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

Good afternoon, ladies and gentlemen, and welcome to the InterContinental Hotel Group 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.

Thanks, James. Good morning, everyone. This is Catherine Dolton, Head of Investor Relations at IHG. I am 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 discussion the Company may make certain forward-looking statements as defined under US law. Please check this morning's press release and the Company's SEC filings for factors that could lead actual results to differ materially from any such forward-looking statements. I will now turn the call over to Richard Solomons.

Thank you, Catherine. Good morning, everybody. Thanks for joining us. In a moment, Tom will take you through the financial results in detail, but first let me just cover the highlights. 2013 was another strong year for IHG, with our preferred brands driving RevPAR up 5.2%. So together with 2.7% net rooms growth, which is fueled increasingly by our expansion in developing markets, this drove up fees almost 7%. We see significant opportunities to add to our already strong position in many parts of the world. We are making great progress, developing our existing brands, and we extended our portfolio in the year by adding the innovative HUALUXE Hotels & Resorts and the EVEN Hotels brands.

At the same time, we continually look to be efficient in our cost management, combined with our success in leveraging our scale, has allowed us to reinvest in the business and simultaneously to grow our margins over number of years. We once again demonstrated the ability of this business to drive powerful cash flows, providing us with the flexibility to invest in growth opportunities, at the same time as being able to generate significant and consistent shareholder returns. The $1 billion return of capital which we announced in August, combined with a16% growth in the 2012 total dividend announced today, demonstrates our commitment to this long-standing strategy.

So I will now hand over to Tom to talk more detail about the financial progress IHG has achieved in 2012. And I will return later, to look a little into the future and discuss our strategy and business developments.

Thanks, Richard, and good morning, everyone. Revenue and operating profit were up 4% and 10%, respectively, in the year. On an underlying basis, operating profits were up 13%. This is at constant currency, and excludes the impact of $16 million of significant liquidation damages received in 2011, and $3 million in 2012. Profits after tax grew 8% to $407 million, and adjusted earnings per share were up 9% to $1.415. One of the most important metrics for an asset light cash generative business such as ours, is growth in fee revenues, of which the key drivers are RevPAR, room growth, and royalty rates. Our strong rooms and RevPAR growth in the year drove up fee revenues by 6.8%, with royalty rate growth being more of a long-term driver, with only small fluctuations from year-to-year.

Looking at the key two drivers in more detail, starting with RevPAR. In the Americas, RevPAR grew 6.1%, including 6.3% in the US, where trading remained strong in the fourth quarter, despite uncertainty around the presidential elections and the fiscal cliff. We continue to outperform the industry in the US, with total RevPAR growth of 7%, which is on the same basis as the Smith Travel Research data. Europe grew 1.7%, a consistently robust performance for the year, and 4.9% in AMEA reflects strength in Southeast Asia and Japan, partly offset by tougher conditions in some parts of the Middle East. Rates in China RevPAR grew 5.4%, significantly outperforming the industry, but with a slowdown in the second half primarily due to the impact of the political leadership change, which impacted the whole industry.

Net system growth of 2.7% was at the top end of our guidance, and a notable step up compared to the previous two years. We opened 34,000 rooms, up almost 5% from 2011 on an underlying basis, and over a third of these rooms were in our fast growing AMEA and Greater China regions. Room removals have reduced to a more normal level now, we completed the Holiday Inn relaunch and, with our ongoing focus on the quality of our estate, we would expect to continue exits around 2% to 3% from the system each year. Signings of 54,000 rooms, or almost 1 hotel a day shows the demand for our brands, despite the significant or the difficult financing environment which still exists in many markets. Our pipeline continues to be of the highest quality, with 40% under construction. So that is what is driving our fee revenues today.

And I now want to spend a few minutes talking about the shape of our fee growth going forward. The geographical mix of our business is changing, reflecting faster demand growth in developing markets. These accounted for most 30% of our openings in 2012, but a proportion of our system and pipeline at 19% and 50%, respectively. In these locations, hotels are often opening at the same time as the sources of demand for rooms are being developed, which means that they generally achieve a lower absolute RevPAR, particularly in their early years. The best way to think about this is, is at year one these hotels will have RevPARs around 30% of the level of an average mature hotel in that region.

Now let me turn to our financial performance in the year by business model. Underlying franchise profits grew 8% in the year to $547 million, with high absolute margin levels of 84%, illustrating the scalability of this part of the business, which is dominated by our strong presence in the US. In our managed business, we converted 7% underlying revenue growth into 15% underlying operating profit growth, with the proportion of managed hotels now earning incenting fees at 59%. Our owned and leased hotels have performed very well in the year, with strong RevPAR driving a 20% increase in underlying EBIT to $125 million. At the group level, our fee-based margin expansion was better than expected, up 2 percentage points to 42.6%. This was helped in part though, by some one-off items, that are individually small but collectively added around 0.5 percentage point to margin.

We have reported strong margin progression over the last few years, particularly in China, and sustainable margin growth over time remains a key focus. However, in 2013 we are increasing the level of reinvestment, particularly in fast developing markets, as well as supporting our brands to drive continued outperformance. Furthermore, you will remember that in January we announced 8 FelCor hotels will be leaving our system, and these generated around $9 million in fees in 2012, and contributed about 50 bps to our fee-based margins. Therefore, we don't duly expect underlying 2013 margins to grow at the same level as in recent years.

Looking now at cash flows, EBITDA was up 8% to $708 million translating into strong free cash flow, up 10% to $463 million. Net debt of just over $1 billion includes $612 million of capital returns, as we paid out the special dividend and commenced the share buyback in the fourth quarter. I have talked on separate occasions about our three uses of cash, investing for growth, growth in the ordinary dividend, and additional returns to shareholders. We continue to expect to spend around $100 million to $200 million on growth CapEx each year into the medium term, but around half of this in 2013, getting the EVEN brand up and running. As regards maintenance CapEx, we expect this to be around $150 million per annum over the medium term, this compared to $113 million spent in 2012. We grew the ordinary dividend by 16% in 2013 as Richard mentioned, and we have just -- and we have completed just over $600 million to date of the $1 billion capital return we announced at the interims. This reflects our ongoing commitment to an efficient balance sheet, of maintaining an investment grade credit rating.

I am sure you all of have seen the change to our quarterly reporting disclosure that we announced in our release this morning. Having consulted with many different stakeholders, and in order to focus attention on the longer-term performance of the business, we have made the decision to stop producing full quarterly financial statements for Q1 and Q3 results, as of Q1 this year. We will instead provide a trailing update supported by our usual supplementary data for RevPAR and system size. So you will still be able to track our quarterly performance, and we will continue to hold the conference call with time for questions at the end.

I will hand back to Richard in just a moment. But first some comments on current trading and outlook. Although we can only look out around a month with any certainty, forward indicators of lead times and travel intentions are encouraging. Supply in developed markets remains at historic lows, also global demand is at record levels. Group RevPAR grew 6.6% in January, with 7% growth in the Americas reflecting improved business confidence. Greater China RevPAR grew by 21%, principally due to the change in the timing of Chinese New Year. Short-term visibility in this region continues to be limited, and will probably remain so until at least March when the leadership changeover completes. The long-term drivers in greater China remain highly compelling, and our market-leading position leaves us very well-placed. AMEA was up 6% in the month, an improvement on Q4, also helped by the shift in timing of Chinese New Year. And in Europe, RevPAR held flat in challenging economic markets. And with that, let me hand back to Richard.

Thanks, Tom. In April of this year, IHG will celebrate its 10th Anniversary as a standalone Company. Looking back over that time, it is fair to say we have consistently delivered against a clearly-defined strategy. Our focus is on high quality growth. This drive has led us to remove over 260,000 rooms. And in the same time frame, we have opened a remarkable 425,000 rooms, giving us one of the highest quality, freshest portfolio of hotels in the business. We have created an advantage position, through the great work that we have been doing to strengthen our existing brands and create new ones, as well as the unique partnership we enjoy with our owners, and especially through the IHG Owners Association. We have all but completed our move to an asset light business model, disposing of 190 hotels to some $5.7 billion in proceeds.

In more recent years, we have demonstrated the resilience of our business through the recession, successfully relaunching Holiday Inn, and maintaining our dividend while continuing to invest in growth. And in the process, we proved that IHG is one of the highest quality income streams in the industry. We, of course, remain committed to continuing to reduce the capital intensity of IHG and our asset-light strategy, which has helped us drive up return on capital deployed to 7% in 2003, to some 44% last year. We have delivered significant value to shareholders over that time, returning about $9 billion, almost twice the market cap of the group since being listed as a standalone Company. We have grown the ordinary dividend by 11% compounded since 2003. All of this has resulted in total shareholder return in the last ten years higher than any of our major competitors. And we are very proud of that.

So the question on your mind and definitely on ours is, how we continue this track record for the next ten years and beyond? And the answer is more of the same. I have talked on several occasions about generating steady and sustainable growth and market share, through driving RevPAR, and adding the right hotels, at the right locations with the right owners. And making this happen through our three clearly-stated priorities of brands, people and delivery, underpinned by responsible business practices. Looking at where we are today on a couple of these priorities, let's start with our brands. And our brands already deliver superior and consistent experiences, which drive RevPAR premiums to deliver better return on investment for us and for our owners. But we have to keep them contemporary and relevant, and meet changing guest's needs. So we recently enhanced our understanding of our guests through an industry-leading piece of research.

The hotel industry is relatively unsophisticated in this area, and continues to focus on industry classification price points, which mean nothing to guests. Definitions such as our Upper Upscale, or Midscale are categories that guests just don't buy or think about. Our research has allowed us to identify the choices guests make, as a function of who they are, the occasion they are traveling for, and their need when traveling. The detail segmentation analysis we produced now integral to all our brand management processes, including the proposition for our two new brands, and it has been fundamental to our plans for Crowne Plaza.

I will share some of the details on Crowne Plaza now, but will be providing more insight on the work that we have been doing on our other brands at the analyst investor educational event that we have planned for Q4 this year. Crowne Plaza is a well-established brand, and has been a big success for us. But there is a significant opportunity for us to close the performance gap that exists between the brand in the Americas and the rest of the world, and we have got a plan to achieve this. We have made good progress against phase one of this plan, improving the overall quality of the estate. We have exited 18 substandard hotels, and around another 22 to leave in the next couple of years. All quality action plans are scheduled to be completed in the Americas by the end of Quarter 2, and we have rolled out the new guest service training program into all of our regions. And we are on track to complete the rollout of the new brand hallmarks by the end of 2015. In developing these, we have leveraged our guest segmentation work to help us better meet the needs of our target guests.

For Crowne Plaza's target guests, business productivity is their primary need. As a result, we have designed hallmarks to enhance four key areas of the guest experience, arrival, food and beverage, guest room, and fitness and recreation. The team has done a great job. The hallmarks have been tested and piloted now, and we will start to roll them out later in the year. We will talk about them in more detail, once we have communicated with owners and the roll-out has commenced.

Moving now to Holiday Inn, and our efforts to drive awareness for this brand family continue to pay off, with Holiday Inn being named JD Power Award winner for Best Guest Satisfaction in the mid-scale full service category for the second consecutive year. Holiday Inn has enjoyed a fantastic 2012, celebrating its 60th anniversary and being the official hotel provider for the London Olympics. Looking forward into 2013, we won't be standing still, as we will be launching a new advertising campaign for Holiday Inn across several media channels. A testament to the power and longevity of the brand according to Smith Travel, it was the fastest growing brand in the segment in the world last year, with more rooms added than any other brand family. Pretty impressive for a 60-year-old brand as evidence of the success of our relaunch.

Our two new brands tap into the growing global demand for hotel rooms, and the rising consumer trends of greater segmentation and differentiation. We signed 15 HUALAXE Hotels in greater China in the year, and have a further 15 letters of intent in place. Great results for a brand that is not even a year old. We are also making good progress at our EVEN Hotels brand in the US, with one in the pipeline, with several more close to signing. We continue to leverage our global scale with the power of our systems to drive a greater share of industry demand into our hotels. In 2012, 69% of total rooms revenues booked through IHG channels and direct to our hotels by our Priority Club Members. We deploy these systems and platforms in a coordinated way around four fundamental strategies, creating, converting, yielding and retaining demand.

Taking each of these in turn, we need to ensure our brand is top of mind for potential guest search for hotels. We do this through mass marketing campaigns, such as those run for our InterContinental and Crowne Plaza brand in greater China last year. These drove great results, helping us to more than double brand awareness and preference scores in the space of a year. In 2012, we generated $1.4 billion of revenue through online marketing activities, purchasing or managing more than 8 million keywords. Another example of what we can do, due to our scale. In the area of sales, IHG leads the way for innovations, with the focus remaining on growing our overall share of corporate business, through our successful and dynamic pricing initiative. We now have 43% of our centrally negotiated rates on this system, and we are seeing significant success. In 2012, these accounts achieved nearly double the growth in revenue of our traditional accounts, and had meaningful share gain.

Consumers are comparing and shopping like never before, so we have clear strategies to convert more browsers into buyers. In 2012, our websites experienced more than a 0.25 billion visits, and generating $3.4 billion of revenue, which put IHG among the top 10 internet retailers in the US, and our mobile strategy is at the forefront of the industry. We were the first to have apps across all major platforms. And in just three years, we have grown bookings made by our mobile websites and apps from $3 million to $330 million. We continue to innovate to maximize bookings through our direct channels, and to achieve this the most effective way. Not only do we have our powerful best price guarantee, but also a founding member of Roomkey.com, the first industry-owned hotel search engine launched last year. Another industry first is our collaboration with China's biggest e-commerce platform, Taobao Travel, which will enable us to reach many more Chinese guests.

Effective yield management is essential to maximize owner returns. Our industry-leading price optimization tool supports hotels to make the best pricing decisions based on sophisticated algorithms that consider a combination of these target demands, pricing and economic indicators. Our Priority Club Rewards program cultivates our guests into loyal repeat customers and advocates of our brands. We offer members a vast array of point redemption and recognition opportunities, and this great customer value proposition means we now have 71 million members around the world who deliver 41% of revenues to our hotels.

So why have I gone into what might seem like a lot of operational detail this day? I wanted to make it clear how we have driven growth in our [portfolio] for the past ten years, and to explain how we believe we can continue to drive the growth of IHG in the years to come. We built a strong business over the past decade, established a leading position and good momentum in a global industry that has compelling, long-term future demand drivers. However, it's also a very competitive industry which makes it vital to have a clearly-defined strategy that will deliver results, not just for us, but also for our hotel owners. At the heart of this is our brands, which is some of the biggest and best in the world. Through our industry-leading consumer insight work, we are making our portfolio even stronger, refining propositions for our existing brands, as well as launching new ones to capture the growing demand for hotels around the globe. We are also leveraging the scale of our systems, along with the expertise of our people to drive a greater share of demand into hotels in the most cost effective way. Continued innovation and investment in this area is vital in order to ensure we deliver value to our owners and to build on our competitive advantage. And remember, that the sheer scale and expertise we have here is a considerable barrier to entry too.

So we have taken a lot of actions to ensure we deliver high-quality growth into the future is required to invest in our brands, infrastructure, people and technology. Developing markets is, of course, a key area of focus. It is especially so in China, where we need to further build our infrastructure to support our 187 open hotels, and 160 hotels we will open and manage there, effectively doubling the size of that business over the next few years.

As Tom touched upon, our fee-based margin growth will revert to more normal levels in 2013, as we strive to provide balance between current profits and investing for the longer-term future. We do [have], and continue to remain very focused on driving long-term sustainable growth in margins. And while the economy continues to be uncertain in many parts of the world as you know, but we remain confident in our outlook. We have an excellent record of driving superior returns for investors, and we are focused on continuing to do so into the future. Thank you. Tom and I will now be very happy to take your questions. Operator, if we can open up --?

My apologies.

(Operator Instructions)

Our first question comes from the line of Patrick Scholes from SunTrust. Please go ahead.

Good morning.

Hello, Patrick.

I am wondering if you can just give us any more color on the -- those loss of the Holiday Inns with [Halcor]. I am wondering if you folks tried to counter offer, or was the $31 million just too enticing?

Yes, so this happens as you know.

Yes.

260,000 rooms are taken out, and 425,000 new ones we added. So I think we have always seen in this business that some brands that are struggling to grow will have issues. We will often put big financial incentives out there to take some assets. So we have had a relationship with Halcor for many years. So these were, 8 assets in our portfolio of -- I guess, say average quality. And certainly from our perspective, the financial incentives that were offered were way above and beyond anything that could have made a sensible economic return. And our Holiday Inn brand is very successful. And as I have said, it is fastest-growing brand and segment in the world. And we can do deals with owners who want to invest behind that brand, and bring new products in. And so, it wasn't something we lost a lot of sleep over, or spent too much time trying to counter on it.

Got you. I appreciate the update, thank you.

Thanks, Patrick.

And our next question comes from the line of Robin Byde from Cantor Fitzgerald. Please go ahead.

Good morning. Just two questions for me, please. Firstly, on the cost of debt, you just issued a medium term note at a fairly attractive coupon. So I guess your average cost of debt is now coming down. Can you provide any metrics on that movement? And then secondly, you just mentioned system exits a bit earlier of about 2% to 3% each year. Just to clarify, was that system-wide or was that just relating to the Holiday Inns? And is that a rate of churn increasing or decreasing at the current time? Thanks.

Robin, thanks. On the exits, and that has been decreasing, because we had a temp -- a very big quality drive, and we went through the relaunch of Holiday Inn. So we are down -- we are running that much more normal levels. So we saw 2% to 3% system growth, which was net of those exits, across the brands, across the world.

Okay.

So Tom, do you just want to pick up on these -- the interest --?

Yes. I mean, on the that we issued as you say the $400 million selling bonds, at a coupon of 3.875% And that was a great deal for us to do, to put piece of some long-term debt in to the balance sheet. In fact, the majority of our debt now is actually fixed interest rates. And you can work out from the [benched] average of those fixed interest rates from the two bonds and the [loss in leads] what we are paying. It is roughly of the order of 5.5%. In the rounds, and obviously any drawings that we might make on our bank facilities which remain undrawn at year-end, and we will have to factor that in as well, in terms of coming out to a blended rate for the full year.

Okay, thanks for much.

Thanks, Robin.

We now have one further question. It comes from the line of Jonathan Komp from Robert W. Baird. Please go ahead.

Hello, I just wanted to follow-up on the EVEN hotel that is near Grand Central. I just want to get an update on when you envision that opening? Are you still on track for late 2014, or is that potentially getting pushed out until a little bit later?

Yes, we haven't been absolutely specific on opening times. You know what these what things are like, but of that order. I think the thing right now is, we have got the hotel. We are working very much on the experience, making sure that is absolutely right, and developing the brand. So that is the key focus. But we will get it open, and we are looking forward to signing a few more.

And then one question on share repurchases. You did $107 million in the fourth quarter. What you see for the timing for the rest -- for the balance of that program? Do you see it dragging on throughout?

We are not going to be specific about timing, but we are very committed to returning the full $500 million through share buybacks. And we will complete the program in due course

Great. That's all I had. Thanks a lot.

Thanks.

Thank you. We currently have no further questions coming through.

(Operator Instructions)

We now have one further question. It comes from the line of Steven Kent from Goldman Sachs. Please go ahead.

Hello, good morning. Can you hear me?

Yes, hello, Steve, how you doing?

So can we just talk about the asset sales? I missed a little bit at the beginning of the call. But do you have to start all over in New York, and what is the timing in London? And how do we -- how shall we start to think about that as a brand-new bidders? Just explain the process a little bit?

Sure, well, Steve, hello, it's Tom Singer here. Well, as you know we have been on the market with the New York Barclay for some time now. And through the third quarter of last year, we thought we were getting close, so we granted exclusivity to one party, which then subsequently was unable to consummate the deal, so the exclusivity dropped away. We have actually taken the additional time to do a lot more work, in terms of figuring out what we want to do with the assets. And as you might recall, there is a significant refurbishment plan that goes with the Barclay. And a new owner is going to have to spend probably upwards of $100 million to improve the hotel. And we have put together extensive plans and cost estimates now, that we are able to share with people who are interested in taking conversations forward.

So we shortly hope to be back out in the market, talking to people about the Barclay. The good thing is that the asset continues to trade extremely well. And ultimately, we are confident that we will do a good deal that is in the interest of shareholders, in terms of maximizing value through this disposal. In terms of the other asset that we just started to market here in London, the InterCon Park Lane. Again, it is very early days. But again, the asset is trading well, and given the quality of that real estate, there is going to be a lot of interested parties around the world, who I am sure will come in and bid for it. So the main thing to really take out of -- the update I think is that, both assets continue to trade well. We are not forced sellers, and ultimately we are very focused on doing the best deal we possibly can for shareholders.

Okay, thank you.

We now have no more questions coming through.

(Operator Instructions)

Okay. Thanks, operator. I think we will call that it a day. Thank you everybody for much for listening. We appreciate that. And obviously, if you have any more further questions at all, please give us a call. Have a good day, thank you.

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