InterContinental Hotels Group PLC (IHG) 2017 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the IHG half year results call. My name is Laura, and I will be coordinating your call today.

I will now hand over to your host, Heather Wood, to begin today's call. Heather, please go ahead.

Thank you, Laura, and good morning, everyone. This is Heather Wood, Interim Head of Investor Relations at IHG. I'm joined this morning by Keith Barr, Chief Executive; and Paul Edgecliffe-Johnson, Chief Financial Officer. Before I hand over to them for the 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 U.S. law. So 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 Keith Barr.

Thanks, Heather. Good morning, everyone, and thank you for joining us today, and welcome to our 2017 interim results conference call, my first as Chief Executive. It is a privilege to be taking over as the CEO of IHG. Our sector is as dynamic and as fast-changing as ever. Having been part of IHG's Executive Committee for the last 6 years, taking a central role in defining and executing our commercial plans, I am confident that our strategy takes account of this landscape and puts us in a strong position for the future. However, no business can afford to stand still, particularly as the competitive environment involves. I believe there are opportunities to sharpen our focus and drive an acceleration in our growth rate, whilst retaining a high-quality sustainable approach.

Before Paul goes through the financial results, I want to share some early perspectives on how I plan to lead this next phase of IHG's growth. The winning model has proven to drive value creation for IHG and its 5 elements will remain the same. My focus will be on making the winning model work harder for us. We will look to grow at a quicker pace, leveraging the IHG enterprise to deliver growth for our business and returns for our owners. We will strengthen our brands, quickly refining our existing portfolio and leveraging our deep consumer insight to launch new brands that fill unmet consumer needs and deliver superior owner returns. We will invest intelligently in digital, technological and loyalty innovation to enhance our competitive advantage. Our model works best where we've build relevant scale in high-value markets. We will therefore focus our efforts on increasing resources dedicated behind our highest opportunity markets and segments and finding further efficiencies to create more fuel for growth. Through this and an ongoing disciplined approach to capital allocation, we will aim to deliver high-quality long-term sustainable growth in cash flows and continue our record for maximizing shareholder returns. I am confident that we have the strong foundation on which we can build and accelerate our growth, and I look forward to sharing more as our plans evolve.

Paul will now take you through the detail of our half year results, and I'll return later to share our progress on some of our current strategic initiatives.

Thank you, Keith, and good morning, everyone. We're pleased to report a good financial performance for the first half. On an underlying basis, we translated 4% revenue growth into 7% operating profit growth by leveraging the scalability of our asset-light business and continuing our focus on disciplined cost management. This has allowed us to increase our fee margin by 150 basis points year-on-year, whilst continuing to invest for growth. Based on the current outlook, I expect the margin growth for the full year will be broadly in line with our long-term average.

Interest charges fell by $1 million, reflecting the benefit of a lower average cost of debt following our recent bond refinancing, offset by higher levels of average net debt. Our effective tax rate of 33% is consistent with last year's interim results, but we do still expect it to be in the low 30s for the full year.

The weighted average number of shares decreased due to the cumulative effect of the share consolidations following the special dividend payments made in May 2016 and May 2017. In aggregate, this enabled us to increase our underlying earnings per share by 27%. Reflecting this good start to 2017, and our confidence in the future, we have increased our interim dividend by 10%.

Looking now at our levers of growth. We added 23,000 rooms to the system, the highest in 6 years. At the same time as adding these new high-quality representations of our brands, we remain focused on removing hotels that are not delivering a consistent guest experience, exiting 12,000 rooms. This took net system size growth to 3.7%, which, combined with RevPAR growth of 2.1%, drove total underlying fee revenue up 4%. We also signed 32,000 rooms into our pipeline, which means that we've now passed the milestone of over 1 million open or pipeline rooms.

Turning now to our regional performance. First, the Americas, where RevPAR growth was predominantly rate driven, up 1.1% in the half. In the U.S., RevPAR declined by 0.4% in the second quarter. As we highlighted at the first quarter, this is adversely impacted by the shift in the timing of Easter, which we estimate was equivalent to 120 basis points. It's worth noting that third quarter RevPAR in the U.S. will also be adversely impacted by calendar shift. Looking at the performance of individual brands, InterContinental and Crowne Plaza RevPAR declined 3.7% and 2.7%, respectively, in the second quarter, impacted by their distribution in higher supply growth markets, such as Dallas, and a challenging San Francisco market due to the refurbishment of the Moscone Convention Center.

Holiday Inn RevPAR grew 0.2% in the second quarter, while Holiday Inn Express was flat, both brands being impacted by their higher exposure to oil markets and their weighting to a higher supply growth segment. It is, though, important to remember the absolute strength of these brands, our focus for the brand family continues to be on protecting, and where possible, increasing the rate premium we have built over the rest of the upper mid-scale segment, which now stands at 6%. Keith will provide more details on how we're doing this through the transformation of public spaces and new room designs and further innovations in our food and beverage offerings. Newly opened and recently renovated hotels now make up nearly 30% of the brand family. And with over 100 new hotels signed into the brand family in the half, we are well positioned to continue to accelerate the rollout.

For the region as a whole, RevPAR growth of 1.1% and net rooms growth of 1.6%, translated into underlying revenue and profit up 3%. We signed 16,000 rooms in the half, including the first Kimpton in Mexico, our fourth Kimpton hotel outside of the U.S. We also opened 11,000 rooms, including the 900-room InterContinental Los Angeles Downtown.

Moving now to Europe, where RevPAR growth was 6.2% for the half. In the U.K., RevPAR growth of 6.7% benefited from resilient business travel, increases in inbound leisure demand and a reduction in outbound travel, triggered by the devaluation of the pound in 2016. In Germany, as expected, RevPAR declined 3.6% in the second quarter, due to the timing of trade fairs, with the half up 2.3% after a strong first quarter. We expect only modest growth in the second half, again, due to the timing of trade fairs. In France, RevPAR was up 4.5%, driven by almost 12% growth in Paris and leisure demand continued to recover following the terror attacks in 2015 and 2016. Underlying revenue for the region was up 11% and underlying profit was up 12%, driven by strong trading in the U.K. In terms of signings, we had a successful first half, signing 3,000 rooms into the pipeline. These included a Hotel Indigo at London's Leicester Square and 10 Holiday Inn and Holiday Inn Express properties in Germany, where we now have 112 open and pipeline hotels.

Looking now at our Asia, Middle East and Africa region. In the Middle East, RevPAR declined 3.7% due to the ongoing impact of low oil prices, political tensions and industry-wide supply growth. There was some moderation of the decline in the second quarter due to the favorable timing of Ramadan and increased royal family business in Saudi Arabia. We continue to expect tough trading conditions across the Middle East for the remainder of the year.

Performance in the rest of the region was strong, with RevPAR up 4.2%. On an underlying basis, revenue was up 1%, impacted by our weighting to the Middle East and the renegotiation of a joint venture agreement in Japan. Operating profit increased 11% due to the favorable timing of cost. Overall, we continue to expect profits in this region to be in line with the levels achieved last year.

Finally, moving to Greater China, where we continue to see the returns from our focused investment over the past 10 years. RevPAR in Mainland China grew 5.1%, benefiting from strong meetings and corporate demand in Tier 1 cities, up 5.4%; and strong meetings business in Tier 2 and Tier 3 cities, up 5.2%. Total RevPAR declined 0.3%, driven by the mix impact of our strong growth in lower absolute RevPAR secondary and tertiary cities in China. These markets are experiencing rapid increases in supply and demand, and we believe offer the greatest opportunity for future growth. Encouragingly, in the first half, we began to see some moderation in supply growth outside of Tier 1 cities, which balanced with near double-digit demand growth, allowed RevPAR to grow 5%.

Underlying revenues increased 11% and underlying profit grew 15%, boosted by scale benefits and cost efficiencies. Signings totaled a record 46 hotels, 10,000 rooms, including 24 Holiday Inn Express Franchise Plus hotels. Openings for the half totaled 16 hotels, again, a record, and included our 300th hotel, the 350 -- 340-room HUALUXE Zhangjiakou and the first 2 Holiday Inn Express Franchise Plus properties.

Moving on now to cash flow. Our business model continues to generate significant amounts of cash, with underlying free cash flow of $204 million. This is lower than the levels achieved last year, due to the one-off $95 million received in 2016 related to credit card partnership agreements and the movement in system fund balances. As well as using cash to invest behind our long-term growth, we continue to generate sufficient funds to support sustainable growth in the ordinary dividend, which we have increased by 10% to $0.33 per share.

Looking ahead, we continue to be committed to an efficient balance sheet and an investment grade credit rating. This equates to a net-debt-to-EBITDA of 2x to 2.5x, and we are happy to be at the top end of this range in the current economic conditions.

I'll now hand back to Keith to provide you with more details on how we're driving our strategy.

Thanks, Paul. Now I'll give you some highlights of how the winning model has continued to guide our focus as a business. Over time, we've developed our strong and differentiated brand portfolio to fulfill a broad range of stay occasions by evolving our existing brands, creating new ones and buying others to fill white spaces. Using our insight, we continue to innovate and refresh our brands to ensure they remain relevant to changing guest demands and create value for our owners. On the webcast this morning, I gave a quick update on how we continue to strengthen our position in the luxury, boutique and lifestyle segments globally. Please do listen to the recording and download the slides.

On this call, I'm going to focus on how our mainstream brands are evolving. IHG's scale is underpinned by our strength in the mainstream, which we define as the combined mid-scale and upper mid-scale segments. Our mainstream brands, Holiday Inn, Holiday Inn Express and Candlewood Suites, account for 2/3 of our open rooms and pipeline and over half of our revenue. The transformation of the Holiday Inn is moving at pace. Our open lobby public areas continue to be rolled out across Europe. 54 hotels have the new concept, which is driving a 9% uplift in Guest Love scores, and an impressive 20% uplift in restaurant and bars revenue.

In the U.S., results from the rollout of the new public space design have also been encouraging, with hotels achieving a 5 percentage point Guest Love premium versus other recently renovated hotels. We now have more than 40 hotels committed to rolling out the concept by the end of the year, and open lobby is set to become a brand standard by the end of 2018.

Holiday Inn Express is the world's largest hotel brand, with more than 2,500 hotels. Over 2,000 of these are in the U.S. alone. In both Europe and the U.S., our public space innovation, guestroom design and breakfast solutions continue to encourage owner investment. In the U.S., the transformation, which encompasses both public space and room design, is driving real results. We've quickly scaled up to have almost 900 open or pipeline hotels committed to this renovation program, which is driving a 4-point Guest Love premium versus the rest of the estate and a 4 percentage point RevPAR premium versus the brand average. 2/3 of our U.S. open and pipeline Holiday Inn Express hotels will have these designs in place by 2020.

We have also developed a new breakfast solution for both the U.S. and Europe, providing higher-quality food options at a better cost that maintains the lean and highly profitable operating model of a Holiday Inn Express. In the U.S., pilot hotels with the new breakfast solution has seen a 4- to 10-point increase in Guest Love scores, and our owners are committed to installing the solution for the entire estate by the end of 2018.

In Europe, the new solution is now in over 100 U.K. hotels, which represents more than 70% of the estate in that market. We are on track for a full rollout by the end of Q3. So far, results have been extremely positive, delivering a 12-point uplift in breakfast scores.

Due to the success of Holiday Inn, Holiday Inn Express and Candlewood Suites, there's a clear opportunity to build another mainstream brand of scale for IHG. In the mid-scale segment, priced below Holiday Inn and Holiday Inn Express, we've identified 14 million guests worth $20 billion in annual industry revenues, who are currently underserved by existing brands. These guests are traveling for both business and leisure, and they're looking for consistency, a clean safe environment and good value. They want the basics done exceptionally well at the right price and don't want to feel they're paying for things they don't need. Given the significance of this opportunity, and our ability to build scale quickly, we announced in June the launch of a new high-quality mid-scale brand. This will become one of the largest brands in the U.S. -- one of our largest brands in the U.S.

We have a track record of launching brands and building scale positions, and we know we have strong revenue delivery systems that are attractive to franchisees. In the U.S., the Holiday Inn Brand Family deliveries a 50% loyalty contribution and over 80% enterprise contribution. Owners also benefit from our leading-edge revenue -- revenue tools and productivity systems, which drive lower cost of sale. We also have the purchasing scale and design know-how to balance quality, cost and value. When it comes to hotel design and fit-out, all of this drives higher ROI for owners. Using our deep consumer insights into the target segment, we have designed a brand that will give guests consistent delivery on the basics, including a best-in-class mattress and noise insulation that focuses on delivering what matters to them with an elimination of what doesn't. We will target the brand in a $95 to $105 rate, which is a 10% to 15% discount to Holiday Inn Express. We expect to bring in incremental customers to IHG, who are unhappy with the standards of quality, comfort and cleanliness currently offered by other brands in the market. At the targeted price point, with an appropriate room size, suitable fixtures and fittings, relevant public spaces and the lean extended-stay style operating model, we will deliver cash-on-cash returns equal to Holiday Inn Express. This will justify a royalty rate at 5%. This is an incredibly enticing proposition for around 2,000 existing Holiday Inn Brand Family franchisees, who are ideal owners for this new brand and have been heavily involved in all the areas of its creation. The demand for this compelling offer was clear at our recent Americas Owners Conference, when we announced the brand, with over 100 written expressions of interest. We will have more news on the brand later this year.

So in summary, I believe we have a clear strategy, but one that we can make work harder to deliver even better results. We will continue to invest behind improving our existing brands and ensuring they reflect the needs of the guests we serve. We will keep white spaces in our portfolio under review to explore new avenues for growth, and our loyalty program and digital technology capabilities will continue to benefit from the enhancements that strengthen our competitive advantage. We see an opportunity to become more efficient and increase resources behind the highest growth opportunities. This will enable us to continue to generate significant levels of cash, and in turn, allow us to invest for growth and make ongoing returns to shareholders. We operate in an industry with strong demographic tailwinds. And while we are mindful of the macroeconomic and geopolitical factors outside of our control, the strength of our 12 brands and our scale operations in almost 100 countries, gives us confidence in our outlook for the remainder of the year.

Thank you. With that, Paul and I will be happy to take your questions.

(Operator Instructions) Our first question today comes from David Katz from Telsey Group.

I wanted to just ask about your forward-looking perspective. What it appears to be on the surface related to you and not just others is that RevPAR and ultimately, the economy in the Americas, and specifically North America, has been fairly moderate, yet there seems to be some range of expectation that RevPAR reaccelerates later in the year and next year, based on goings-on. I just wanted to have your collective view about where you think and how you're preparing yourself for the back half of the year and into next year.

Sure, well, thanks for the question. I think when we look at kind of the first half of the year, what we saw, as we noted in the comments, was the impact of the shift of Easter, some of the headwinds from the oil markets, things like renovations at Moscone Center and a few one-offs. So there is a multitude of small little things driving it. And then going forward, you have kind of the shift of the Jewish holidays as well impacting Q4 and Q3. And I think the other tailwind, which we've kind of talked about briefly today, has been our commitment to improving the quality of the Holiday Inn Express brand, where we currently have about 300 hotels undergoing renovation, new guest rooms, new public areas and breakfast. That's about a 30 basis point impact on RevPAR right now. So there's lots of ins and outs we try not to list them all in the [SCA]. And I think going forward, we're expecting probably the impact of the Jewish holidays in Q3, but with probably a strengthening into Q4 overall. And I think the other aspect of our business clearly is the acceleration of our system size growth. So with a growing pipeline, we're signing more than a hotel a day, we're opening up 5 hotels a week. Openings are up 30% year-over-year. So at this point of the cycle, where the industry is seeing slowing RevPAR in the U.S., we're seeing accelerating system size growth. And then on a global basis, we're seeing strong revenue growth in Europe, 6% RevPAR growth there, particularly, U.K. and France. And strong growth coming in China as well, too, as we're seeing kind of the whole thesis of investing in China getting to scale with 300 hotels now, a solid pipeline, kind of the maturation in Tier 1 markets and getting to occupancy levels that -- now on par with the Western markets, driving solid RevPAR of 5-plus percent in Mainland China, giving us revenue growth of 10% and profit growth of 15%, too. So again, definitely a slowing in the U.S. along with the industry, but a strengthening in China and other markets like India, Japan, rounding things out to give an overall reasonable RevPAR growth for the company, that's flowing through with effective controls of margins. And so Paul, any?

No, no. That covers it.

All right, okay. I wanted to also talk about the new brand a little bit, which sounds like an exciting opportunity. One of the questions that occurs is -- the limited service in that whole category has been drawing a fair amount of growth. And I wonder at which point you may find it to be a little bit crowded? Meaning, are you taking share from other hotel companies? Or are you capturing demand or customers that would otherwise be in your system, but are sort of leaving for some other brand because you don't have an offering in that category, or some combination?

Yes, that's an excellent question, and of course, anytime you're developing a new brand, it is one of the principal things you have to ask yourself, is the incremental benefit. And so when we did a deep, demand-based segmentation analysis of the mid-scale segment, really determining the white spaces of what was the customer proposition we wanted to offer and at what price point, which we believe we could grow to scale, which would have minimal impact on our existing estate of Holiday Inn and Holiday Inn Express. And so when we designed the proposition in terms of the room design, the guest experience, the food and beverage offer and certainly, the price point, where Project Horizon sits, and testing that against it, these are distinct customers. There is very little overlap with our existing customer base. To say that there is none, no one can say that; anytime you launch a new brand, you are going to have some. But for the most part, this is just meeting the needs of a 14 million guests, $20 billion segment that's being underserved by existing brands today. And the reason for that, this is going to be a new-build offer, powered by IHG's enterprise in the mainstream segment, which we know better than anyone else. And a lot of that existing supply out there is not new-build, effectively it has been conversions that are much older from other brands, who deliver an inconsistent, undifferentiated product and experience, too, so we're very, very confident that this is incremental customer demand coming into IHG principally, and also enabling us to tap into demand from our owners, because it's being built on a different footprint. So an Express needs to be built on a 2.5-acre site, this can be built on a 1.5-acre site. It brings us into different markets where today we can't access it. And the response from our owners at the Americas Conference, a couple of days later, we had 100 written expressions of interest, huge demand from them to be able to invest more with IHG behind our brand. So very confident about it.

Okay. And if I can just ask about your pipeline. Clearly, you're doing nicely, or you sound pleased with the pace of openings. But in terms of construction and development and so forth, are you seeing any change in the cadence of development or starts or openings, either an acceleration or deceleration at this point?

Thanks, David. It's a little bit different around the world and depending on which segment you're looking at as well. As you've seen, we've got a lot of rooms that are coming up in China, and the upper upscale hotels there are largely, pretty large. So they're big boxes, and they do take quite a long time to open, but no real change that we're observing there. But it is quite a long gestation period. I suspect your question is more around what we're seeing in the U.S. and are we seeing a slowdown there. And it's always hard to tell, right? But we've got a very large pipeline and we are starting to see the number of rooms we're opening there accelerating. If you look back to 2013, 2014, when we started to sign a lot more rooms, those are now coming through into a higher level of openings, which is really what we have been talking about for a while in terms of wanting to increase our net system size growth. And as those signings come through, and as we also manage down somewhat the exits within our sort of 2% to 3% range, that is going to give us potential to increase our net system size growth, which at the first half, it was 3.7%. So a better performance that we've had recently and we want to keep pushing up from there. You've got 45% of the pipeline currently under construction. And once the hotel gets under construction, so once you break ground, then the hotel gets opened. So we do monitor ground breaks very closely. And if I was to give you a read, I'd actually say in recent months, we've seen more coming under ground break, rather than fewer. So I wouldn't be calling anything for concern in the -- in the pipeline at the moment.

Okay. One last one, if I may, which is with respect to your rewards and loyalty program. There certainly has been a lot of focus on that aspect of the business lately and enhancements being made to it and inducements to book -- for those members to book directly, rather than going through some other channel. What can you tell us about your plans to enhance that offering and roll out greater inducements toward people joining the loyalty program and using it to their benefit?

Sure, I'll pick that one up. So we really began focusing on reinvigorating the loyalty program about 4 years ago. So we're now north of 100 million members. And over the last 4 years, we've increased to about a 43% contribution from our loyalty program, that's up 4 points in 4 years. So we definitely have some great momentum there. That came from the restructuring of the program, the launch of Spire Elite and the launch of new benefits and so those are beginning to -- those continue to take traction. And so we're growing share every single year with our loyalty program in terms of contribution. And that basically is pulling in customers from other program and increasing the revenue delivered to the hotels. We've got a multi-year road map in front of us to continue to deliver new enhancements and new benefits to members. Some of those are in terms of partnerships. So we've announced things recently with partnerships with Hertz, which give our premium members additional benefits and discounts. And we'll continue to look to enhance the program, to make it more and more valuable, to see that contribution continue to rise, because we recognize it's critical in terms of driving low-cost revenue to our hotels.

Our next question comes from Gregory Miller from SunTrust Robinson Humphrey.

I'm on the line for Patrick Scholes. Apologies if I missed this, but I'm hoping you could provide some more color on your U.S. RevPAR for the first half? And particularly, were there any material changes to your RevPAR indices for the Holiday Inn and the Holiday Inn Express brands?

Thanks, Greg. Yes, so we talked about U.S. RevPAR and the Q1 versus Q2, Q1 being helped by the timing of Easter and then that swinging back in the second quarter, where we were 0.4 negative across that quarter. And a few things we'd pull out there. One, you've still got a little bit of a drag from the oil markets, which we've talked about with the continued quite high levels of supply coming into those markets, nothing like what we saw in 2016, but it still is a bit of a drag. And then we're also seeing some impact from the higher level of hotels, particularly in Holiday Inn Express, that are bringing in the new room product. So obviously, in a very high occupancy environment such as we're seeing at the moment, not having those rooms to sell, because they are under renovation, has been a bit of a drag on the RevPAR, so probably 30 basis points or so. But that is part of the normal business environment and so we're not pulling it out particularly. It will continue probably through the rest of this year, but it will give us a much higher quality estate we've spoken about for a long time. One of the reasons that we signed so many hotels for Holiday Inn and Holiday Inn Express is that we do run a quite considerable premium to the mainstream and we're continuing to keep that. So no reduction to the RevPAR index. It remains high and it's one of the reasons we're getting so many signings.

(Operator Instructions) We have a question on the line from Stephen Grambling from Goldman Sachs.

I guess some follow-ups related to David's questions. First on the loyalty program, and maybe specifically, credit card partnerships. As the program has become more important, and given some of your peers renegotiating some of their credit card programs, is there an opportunity to mark your credit card partnership to market?

Well, we renegotiated our partnership 24 months ago with Chase and so we are in a long-term agreement with Chase at this point. So it's a very market competitive rate and program overall. And again, as we continue to see the program strengthen, it will always help us to have even stronger negotiations in future years. But we're basically in a long-term agreement, which we've recently negotiated, which gave us the cash impact in 2016 of $95 million.

Got you. So that would be something that you'd have to wait for the next kind of renegotiation period. There is no intra period or do you actually get incremental upside if you hit certain targets?

I mean, effectively, it's a long-term agreement that has, of course, performance benefits as the scale grows overall, but there's nothing material that's going to come through in the near term.

Got you. And then on the pipeline and construction, what are you seeing or hearing from your owners on labor costs, both to service the properties and to build the pipeline? And could these factors impact future development or be meaningful to the underwriting of the new brand?

It's an excellent question to be asking. Of course, the inputs in terms of cost can impact development. What struck me, I spend quite a bit of time in the U.S. talking to our U.S. owners and have actually led the ownership relationship with the association for the last couple of years. I have been really surprised by the lack of impact of labor and increased supply cost. They're getting such high cash-on-cash returns in a low cost-of-debt marketplace right now, they're not really seeing it hinder at all in terms of the mainstream development. Of course, it could have some impact in some of the more upper upscale luxury and some of the higher cost markets, but in the mainstream, not hearing any noise at all from our owners that it's having any impact on their desire to break ground or move ahead, because of the high level returns they are currently making and the really kind of favorability of the debt market in those segments right now.

(Operator Instructions)

Okay, well, Laura, if we have no further questions at that point, I think we will draw the call to a close. So thank you all for calling in. Really appreciate your interest and look forward to speaking with you all soon. Bye for now.

Ladies and gentlemen, thank you for joining the IHG half year results call. The call has now finished. You may now disconnect your lines.