InterContinental Hotels Group PLC (IHG) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the IHG half-year results call. My name is Indy and I will be your coordinator for today's event.

(Operator Instructions)

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

Thanks, Indy, and good morning, everyone. This is Catherine Dolton, Head of Investor Relations at IHG. I'm joined this morning by Richard Solomons, Chief Executive Officer, and Paul Edgecliffe-Johnson, Chief Financial Officer. Before I hand over to them for 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 laws.

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.

Thanks, Catherine. Good morning, again, everyone. Thanks for joining us today welcome to our 2016 interim-results conference call. Before we get started all spend a couple of minutes looking at IHG in the context of what's happening in the world right now.

In recent months there is been considerable economic and political uncertainty not least because of Brexit, concerns about the stability of the European Union more broadly, the US Presidential election campaign, and ongoing unrest in other parts of the world. In the midst of this we've seen an increase in terrorism with horrifying scenes in France, Belgium, and Germany.

As a global business with a footprint in nearly 100 countries, managing through change in uncertainty is something we're very used to and it continues to be one of IHG's greatest strengths. This is underpinned by having a clear long-term strategy, significant global scale, brands that (technical difficulties) and long-term relationships with our owners.

So back to our interim results. Before I hand it over to Paul, I'd like to share some highlights from the first half. We continue to deliver against our well-established strategy. Maintaining strong momentum for our brands and driving good growth in all of our key metrics.

3.6% net system growth combined with solid RevPAR increases delivered underlying fee revenue growth of 5%. This top-line growth was underpinned as ever by disciplined execution and a clear focus on costs. We continue to invest in key areas of the business, thus growing our fee-based margin and generating significant free cash flow. Reflecting this performance and our ongoing commitment to generating shareholder value, we have today announced a 9% increase in the interim dividend in dollar terms.

I will now hand over to Paul who will talk in more detail about our financial performance so far this year and I will return later to discuss execution against our broader strategy.

Thanks, Richard and good morning everyone. We're pleased to report another good financial performance in the half, despite the uncertain environment in some markets.

I will focus my commentary today on our underlying numbers, which includes business adjustments for owned hotel disposals, managed leases, significant liquidated damages, and the impact of foreign exchange. As this gives the clearest explanation of our financial performance.

We translated 5% revenue growth into 10% operating profit growth by leveraging the scalability of our asset light business and continuing our focus on disciplined cost management and productivity. This has allowed us to increase our fee margin by 260 basis points year on year while continuing to invest for further growth.

But does also reflect that certain costs, predominantly in our America's franchise business, will be more weighted toward the second half of the year. Consequently we expect our fee-based margin growth for the full year to normalize nearer to our long-term average of 125 basis points. The slightly lower interest charge was due to the increased levels of cash ahead of the $1.5 billion special dividend that was paid at the end of May.

Our effective tax rate increased by three points to 33%, but we do still expect for it to be in the low 30%s for the full year. The weighted average number of shares decreased following the five to six share consolidation relating to the special dividend. In aggregate this enabled us to increase our underlying earnings per share by 11%.

Looking now to our levers of growth. Our hotels continue to operate at near record occupancies of almost 70%. Our comparable RevPAR growth of 2% was predominantly rate driven. Second-quarter RevPAR accelerated from Q1 in each of our four regions with 2.5% growth for the group as a whole. Across the half, we added 17,000 rooms and we removed 12,000 rooms, as we continue to focus on enhancing the quality of our portfolio. This took our net system size up 3.6% year on year.

Turning now to our four regions and starting with the Americas. Where US industry demand remained at record highs and our revenue delivery systems are driving close to peak occupancy rates of almost 70%. In this environment we were able to deliver solid-rate growth taking US RevPAR up 2.1% with 2.6% growth in the second quarter. Our performance continued to be impacted by our over-weighting toward the oil markets, where RevPAR in the second quarter was down 6% compared to the non-oil market up almost 4%.

Underlying profit was up 9%, with good growth in franchise and managed fees. This was aided by a $4 million year-on-year savings on US healthcare costs, which we have now restructured to minimize any future fluctuations. In addition, we had $5 million favorability in the phasing of franchise costs, which we expect to reverse in the second half.

InterContinental New York Barclay reopened in April following its extensive refurbishment. As expected, we did incur some costs ahead of the reopening. These totaled $4 million to date with a further $2 million expected in the remainder of the year as the hotel continued to ramp up.

We signed 20,000 rooms in the half including more than 100 Holiday Inn brand family hotels in the US. We also opened 13,000 rooms, our fastest pace since 2011. To continue accelerating our signings pace and to support the opening of our pipeline hotels, as previously disclosed we plan to invest a further $7 million, primarily into strengthening our franchise development team. We've been recruiting over recent months and we have now filled most of these positions, so expect to incur around $4 million of this cost in the second half with a further $3 million of annualization in 2017.

In Europe, we saw 2% RevPAR growth with mixed performances across the region. The UK provinces continued to trade well. Though London saw a RevPAR decline driven predominantly by continued supply growth. Germany had a strong second quarter due to a particularly active trade [affair] calendar leading to an almost 9% growth for the half. Unsurprisingly, trading continued to be tough in Paris, where RevPAR was down almost 20%, although the French provinces were up 7%.

This solid RevPAR performance along with almost 3% net system growth, would have delivered underlying operating profit growth of 5% were it not for a $2 million reduction in revenues in relation to three managed hotels. Two of these have exited the system. These were older properties, which were good fee earners, but did not live up to our brand expectations. The third is in InterContinental in a key city, which is currently undergoing an extensive refurbishment. We don't anticipate any further impacts in relation to these hotels for the full year.

In Asia, Middle East and Africa RevPAR declined 0.4%. The low oil price and the high level of supply growth in the UAE, meant that RevPAR for the Middle East fell 8%. Excluding the Middle East RevPAR for the region grew 4.3% with strong performance in several markets. In Japan the weaker yen drove increased international businesses and this together with strong domestic demand helped deliver almost 7% RevPAR growth. Australia and Southeast Asia both performed well up 4.5% and 2% respectively, the last are lead by Vietnam, Thailand and the Philippines.

8% net rooms growth and a solid RevPAR performance meant we achieved good underlying growth in our core managed business in the half, but this was offset by $4 million revenue reduction in relation to four hotels. One of these was an equity stake disposal and the other three were long-standing contracts renewed on more current commercial terms. Excluding these four hotels underlying operating profit would have been up 2%. We expect a further $3 million revenue impact from these hotels in the second half.

Moving on now to greater China. Where we drove an increase in fee revenue of almost 14%. Through 12% rooms growth combined with a solid RevPAR performance. RevPAR increased 2.4% for the half with mainland China seeing a 4.7% growth. This is driven by Tier 1 cities, which were up almost 7% led by Beijing and Shanghai benefiting from strong business transient demand. Tier 2 and Tier 3 cities delivered 3.4% RevPAR growth with strong ledger performance.

Hong Kong and Macau were down 5% and 12% respectively for the quarter. Hong Kong continued to suffer from an industrywide decline in inbound Chinese tourism and Macau continues to be impacted by the austerity measures implemented in China.

We have once again generated significant amounts of cash from operations with underlying free cash flow of $241 million. Our gross CapEx of $108 million was covered 2.5 times by our underlying operating cash flow. With our permanently invested maintenance capital in key money covered more than 7 times.

Our CapEx guidance remains unchanged at up to $350 million gross per annum and we expect our recyclable investments to even out over the medium terms, resulting in $150 million net per annum. But in the short term this type of expenditure will continue to be lumpy.

Looking ahead we are being very clear that we continue to be committed to an efficient balance sheet and an investment grade credit rating. This equates to net debt to EBITDA of 2 to 2.5 times and we are happy to at the top end of this range in favorable economic conditions. Following the payment of the special dividend in May, we're currently around the midpoint of that range.

At the current time economic conditions are favorable and we have just driven another half of double-digit underlying EPS growth. However as you would expect and given the uncertainty in some markets exactly where we will feel comfortable within our gearing range is something we keep under constant review.

We will continue to maintain our disciplined approach going forward with the aim of striking the right balance between investing for growth and returning funds to shareholders.

I will now hand back to Richard to provide you with more details on how we are driving our strategy.

Thank you, Paul. At our America strategy presentation last month I spoke about the powerful tailwinds that will continue to drive hotel revenue growth across the globe. These include growing disposable income in aging population and globalization of travel driven by low-cost airlines and emerging market expansion. And it's the major branded hotel companies such as IHG that are benefiting most in these positive trends.

Branded hotels are growing their share of the global hotel industry with 52% of industry revenues in 2015, up from 46% in 2003. We know that branded hotels appeal to guests as they are more confident of the experience they will receive and the value they will get. They also appeal to owners due to high returns achieved and the relative ease of obtaining debt-and-equity finance.

Add to all of this the fact that hotels with powerful brands are more resilient through the cycle and this is why the big branded players such as IHG have been winning and will continue to win market share. This is something that IHG is both contributing to and benefiting from.

Within this there's a clear distinction between the big 5 soon-to-be 4 branded players of which IHG is one and the rest. Between us we have 19% of open rooms around the world but some 60% of the active industry pipeline. This reflects the many advantages of having enough scale confers including a portfolio of powerful brands and loyalty program, funds for sales and marketing, world-class technological capabilities, and operational expertise across all key hotel markets. And it means that IHG will continue to grow at a faster rate than the industry.

So there's a huge opportunity for IHG and our winning strategy optimally positions us to take advantage of this growth in the hospitality sector. Our preferred brands are the heart of this strategy and we have a strong balanced portfolio capable of meeting the principal needs of the vast majority of travelers. But as in any branded business we need to innovate to keep our brands fresh and relevant to drive higher levels of guest satisfaction and open up new avenues for growth.

So I will talk briefly now about some of the brand milestones we have achieved in half. 2016 marks the 70th anniversary of the world's largest luxury brand, InterContinental Hotels and Resorts. This has been our best first half for both openings and signings for 8 years for the brand demonstrating its continuing appeal to both guests and owners around the world.

We also welcome back InterContinental New York Barclay after its major refurbishment. In its first few months of being open it's already commanding rates 35% higher than before it closed. The refurbishment has allowed us to access new parts of the market. For example our greatly expanded conference and banqueting space means we can cater to much larger groups than was previously possible.

Moving on now to Crowne Plaza we're excited about the great strides forward we're making with this brand. As many of you know, this is a highly successful brand throughout Asia and China and over the last few years we have sorted out the basics and cleaned up the portfolio in the Americas. Now we are in a position to invest behind the brand to drive its success into the future. And in June we announced the next phase of the refresh in the Americas. This will include new design in infant innovations allowing guests us to work flexibly recognizing that the line between work and leisure is blurring.

This was another good half for our boutique brands where we continue to have a leadership position. One of the reasons we acquired Kimpton is its potential for international expansion. In January we signed the first hotel for the brand outside the Americas and this will be opening in Amsterdam next year. And just last week we were delighted to be able to announce our second Kimpton signing for Europe in Paris, which is scheduled to open by 2020.

We're also building momentum for our newest brands. We signed a further Hualuxe Hotel in China in the historic city of Handan, bolstering the pipeline for the brand and we're planning more openings soon. In July we opened our fourth EVEN Hotel in Brooklyn our third-owned property for the brand. The pipeline for EVEN is now 7 hotels strong and it's completely asset light, demonstrating the potential for [owners see] for this brand. Both EVEN and Hualuxe continue to receive great guest feedback with EVEN Time Square consistently voted in the top 10 hotels in all of New York, according to Trip Advisor.

Moving to the Holiday Inn brand family, the world's largest hotel brand by a factor 2, continues to power our growth. Holiday Inn and Holiday Inn Express are both driving great success and its vital we keep them fresh and relevant. So we're continuing the rollout of our formula blue room design in the US for Holiday Inn Express, which is mandatory for new signings and major refurbishments.

And for Holiday Inn, our open lobby design for public areas is being rolled out in the Americas and Europe. Both designs are delivering strong results with formula blue driving double-digit increases in RGI and open lobby in Europe driving double-digit increases in both guest satisfaction and intent to return.

It was a particularly strong half for Holiday Inn Club Vacations. Our asset light time share brand that we've tripled in size since 2008 and fast becoming one of the highest growth vacation ownership brands in the US. We opened a record 6 new resorts in the half with almost 2,000 villas including properties in Texas and Orlando.

I will take a moment now to highlight progress we have been making in two important areas of our commercial strategy. Driving direct bookings is a core element to this strategy and our focus is paying off. Digital is our largest channel delivering over 20% or $4.2 billion of our gross rooms revenue per annum, up from just 12% in 2005. Mobile in particular continues to thrive with revenue up more than 30% in the half delivering almost $1.4 billion in the last 12 months up from less than $50 million per annum in 2010.

Furthermore mobile now drives more traffic to our website than desktop, either from mobile visits to our website or via our mobile app. We are also driving significant step changes when it comes to loyalty. We have made some major and high-profile enhancements to our program over the last few years. One of these being the launch of Spire Elite our top-tier membership level in July last year.

Following our pioneering and successful direct channel pricing trial in Europe and Americas in 2015 in May we launched Your Rate by IHG Rewards Club. This provides exclusive preferential rates to loyalty members when booking to our direct channels and is now live in around 14 of 100 hotels acrossed all of our regions except greater China.

These initiatives are delivering some really encouraging results. We are driving material increases in revenue contribution for both new and existing IHG Rewards Club members. Enrollments are significantly up as are point redemptions. A strong sign that members are engaged with the program. And since the launch of Your Rate we have seen a material 2 point shift in growth rate to direct web from OTA.

So to summarize, clearly there continues to be some macro uncertainty in the world at the moment. But IHG has a presence in almost 100 countries and we have one of the most resilient business models in the industry. Looking past this the medium- to long-term drivers for hotel industry and for a large global branded hotel Company like IHG, remain as compelling as ever. We have a clear strategy that we are executing against in a disciplined fashion.

We will continue to generate (inaudible) levels of cash which will allow us to both invest for growth and make ongoing returns to shareholders. We look forward to the future with confidence.

Thank you. So with that Paul and I will be happy to take your questions. Operator, let's move on to questions.

(Operator Instructions)

David Loeb, Baird.

Good afternoon. Richard, you talked about the growth in the 2 points coming into Your Rate from OTAs. There has been a lot of discussion among owners about the near-term impact of these kind of direct booking initiatives. You guys were pretty open on that -- about that in past.

Could you talk a little bit about how that trade-off has gone and whether you think you are just giving essentially a discount to loyal members relative to what they're paying today? Is it cannibalizing or do you think it's already beginning to show up in greater net revenues?

Look I think, from an owners' perspective, done right, it is extremely beneficial. And certainly our owners are incredibly supportive of what we're doing. And as you know, with the IHG Owners Association, we have a very direct and ongoing dialogue, both in Europe and the Americas. Heavily engaged with what we are doing and advising us and very supportive.

I think a couple of ways to look at it. Maybe differently to some of the commentary that's gone on out there. Firstly, this is, in a way, a strategic move around driving a very important channel. Even if there were a short-term impact, which actually, from a rate perspective, we don't see, the fact that we are creating more loyal customers, driving -- heavily driving enrollment into the Rewards Club, at a net cost to owners which is substantially less, is beneficial.

We know over time -- and, David, we have talked about this in the past and you know it, that Rewards Club members stay more and pay more than non-brand loyal guests. So it's got to be the right thing to do. From an OTA perspective, it's very important -- and we have certainly pitched it this way and believe it, OTA is a very important channel to us. And it's not going away nor do we want it to.

It enables us to access price-sensitive leisure travel very effectively with travelers who are not going to be brand loyal and we're never going to be able to afford to access directly. The issue is it's an expensive channel, so the business has to be incremental and profitable; otherwise, it's way too expensive.

So we see them as very much not mutually exclusive. These are both channels that we want to pursue and they work very well. And I think we are seeing a benefit from it.

I totally understand the strategic initiative and agree with you about that. It was really more about, do you think there's some near-term pain that is going on? It sounds like what you are saying is very little. Am I hearing that right?

Paul, do you want to pick that?

David, what we found when we did our trial on this last year in the UK with Holiday Inn Express, and then what we have found since we launched Your Rate, is that the additional revenue management capability that we have from having this new channel means that we can average up, so that any discount that we would have otherwise have seen we are able to negate. So the analysis that we do suggests that we are getting the same average rate as we would have done without the Your Rate channel.

At a much lower cost.

Exactly.

Okay. Great. And one more topic if I may. On the increase in the franchise sales step, when do you expect to see that start to pay dividends in terms of more rapid pipeline growth?

Well, these guys, they phased in this year. We're already signing at record levels. It can only help. But I am not sure Paul would give any guidance on increase in signing. More feet on the street we think absolutely will be beneficial.

Great. Thank you.

Christopher Agnew.

Thanks very much. Good afternoon. On the strong unit growth in the first half of the year, I think we normally -- is it fair to say you've normally seen stronger growth in the second half of the year? Can we assume that this year? And have you seen any delays? I think one competitor talked about some cancellations, or at least push outs.

You're right that a lot of the openings that we see typically will come through in the fourth quarter. And it will be the same again this year. But if you look at the 3.6% net rooms rate increase that we saw (technical difficulty), in comparison to the end of the first half of 2015. So it doesn't include the rooms that got opened (technical difficulty). But we would expect to see more of the rooms come through fourth quarter 2016. In terms of some of the commentary around [people's] pipeline slowing down a little bit -- the last [scene] has been in China -- and I think that some of our peers have a slightly different mix of hotels in the pipeline there. And more of ours is midscale and mainstream, and getting built and coming through well.

And we are continuing to see very strong room openings and very strong room signings in China. So, we're not really seeing it. You always will see the odd hotel becomes part of our project that slows or it's mixed use, so it might take it a little longer, but nothing systemic that we'd pull out.

Chris, I'd just add to what Paul was saying, I think our pipeline is of a higher quality than it's ever been. And the nature, I think, of the markets that we are in today in many countries and the type of owners we are working with is that these are very serious players. And, for us, I know we talk about high-quality growth and it could be just a buzzword but it really isn't. We are very choosy about who we are going to do business with.

David's last question about new developers coming in to sign deals, we could sign a lot more deals if we were less discriminate. And I might say, in the past, we maybe were. But we're very careful now. I'm not saying we're never going to be affected by the economic environment and, clearly, if there's an economic downturn we know that openings slow. But we are signing a lot of deals I said in China, [signings were up in the half]. And I think our diligence and our patience pays off. Because we're working with the owners to power through.

We certainly see in China before that our competitors have been impacted by a lot of developers who required the sale of residential to fund hotel developments and we just have many fewer of those. Not saying we're perfect, we make mistakes, but I think, on balance, it's a very high-quality pipeline we've got.

Got you. Thank you. Maybe a follow-up to that. You talked about removing 12,000 rooms, focusing on quality. Is there a point at which the overall quality of your portfolio's at a point where the removals start to slow down, and is that it point you anticipate?

Let me talk just philosophically a minute and then Paul will pick it up. In any multi-unit retail business you are going to have some churn. You've got assets that age, you've got owners that change, you've got markets that change. And if you think removing 2% to 3% of our real estate, you're talking about, on average, a hotel being 50 years in our system and that's a long time.

I think if you don't remove assets, and we do have a higher removal rate than most of our major competitors, you are ultimately going to be compromising, in my view, on your portfolio. Just common sense will tell you that -- look at any retailer, they churn their portfolios. Not to do it, is great in the short term, but it's extremely dangerous in the long term. Paul?

Yes, I guess the only thing I would add to that is we have talked about the changes we made to some of our franchise contracts in the US where we have moved them from 10 years to 20 years with some stops along the way where there is mandated CapEx. So, longer term, I think it will probably help us.

We've talked about a 2% to 3% removal rate; past couple years it's been around the top end of that. Over time maybe we will drop it down a little from that top end. But, as Richard said, we will continue to take out rooms that are not the best quality under the brands and replace them with others.

Thank you. And then, a little bit of a housekeeping. You talked about fee-based margin increased 260 basis points. Did you say the second half would drop back to your normalized rate of 125 basis points, or was that for the full year?

For the full year, what we said is our long term is 125 basis points. That being the frame that we have seen. So, we would anticipate that, in the second half, it will come closer to that. It might be a fraction ahead of that this year, but my comment was about the year as a whole rather than for the second half.

Okay, great. Thank you very much.

David Katz.

As I look at specifically the Americas and the unit growth, if I am reading correctly it's 1.7%, which is where it has been. If I compare that with a couple of the other larger systems in the Americas, particularly in their limited service categories, their net growth is a little bit more than that. My question is, is that a function of you being perhaps a bit more aggressive on the removals, which has its positive aspects from an operating perspective, or are there other dynamics in that number as you look at yours versus the other guys?

Yes, thanks, David. If you look at our gross openings, our gross openings are right up there with anybody's. In the Americas, in the first half, we opened almost 13,000 rooms, but then we removed 10,000. And that is a greater level of pruning than you're seeing from some of our competitors. And it's deliberate, it's hotels that we've identified that we want to leave, as we continue to push up the overall quality.

I think if you look on a gross basis, lots of demand, lots of signings. We signed 20,000 rooms in the Americas in the first half, which was a very, very high level. Over time, as I said, we may bring down the removal level a little.

Adding developers will help.

Absolutely.

We are not necessarily directly privy to -- does that show up in RevPAR or other for the operating metrics that you strive to improve quality?

It does and it will over time. Absolutely. If you look at our RevPAR -- our share in market by market, then you definitely see it. Share of revenue market share is all driven by everything that we do. And obviously what one removes in a particular year is very small content, but over time it absolutely will.

Great. And I wanted to ask about the free cash flow. And I will admit that I've been on and off since the start, so I apologize if you discussed this already. But the $336 million is up considerably for the half. Can you explain how the dynamics work of that long-term partnership agreements and a favorable phasing of tax payments sort of what that is?

Sure, happy to go into that and some of that might need to get into the nuts and bolts, David. Always happy to do that off-line. We did get a benefit -- we got a benefit in this half from a cash receipt, which relates to a couple of reasonably long-term contracts where the funds are effectively for the system funds, but we get the cash when the system fund doesn't have a set process for balance sheet and separate process for bank accounts.

So when we deploy capital on behalf of the system funds we pay for it and then we get back the depreciation over time through the working capital line. It will be the same with this long-term contract. So we will get the cash up front and then it will effectively amortize back to the benefit of the system funds over time. And then, in terms of tax, there's a few different components in that, which I'll try to explain. All companies tax payers on a public line like this is always hard to do but there's nothing out of the ordinary that's not in the ordinary course.

Got it. Okay. That's it for me for now.

We have no further questions in the queue.

(Operator Instructions)

Thanks, operator. We will call that a day. We've had a few questions. Everybody, thanks for listening. If you've got any questions, please call the IR team here and we will get back to you. Have a good day. Thank you.

Thank you for joining today's conference. You may now replace your handset.