about doing the best deal for shareholders. And, we're very focused on getting the deals done. But, as to a specific timing, I won't be droll of that because it is subject to a negotiation that is not wholly within our control.

Sure. I understand that. Can you talk a little bit more, Tom, about the process -- both prospectively and retrospectively? Were you approached by others? Are you now opening this up to essentially broad broker marketing? Or, is it just that you are talking to the original potential buyer and one or two others that approached you?

I'm not going to comment on a live process because I think that wouldn't be helpful in terms of our positioning vis-a-vis the marketplace. It has been the case over many years that Richard has been approached by unsolicited expressions of interest for these two assets. People who typically buy these assets know them well. Certainly, there are not many better hotel assets that will be traded next year. We'll engage with the counter-parties that we think have the ability to close deals and whom we want to work with for the longer-term because that's what's important to us. It's as much about working with people in a long term relationship who share our understanding and vision for the InterCon brand as just getting the deals done. So, we'll do ultimately the deal that we think is in the best interests of shareholder value.

That make sense as well. Thank you. Can I just ask one more if you've got time for -- Richard?

Of course, yes.

On greater China, once we get past the political leadership change, what do you see for the balance of 2013 in terms of broad market trends aside from a few quarters of easy comparisons?

I think if you look at the underlying drivers of growth there that we've talked about many times in the past, they still are very strong. Indeed, the last couple of GDP forecasts I saw just edged China back up slightly. I think that we look at it's down from its peak in terms of growth, but still 7% or 8% GDP growth in an economy this size will lead inevitably to significant growth in demand that we've been seeing. You combine that with infrastructure investment, you combine that with the ongoing urbanization, and you combine that with just the great scale we've got there now -- which is with 180 hotels open which is a long, long way ahead of anybody else.

I think we remain, quite rightly, very positive about the growth there and what we can generate. You see the numbers this quarter -- on 4% RevPAR growth, we grew revenues 15%. Which is as much about the new -- or, more about the new rooms we're opening as it is about the underlying RevPAR. So, we feel very positive about -- we've got a big operation there. People and infrastructure, rather than capital, that we put into that market. Tons of opportunities still. Obviously, with HUALUXE now having signed 12 hotels in the first, effectively, six months from launching it. Again, I think we've got a brand portfolio that owners really want to work with, so I feel good about it.

Great, thank you.

Thank you.

We currently have no further questions. I will hand back to your host.

Great. Well, thanks, everybody, for calling it in for the questions. Obviously, if you've got any more questions in the course of the afternoon, please don't hesitate to give the team here a call. Thank you very much.

Thank you for joining today's call. You may now replace your handsets.