InterContinental Hotels Group PLC (IHG) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the InterContinental Hotels Group half-year results conference call. My name is James, and I will be your coordinator for today's conference. For the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. (Operator Instructions) I will now hand 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, I need to remind you that in the following discussions, the Company may make certain forward-looking statements as defined under US law. Please check this morning's press release and the Company's SEC filings for factors that could lead actual results to differ materially from any such forward-looking statements.

I will now turn the call over to Richard Solomons.

Thanks, Catherine. Good morning, everybody, and thank you for joining us. In a moment, Tom will take you through the financial results, but first let me just cover the highlights of what's been another really good half-year progress for IHG.

At the top line, our global RevPAR grew 6.5%, driven by growing preference for our brands and record levels of consumer demand around the globe. We continue to see significant opportunities to add to our already strong position in most parts of the world. We're doing this both by growing our established brand and developing new ones.

Our latest brands, EVEN Hotels and HUALUXE hotels and resorts, were both launched in the first quarter. At the same time we of course recognize we're operating in challenging economic times, and so throughout our business, we've continued our relentless focus on costs, which you can see reflected in yet another half-year of profit margin progression.

I've talked many times about the ability of our business to generate significant free cash flows, which we've demonstrated once again in our results today. This strong financial performance gives us the ability to invest in growth opportunities. At the same time, it's enabling us to return significant cash to shareholders.

Our announcement today of a $1 billion return of capital, combined with sizable growth in the interim dividend, demonstrates our commitment to this long-standing strategy. An important part of this strategy is the reduction in capital intensity of the business, and Tom will update you in a few minutes on where we are today with asset disposals. So I'll hand you over to Tom, then I'll return later to provide more insight into what we're doing to create preferred brands. Tom, over to you.

Thank you, Richard, and good morning, everyone. Group revenue increased 6%, and operating profits were up 11% on a constant currency basis, excluding the impact of a $10 million liquidated damages receipt in 2011.

Our interest charge of $25 million was lower than in the comparable period, reflecting the reduced average level of net debt. And our tax charge increased based on an effective rate for the first half, 1% percentage point higher, at 29%. For the full year we continue to expect the effective tax rates to be in the high 20%s, moving towards the low 30%s from 2013.

Profit after tax grew 9% to $186 million, and our adjusted earnings per share increased 8% to $0.641 cents. Let me turn briefly to some of our key financial metrics.

We grew our fee-based margin in the half by 2.3 percentage points to 42.9%, helped in part by some favorable facing of costs from the first half into the second half. Our scalable model has allowed us to invest in the ongoing growth of our business while still delivering an excellent track record of margin improvements.

In 2011 we achieved around 1 percentage point of underlying margin growth to 40.6%, and we're looking for a similar level of improvement in the current year. We opened over 17,000 rooms and removed 9,000 rooms in the half, resulting in 1.3% net system growth since year end, and we remain on track to achieve 2% up to 3% net system growth for the full year.

Going forward, we continue to see good potential for growth outside the US, in particular in emerging markets. In China there have been no additional project delays to the handful we reported at Q1. Some of those are now making progress.

And in the US, we're not as yet seeing any meaningful improvements in financing conditions. Our pipeline remains strong, with more than 22,000 rooms signed in the half, and we consider our pipeline to be of the highest quality, with over 40% under construction and around 70% financed.

We continue to have a leading 13% share of the global active hotel pipeline and are confident that this will convert into open rooms. Looking now to cash flow, EBITDA was up $12 million at $332 million, which translated into free cash flow up $62 million at $149 million.

Net debt of $564 million is up marginally on the position at the year end, reflecting seasonal working capital outflows. We've talked before about our three uses of cash -- investing in the growth of the business, paying a sustainable ordinary dividend, and additional returns to shareholders. And let me briefly comment on each of these in turn.

We have a great track record of funding growth capital expenditure through recycling. And we look to continue to do this, making selective investments according to strict criteria, which Richard will talk about in more detail later on. The $5 million of growth CapEx in the half reflects the lumpy nature of this spend, and we do still continue to expect to be in the range of $100 million to $200 million for the full year on top of the maintenance CapEx of around $150 million.

The 31% growth in the interim dividend reflects our confidence in IHG's prospects, the strength of our business model, and continues the rebalancing over time of the interim and final dividends towards a one-third/two-thirds split. It also reinforces our strong track record of increasing distributions to shareholders. We've maintained or grown dividends in every year since demerger, paying out $1.3 billion over that time frame.

And today, we're also announcing a $1 billion return to shareholders in two parts -- a $500 million special dividend with share consolidation to be paid in the fourth quarter; and a $500 million share buyback program, which we plan to commence in the fourth quarter, both subject to approval at a general meeting of shareholders, likely to be held in October.

This will take the total funds returned to shareholders since 2003 to around $9 billion, including the ordinary dividend, almost twice the market capitalization of the Group when we float it. And this return reflects our ongoing commitment to an efficient balance sheet while maintaining an investment grade credit rating. It also takes into account the expected proceeds from the sale of the InterContinental New York Barclay, the process around which continues to progress.

We remain committed to reducing the capital intensity of the business over time whilst maximizing long-term value for shareholders. And in line with this, we expect the Intercontinental London Park Lane to be the next major asset that we market for disposal, with the key milestone in this process being the expected opening of InterContinental London Westminster by early 2013.

Before I hand back to Richard, let me just say a couple of words about current trading. Based on provisional figures, Group RevPAR grew 3.8% in July, and this, in part, reflects tougher comparatives as well as we the midweek timing of the Fourth of July holiday in the US, Ramadan being a month earlier in 2012, and softer trading in London ahead of the Olympics. Greater China maintains a strong level of RevPAR growth, particularly in the north of the country.

Despite continued uncertainty in the macro economy, especially in the euro zone, we remain very confident about the outlook. Supply in developed markets remains low, whilst global demand is at an all-time high, and this will help support RevPAR. Although we can only look forward with any certainty around 4 to 6 weeks, leading indicators of booking pace and travel intentions remain encouraging, with rooms on the books and rate up for the Group as a whole for the rest of the third quarter. So on that note, let me hand back to Richard.

Thanks, Tom. I talked in some detail at our full-year results in February about the tailwinds that will continue to drive up demand for hotels over the next few decades. IHG has around a 5% share of an industry which is set to double in size over the next 20 years, much of which will come from the US, China, and India.

The penetration of branded hotels will also continue to grow, and IHG, as the biggest branded player, is extremely well placed to benefit from this significant future demand growth. Our long-standing strategy of strengthening and developing our established brands, whilst adding new brands, gives us the confidence that we will continue to grow our share of these increasing industry revenues.

I want to spend a little time now focusing on the work we've been doing on our brands. So let's first take a look at the progress we're making with our established brands.

As our largest brand, the relaunch of Holiday Inn continues to deliver significant value for both IHG and for our owners. The brand continues to grow its premium to the upper-midscale segment, and as our owners get improved returns, we're seeing the benefit in better signings and improved net system growth.

Highlighting the scale of what we've done, we removed almost 1,400 hotels and replaced them with almost 1,800 new ones. This has brought down the average age of the Holiday Inn family around the world to around 10 years old, making it one of the freshest brands in its segment.

Our efforts don't stop there, though. We are continuing to drive awareness for the great work that we've achieved, and this is really paying off. You'll recall that in 2011 Holiday Inn in the US was named the JD Power award winner for best guest satisfaction in the midscale full-service category for the first time. Well, we heard just a few weeks ago that we've won this award for a second year running, clearly demonstrating the very positive impact the relaunch has had on our guests' perceptions of Holiday Inn.

Holiday Inn and Holiday Inn Express are the official hotel provider for the Olympics, a great opportunity for us to showcase them in London, but on a global scale. The campaigns we've had in place in the run-up to the Games have driven great increases in awareness for the brand, and we are also celebrating Holiday Inn's 60th birthday this year, with a number of events at our hotels around the world. This is a great platform for highlighting the heritage, longevity, and innovation for our largest and most successful brand.

I talked at some length in February about the work we're now doing on the Crowne Plaza brand. Crowne Plaza is today our highest priority, especially in the Americas. It generates almost 20% of our hotel gross revenues and is the fastest growing upscale brand in Asia Pacific. So it is successful and has a very solid foundation for future growth.

But there remains a significant opportunity to close the performance gap which exists between Crowne Plaza in the Americas and the rest of the world. We're making good progress against phase 1 of the plan I first told you about a year ago, improving the overall quality of the estate. We've already exited 16 substandard hotels in the system and expect to remove around another 25 over the next couple of years. In total, this represents about 10% of the Crowne Plaza hotels open today.

We're also well underway with quality audits across the estate, and we expect these to be complete globally by the end of the first quarter 2013. Phase 2 will see us using our own capital, if necessary, to make sure we add and retain Crowne Plaza hotels in the right locations with the right assets to build awareness and showcase the brand properly. And phase 3 will see us rolling out the new hallmarks. We continue to expect this process to be largely complete by the end of 2015.

Our approach has always been to maximize the strength and scale potential of every brand that we own. This has worked well for us. Although we have fewer brands than most of our major competitors, ours are among the largest in the industry. Our brands rank either first or second globally in their respective segments in terms of open and pipeline rooms.

These leading positions have been delivered through innovation and the creation of brand families. So we concentrate on doing as much as we can with our portfolio of existing brands, but there is a limit as to how far we can go. A good example of this is the strength of InterContinental and Crowne Plaza in Shanghai, where we will have 15 hotels operating under these two brands once our pipeline is open.

This is just one of the reasons why we develop new brands, which I want to talk about now. The requirement for new brands in the hotel industry is also fueled by the evolution and multiplication of consumer needs. We've seen this elsewhere, from fast-moving consumer goods, to cars, to clothing, and it happens in different speeds and developed in emerging markets.

The scale of our business and the way we've set up and designed our revenue generation systems makes it relatively easy for IHG to add new brands. We can create instant demand overnight through the strength of our loyalty scheme websites, call centers, and sales professionals.

On the supply side, there is a natural limit on the number of hotels a single brand can support in any given market. This is due to a number of factors, but is primarily down to the nature of the third-party ownership of hotels and the way that we deliver demand into a market.

So we push this as hard as we can with brand extensions, but the counterpoint were to meet demand and supply requirements, and maintain our rate of share growth, we do need to look at adding new brands to our portfolio. At IHG we have a successful track record of buying and launching new brands. This is due to our thorough approach, which takes into account the needs of our target guests and our owners as well as how we leverage the expertise we have at IHG.

This is the approach that informed our decision to launch two new brands this year. Earlier I referenced the huge potential for growth in both China and US markets, much of this being in the midscale and upscale segments. HUALUXE and EVEN Hotels not only address this, but also speak to segments of the market that are not currently being catered for -- in the case of HUALUXE, the domestic guests looking for a five-star Chinese experience; and for EVEN, the mainstream traveler wanting a complete wellness solution.

Owners already are showing huge interest in both brands, with 27 letters of intent signed to date for HUALUXE, mostly with owners new to IHG. Furthermore, 8 of these have already been converted into management contracts.

It's IHG's significant expertise in both markets and the scale of our operations which enabled us to launch these two new brands simultaneously. IHG's commitment to invest behind the growth of our brand is crucial to their success. We are very selective in the investments that we make, taking into account the combination of financial and strategic criteria. We will only invest where we see the opportunity to create value for shareholders, and all investment is about driving growth in our brands and having the ability to recycle our capital in the future.

In general, we look for a project to generate returns above our risk-adjusted costs of capital by its third year. And once our investment has been recycled, our ongoing fee income means we're actually driving much higher levels of returns. In fact, the post-tax return on capital for the Group as a whole in 2011 was 40%.

Investments must also support our strategic priorities. Additionally, we may look to take opportunity of value adding acquisitions or joint ventures, as we've done in the past. We do have a strong track record in interesting capital to build brands, including our two extended stay brands and the rollout of Hotel Indigo. In 2011 these brands contributed over $1.2 billion to gross revenues and now account for over 700 open and planned hotels.

With the exception of the Candlewood investment, which remains on our balance sheet, and last year's Hotel Indigo joint venture, these investments have all since been divested and all the capital released for recycling.

So what does all this mean? How much do new brands really matter? Well, it takes time to build new brands and for them to make a meaningful contribution to our top and bottom lines. Nevertheless, we forecast that by 2021, 15% of our gross revenues will come from our newer brands, which today represent some 14% of our development pipeline.

So these brands will become increasingly important to IHG and are already delivering valuable incremental growth. You will have heard me talk on several occasions now about our three priorities for high-quality growth. Today I focused on the first of these, being preferred brands. But we also continue to make good progress with the other two -- attracting and retaining talented people and ensuring we have best-in-class delivery systems, all underpinned by responsible business practices.

By delivering on these priorities, we will generate steady, sustainable growth in market share and margins. So to sum up, IHG is well placed. We are consistently delivering against a clearly defined strategy, and we remain confident in our outlook.

We have leadership positions in 13 of the top 20 global hotel markets and with our industry-leading pipeline are well positioned to continue to grow our market share into the future. We are using sophisticated consumer insights to strengthen our established brands and will launch new brands to capture the growing demand for hotels.

And finally, we are delivering strong increases in earnings, sector-leading ordinary dividends, and by taking returns to shareholders since demerger to almost $9 billion, we've clearly demonstrated our ongoing commitment to deliver superior returns.

Thank you. So with that, Tom and I will now be happy to take your questions. So, James, can we open the lines for questions, please?

(Operator Instructions) Patrick Scholes, SunTrust Robinson.

Good morning. I have two questions. First is just a little more clarification on your target net debt to EBITDA. Still, is that approximately 3 times?

Okay. Ask the second one, and then we'll --.

Okay. And then the second one, I had read during the quarter an article, how you were changing your strategy in India, exiting some relationships and then possibly doing building on your own. If that's correct, could you talk a little bit more about that?

Okay. I'll take that one, and then get Tom to talk a little bit more about debt and the balance sheet. It's not strictly correct, no. I think it's half correct.

Okay.

So we've been in India a long time, certainly way before we were in China, back into the 60s. And to be honest, we probably have made all the mistakes that there are to make in entering into a different market. And we hope we've learned from those.

So our strategy in India has been to unwind our relationships with some owners and take out some poor quality assets, as you've seen us do in other markets. And what we currently have is about 12 hotels open. But we have a pipeline of getting on for 50 hotels. And most recently we signed a joint venture, which I think we've talked before about, with an owner coalition called Duet for launching Holiday Inn Express in India.

So what we're doing is we've tidied up the portfolio. We have a small investment -- it's about $30 million -- into the joint venture, which will develop -- I forget, Tom -- 16 or 18 Expresses in India? Which is, actually, I just -- 19 Expresses. I'm not being very good at the numbers right now. 19 Expresses in India.

So we see a lot of growth potential in that market. It's not an easy place to do business, and choosing the right partners is absolutely crucial. We very comfortable we've done that with Duet, and we're quite excited about the opportunities there.

So that's India. You want to talk about the balance sheet, Tom?

Just in terms of the balance sheet, Patrick, I mean, obviously we are keen to make sure that our balance sheet is efficient, and we previously talked to the equity markets about a net debt to EBITDA ratio of between 2 and 2.5 times. That's really shorthand for saying that the overriding criteria is to make sure that we remain investment grade.

Okay. Very good. Thank you for the update.

David Loeb, Baird.

Good morning. I actually had a few, if that's okay. One kind of simple one. In thinking about the special dividend, was the timing of that, is it important that the timing of that be by calendar year end, given some expectation of increased tax rates on dividends in the US next year?

No, that wasn't really driving the thinking, David. What we are keen to do is return value quickly to shareholders, but we do need to go through the step of having a shareholder meeting to approve the special dividend, which we are planning for October, and we will return the special dividend as soon as we can after that. I know that some of our peers have announced distributions of capital which are driven by the particular tax position of their major shareholders, but that wasn't a consideration in our thinking.

Okay. Shifting to China for a minute, you've made tremendous progress, particularly on HUALUXE, in a very short time. Can you talk a little bit about the contract terms, in terms of the length of those contracts and the basic fee structure? Are they similar to the bulk of your Chinese contracts, meaning, call it 10 years, or do they tend to be longer contracts?

No, the terms are pretty much in line with our existing contracts. I think it's an interesting facet of the Chinese market that we think it's very important that we have a consistent offer there, because things get shared amongst owners; people know each other, and I think it's important to be seen to be treating everybody the same way.

So we have good terms there, as you know, in our contracts. And the HUALUXE contracts are broadly exactly the same. I think it's really important for us that we talk about growth, but we talk about high-quality growth. And that high-quality is about the owner you're doing business with, it's the location of the asset, and it's also the terms of the deal.

And there's no question in China that we obviously have a very big lead in that market. We were there before anybody else, and we've grown significantly faster, and have, as you know, a great presence at about 170 hotels open, about 150 in the pipeline.

There are people out there just signing a lot of deals in order to have the numbers, and we're not getting into that game. We've got to make sure we've got sustainable growth with decent fee streams. So we're holding very firm on contracts out there.

Okay. And from a competitive position, is it advantageous to have 10-year contracts versus the 20 or longer that Marriott's been able to get in some of the major markets, and Starwood has been able to get in major and resort and secondary markets?

We have long-term contracts in China, absolutely.

Okay. I'll leave it at that. On the US-owned estate, I think the last list we saw had three Intercontinentals in the US. I assume Boston is one of those. What are the other two, and what are your thoughts about disposal of those?

There are three hotels. Boston is the least hotel. We've got the Mark Hopkins in San Francisco; and we've obviously got the Barclay in New York, which is for sale. Tom, you want to talk about what we have in there?

So on the Barclay, where in the middle of a negotiation with a preferred bidder, who we've promised exclusivity to. It's taking longer than we would have liked, really because there's also the need to agree on a significant renovation plan for the property.

We expect the new owner will have to spend over $100 million to refurbish the asset, and it just takes time to work through the detail of asking for them to complete the physical due diligence on the property. So that transaction continues to move forward, and clearly the return of capital that we've announced today is in no way contingent upon us ultimately selling that asset, which we remain confident we will do in the coming months.

In terms of the other two owned assets in the US, we have no plans at this point to dispose of them, and the only announcement that we've made today about future InterContinental disposals is in relation to Park Lane in London.

Right. I guess, obviously, New York I've been following very closely and appreciated your remarks in the release about that as well. I was going to ask separately about that, if that was -- if the negotiations were still with the same party, and you were still on track for that. It was just taking a while.

Yes, it's still with the same party. As I was just saying, there's just a lot of detail that has to be agreed. And we're very comfortable with the prospective purchase there of that asset. They share our vision of what the asset could become in terms a rather significant flagship for the Intercon brand in New York, but it just takes time to close out the deal.

Right. So my question was really more geared towards the Mark Hopkins, given asset sales on Nob Hill. That seems like a very robust market. I understand with Boston, the financially -- really means that there's not much you can change there, but is the Mark -- is that another potential source of capital at some point in the not too different distant future, given how hot that market is?

Yes, we continue to look at ways of reducing the capital intensity of the business over time, as I said. We've talked about our focus now on Park Lane in London. And Mark Hopkins -- we'll continue to evaluate it over time, but it's not a priority for future asset disposals at this point.

Okay. I have one more that's more of a request, and then I might come back with some other detailed things later on. We have had a lot of interest from US investors trying to break down the EBITDA streams by line of business, in some cases by geography.

I just want to ask again if you would consider giving us depreciation and amortization by region and by business unit, so that we can do some of that work in helping our investors comp you against -- kind of business by business against the major global competitors.

All right. Well, look, we hear your request, and we'll continue to give it some thought, but we're not going to commit to that on the call today. But we understand where you're coming from.

Great. Thanks, Tom.

And we currently have no further questions coming through, so ladies and gentlemen, as a reminder (Operator Instructions).

Okay. Well thanks, James, if we haven't got any questions, thank you everybody for listening.

Apologies. We do have two more questions now, if you'd like to take them.

We do? Absolutely. Go on.

Chris Jones, Telsey Advisory Group.

Hi. Good morning. Thank you for taking my question. Just really quickly, could you just remind us exactly what -- or give us a ballpark estimate as to what the impact is from profitability from both the Barclay as well as the Park Lane? Obviously it would be helpful in terms of (inaudible) looking forward.

Apologies for interrupting. Chris. Sorry. That's just the operator speaking. The line is a little bit faint. Would you mind (multiple speakers) slightly?

Can you hear me now?

That's great. Thank you. Please go ahead with your question.

Yes, can you just give us -- I'm just looking for a little bit more detail as it related to the Barclay and the Park Lane as to what the overall profitability is, so we can -- for more accurate modeling looking forward?

Yes, we don't actually spec it out on an asset-by-asset basis. The level of disclosure that we go to is by region. So if you look in our regional segmentation of profits, you'll see what we generate out of Europe, for example, which is a combination of our hotels in London and Paris. I'm afraid we don't give further granularity in terms of individual asset performance.

Okay. Thank you.

David Loeb, Baird.

I'll just keep going with my last three. Can you talk about the progress on finding the halo locations for EVEN and Crowne Plaza, particularly in the US? I did see you got some good press this past Sunday in the New York Times about EVEN, which is nice to see. So how is that coming in time in terms of finding those locations?

It's actually going well. We're obviously very careful to make sure that what we do in the first couple of locations is going to be exactly right, so we are taking our time. But the team has got quite a few things they're looking at, so I'm confident in the course of the next few months we'll get there on that.

And as you said, there's an awful lot of interest in the brand, and we're finding from both potential guests and owners an awful lot of interest. So we're quite excited about that. We're moving that forward as fast as we can, but we're going to do it right.

Okay. So you're thinking late 2013, early 2014 for the first openings for EVEN?

I think we've always talked about that, and whether we buy something that we can convert or build, it's going to take a reasonable period of time, as you know. So not before that.

Last two on China. First, Marriott in particular and Starwood to a degree mentioned weakness in some secondary markets in China. I certainly appreciated you giving us some geographic segmentation in the release today, but are you seeing a generalized weakness in secondary markets and resort markets in the southern Chinese markets, and what do you think is behind that today?

In terms of China, we did see a little bit of a slowdown in a handful of projects at the start of the year, where owners were struggling to get financing. And that's really starting to correct itself.

A number of those projects have restarted, but I think the main metric that really indicates the health of the market is RevPAR, where it continues to grow very strongly, and we continue to see good growth in general across the country, albeit it's a little bit weaker in the South and the West.

I think, David, this is one of those areas where in any market you've got winners and losers, and when I talk about being very careful who we do business with, where we sign, and locations of our assets, then even in any particular market you've got -- you can describe a market; you can talk about a hotel, but the location is absolutely crucial, and I think we do have an advantage having been there longer with the sort of relationships that we have.

We really are, I think, outperforming the market in China very significantly from a RevPAR perspective. And I think it's because of the quality of the teams and the people, the relationships and the history. So it hard to generalize, but as in any market, you have ups and downs across the piece, but the really important measure that we set ourselves internally and externally is market share and it affects the performance of our assets against others. And as I say, we continuing to gain very significant share in China.

Great. And my absolute last question. Can you talk about labor cost pressures in China? What's kind of the latest on the labor trend today?

I think in all of these fast-growing markets, whether it's India, whether it's China, whether it's in corporate, whether it's in the hotels, there are labor cost pressures. But what we're seeing is the ability to really drive rates and revenues into the assets. So it's a pressure we have in many markets and just different things on the P&L, but the measure for me, or the test for me, is are we generating returns for owners, which keeps them coming back? And the answer is yes.

With say 150 hotels in the pipeline, and interestingly, the majority of the owners we are in negotiations with our lots are new owners to IHG. So we have a reputation for really being able to deliver returns in the assets, and clearly, that's about driving the bottom line, but also being able to offset costs through efficiencies as well. So it's there, but it's not causing us a problem at this point.

Great. Thank you very much. Appreciate all this.

No further questions coming through.

All right. Thank you, James. Thank you, everybody. Appreciate you listening, and obviously, if you have any further questions, please give us a call. Thank you very much.

Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets.