InterContinental Hotels Group PLC (IHG) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the InterContinental Hotel Group interim results 2014 conference call. For the duration of the call, you'll be on listen-only. However, at the end, you will have an opportunity to ask questions.

(Operator Instructions)

I will now hand you over to your host, David Kellett, to begin. Thank you.

Thank you, Faye, and good morning, everyone. This is David Kellett. Head of Investor Relations for InterContinental Hotels Group. I'm joined this morning by Richard Solomons, Chief Executive and Paul Edgecliff-Johnson, Chief Financial Officer.

Before I hand over to them for a discussion of our results, I need to remind you that in the following discussion, the Company may make certain forward-looking statements as defined under US 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 would now turn the call over to Richard Solomons.

Good morning, everyone, thanks for joining us. In a moment, Paul will take you through the financial results in detail, but first let me cover some highlights. We had a strong first half with RevPAR up 5.8% and underlying fee revenues up 6%.

We opened 17,000 new rooms and had our best half of signings in six years. A further demonstration of hotel owners preference for IHG brands. Fee-based margins are up 1 percentage point year-on-year, reflecting our continued focus on cost efficiencies and leveraging scale and also some benefits from timing.

We continue to reduce the asset intensity of the business and completed the sale of two landmark InterContinental Hotels the US, in New York and San Francisco. The strategic review of remaining owned assets is progressing well, and we will update you as and when we have more to say. We've continued our consistent track record of returning value to shareholders, completing our most recent share buyback in May and paying a special dividend in July. Together with the 9% growth and the interim dividend we're announcing today, total returns to shareholders amount to $10.4 billion, since our formation of the standalone Company in 2003.

So, I'll now hand over to Paul who will talk about the financial progress IHG has achieved in the first half, and I'll return later to update you on some of the key elements of our strategy.

Thanks, Richard, and good morning, everyone. We're pleased to report another strong trading performance in the half-year, with solid growth despite the short term noise from hotel sales and liquidated damages received that are in our reported numbers. I will therefore focus my commentary on the underlying results.

On that basis, we increased both our fee revenue and operating profit by 6%. Higher interest and tax charges were offset by the 4% reduction in weighted average shares as we completed our share buyback program, and underlying earnings per share increased 7% year-on-year. Our 6% growth in fee revenue was the result of continued increases in RevPAR and net system size in each of our four regions which grew in aggregate by 5.8% and 2.2% respectively.

To give you some more color as to where and how we drove this growth, I will now talk to the performance of each of our reasons in more detail. Starting with the Americas where demand was particularly strong in the first half. The $22 million of fee revenue growth we delivered was almost all RevPAR driven. Occupancy of 68% was 220 basis points higher year-on-year and 2 percentage points above the 2007 prior peak.

Effective yield management of this strong demand allowed us to increase average rates in the US by 2.7%. This took them to a record level on a nominal basis, but still 4% below the prior peak after adjusting for inflation. In aggregate, this generated Americas RevPAR growth for the half of 6.7%.

From a competitive standpoint, Holiday Inn outperformed its industry segment by just over 1 percentage point on a total RevPAR basis. InterContinental and Crowne Plaza also performed well, but were held back a bit by their high distribution waging towards major East Coast cities like Philadelphia and Washington DC, which saw lower overall demand growth. And in New York, by the upcoming closure of InterContinental Barclay and high levels of supply growth in the Times Square market. Signings of 19,000 rooms are up significantly year-on-year, reflecting the strength of our preferred brands and supported by the continued improvement in the hotel debt financing environment.

Moving on now to Europe, which drove $6 million of our fee revenue growth. Our key markets continue to perform well with strong growth in the UK where RevPAR is up nearly 9% and solid trading in Germany. In France, however, RevPAR decreased 3.5%, although 2.5 percentage points of this was driven by double-digit RevPAR declines at InterContinental Paris Le Grand where the Salon Opera Ballroom refurbishment was completed in the first half. The region's underlying profit was held back by this refurbishment, reducing by 3% in the first half despite the 8% growth in fee revenue.

Moving now to our Asia, Middle East and Africa regions where fee revenues increased by $1 million. Comparable RevPAR grew 5.4%, excluding Thailand and Egypt which continue to be impacted by political unrest. Total RevPAR grew 1.7%, reflecting the continued increase in mix of rooms from lower RevPAR in developed markets. The core business in Asia, Middle East and Africa is performing well, but a combination of sale one-off items, trading disruption and investment for growth is holding back the region's profit.

Moving on now to Greater China where we drove a $3 million increase in fee revenue through new openings and significant RevPAR out performance, despite the ongoing challenges from the austerity measures that are affecting the whole industry. This is testament to our strong brands and the market-leading position that we have built up in this region over the past 30 years. Although comparable RevPAR increased 4.3%, total RevPAR declined 1.4% as we continue to drive new openings in fast developing tier 2 and tier 3 cities.

Underlying revenue and profit was flat despite good growth in our fee business, impacted by $3 million of lower revenue and profit from our own total InterContinental Hong Kong. This was due to the short-term disruption in the redevelopment of the land adjacent to the hotel which long-term will greatly benefit the area.

Our broad portfolio of brands puts us at a competitive advantage in continuing to grow our scale and China. This was demonstrated by a 13% net system growth and very strong signings once again with 7,000 rooms added to the pipeline. Overall, this takes our total number of hotels open and in the pipeline in China to over 400.

I'll return now to the group as a whole. Sustainable fee margin progression over the medium term remains a key priority for us, and we have again delivered this with 1 percentage point year-on-year increase in the period. However, for the full year, margin growth is likely to be less strong within the first half, reflecting the timing of costs and continued investment for longer-term growth.

Moving now onto our capital allocation strategy. We're been very clear, I think, that we're committed to an efficient balance sheet and investment grade credit rating which equates to net debt-to-EBITDA of 2 to 2.5 times. Following the payment of a special dividend in July, we're now the top end of our stated range, a level we are comfortable with in the current favorable economic conditions. Our approach to capital investment remains unchanged. We will continue to invest to position our business for optimal long-term success.

However, I want to provide further clarity today on how I look at the way we invest and why I have decided to increase our disclosure in this area. You can see some slides on this in the results presentation posted on our website today. Our medium-term growth capital expenditure guidance of up to $350 million a year remains unchanged, but some of this expenditure is recoverable over time, resulting in a lower net amount.

I think of our capital expenditure falling into three distinct categories. Firstly, expenditure on maintenance CapEx and key money to support the business. Secondly, on strategic recyclable capital investments to drive the growth of our brands and priority market expansion. And thirdly, system funded capital investments primarily to strengthen our technology platforms to ensure we remain competitive in the evolving digital world.

Recyclable and system-funded capital investments account for a significant portion of our gross capital expenditure. Whilst there will be ups and downs in these investments, over time, they are expected to self fund effectively and have a broadly neutral cash impact on IHG's net debt position, leaving us with a normalized net capital expenditure of somewhere between $100 million and $150 million a year on maintenance CapEx and key money.

To gives some more context, I will now talk through each of these three CapEx categories in more detail. Looking first at maintenance CapEx and key money. This is the investment we need to support the business day to day.

Maintenance CapEx is the amount needed on basic hotel maintenance and investments in our infrastructure such as our regional offices and corporate IT. Key money, or contract acquisition costs, is an important lever that we already use selectively to access strategic growth, particularly into the highest quality and most sought after opportunity. As the developments environment in the US picks up with the increased availability of debt capital, more of these opportunities are becoming available. So, you should expect to see our investment here increase in the medium-term to around $25 million to $75 million per annum, partly offset by a reduction in hotel maintenance as we continue to sell owned assets.

Moving onto recyclables investments. This is the investment we make when required to support our brand development and priority markets growth. As of today, we have around 40 investments comprising approximately $450 million on the balance sheet, excluding the remaining big owned InterContinental hotels.

This capital is intended to support brand development. And although the amount invested will fluctuate year by year, over time, the relative capital intensity of the business will reduce. Over the last three years, our gross CapEx on investment in this area has been around $65 million per annum, but after receipts and disposals, the net amount has been flat.

Looking now at system funded capital investments. Our system fund is a key scale differentiator and creates a significant barrier to entry for new competitors. The accounting treatment is explained in annual report, but for those of you that perhaps aren't as familiar with it, I'll start with a quick recap of how it works.

IHG collects cash from hotels to support system fund activities. In 2013, this amounted to $1.3 billion. Unlike royalty fees, these are not recognized as IHG revenue, but instead, are held off P&L in the system funds.

These funds pay for marketing and reservation channel cost and for the costs per operating IHG Rewards Club, all of which drive direct benefits to the hotels. The system fund does not have its own balance sheet or cash flow per se, so any capital expenditure and assets related to it are included in the group financial statements.

Although IHG finances capital investment on behalf of the system fund, depreciation relating to this is charged to the fund and not to the group's P&L. As a result, this depreciation charge is a cash surplus and so becomes a cash inflow for IHG over the useful life of the asset.

To date, gross system funded capital investments have been around $30 million per year, paying for the development of tools and systems that hotels use to drive performance. This is expected to remain broadly stable in the medium term with net investment over time being flat after taking the system funded cash surplus into account. However, increasingly, there are opportunities to invest in technology to drive innovative solutions and enhance the experience right across our guest 's journey with us.

Earlier this year, we announced a strategic relationship with Amadeus to explore these opportunities. Whilst this work is still in its initial stages, it could result in an increase in this type of capital expenditure in the future. That would take our gross investments above current levels, but over time, the dynamic of system funded capital investment would mean that the majority of the spend would be recovered.

I'll now hand over to Richard to provide you with some more details of how we're driving our strategy.

Thanks, Paul. So, I'll start by recapping on some of the major tailwinds that we believe will continue to drive demand for hotel rooms over the next few decades.

Growing GDP, globalization of trade in aging populations will result in a steady increase in both business and leisure travel, key drivers of hotel demand, especially for midmarket brands. IHG is better placed than most to capitalize on this trend, given our extensive geographic footprint and broad portfolio of brands.

That said, today's consumer is evolving rapidly. People are connected 24/7 through multiple devices, and it's important to point out, this is not just the millenials, but many in other age groups too. Arising from this, there are three trends which we see having the most impact on the hospitality industry.

Firstly, a shift in connectivity to a multi channel environment, certain PCs and laptops and smartphones and tablets to maybe one day to wearable devices like Google glasses. Secondly, social media has led to a huge number of travelers of all types posting online, before, during and after their stays in hotels.

And personalization has become increasingly important. This was a key insight from our 2014 trends report explaining the role that technology has started to play in delivering the personalized brand experience that consumers are increasingly demanding.

At IHG, we focus our work in the digital space on the link between today's consumers and their needs across the guest's journey. This starts with when they're researching their location, from spending time looking at specific features of a hotel, to when they make a reservations stay with us and then write a hotel review or share there post date experiences. We know that engaging with guests in this way will result in increased loyalty, an increased share of wallet and an increase in their intent to stay with us again. Collectively, this will help drive a rate premium for our brands.

All this requires hotel businesses now, more than ever before, to have a clear understanding of the core needs and occasions of customers, who these customers are and then how to effectively market to them. Only the largest players who understand these needs and trends and are able to deliver consistent locally relevant and differentiated guest experiences will win.

So, I'll talk a little more about the three key elements for IHG in delivering a winning experience for our target guests, preferred brands, lifetime relationships and strong direct channels. So, building a portfolio of preferred brands the resonate with our guests, and by extension, with their owners, is critical to our success. After all, our business grows when guests want to stay more and pay more for our hotels when owners see more value in a, IHG brand than our competitors.

Secondly, lifetime relationships. Our strong loyalty program is tailored to guests' needs and drives business across our portfolio. Our objective is to make IHG Rewards Club not just the largest, which it already is, but also the most sought-after loyalty relationship program through rewards, recognition and personalization.

Our strong direct channels deliver the highest-quality revenues to IHG hotels at the lowest possible cost. We aim to maximize the conversion of both demand and pricing that we deliver through our channels by having industry-leading revenue management systems and owned property tools.

So, let me try and contextualize our business in this evolving, competitive environment. We've built unparalleled global scale behind these three pillars, taking preferred brands first, our brands include clear industry leaders. InterContinental Hotels & Resorts, which is the world's largest luxury hotel brand, and the Holiday Inn brand family, which is not just more than double the size of its closest competitor, but the only truly global midmarket hotel brand.

Since 2010, the Holiday Inn brand family has grown its premium to the upper midscale segment to around 108%. Growing RevPAR premium isn't always easy, especially since for the most established brand in the market. All of our brands have shown growth in RevPAR premium over these past few years.

The views of our guests are very important to us. We launched IHG reviews in 2012 and now have over 500,000 guest reviews live, globally. In fact, we now collect more new reviews on IHG's website than any other review site.

Our average hotel rating is now 4.3 out of 5 stars, up [near 0.1] in the last year, and we have good momentum across the largest brand of InterContinental Crowne Plaza and the Holiday Inn brand family. And all of our brands have strong existing and pipeline positions with top three combined positions worldwide based on Smith travel data. But momentum is not about achieving growth for growth's sake; it is about an ongoing commitment to the quality of the hotels in our system, and that's why we will continue to remove hotels that don't live up to our brand promise.

The highlight of what we're doing with our brands, I thought it would be appropriate to highlight some of our key openings in the first half. We opened 82 hotels with the Holiday Inn brand family in the half, including 40 Holiday Inn Express hotels in the United States. Holiday Inn continues its success and is IHG's engine for growth as it has been for many years and will continue to be for many more.

Crowne Plaza continues to grow strongly too with 13 opening in the half, of which 9 were in China and 4 in the US. And we opened the first two hotels under our EVEN Hotels brand in Norwalk, Connecticut and Rockville, Maryland. This brand is specifically targeted at wellness-minded guests who seek balance in their daily schedules.

Guest feedback so far has been really tremendous. Great scores in IHG ratings and top local market rankings on a well-known third-party review site, and this is all within a month of opening. It's early days for EVEN Hotels, and it will take time to grow, of course; but we are really encouraged by the response so far.

I personally visited Norwalk in June just before it opened, and the enthusiasm of the team and potential customers to the brand was tangible. It's different, clearly targeted and off to a great start.

Moving on now to lifetime relationships, the second element for us, in delivering a winning experience for our target guests. Our focus on guests' needs and insights, combined with the scale our loyalty program, is enabling us to develop the lifetime relationships with our guests that will really matter in the personalized future. We continue to grow the scale of IHG Rewards Club, having relaunched it last year to communicate clearly to consumers that all of brands are part of IHG. And we've seen a 10 percentage point improvement in awareness of IHG and more multi brand stays as a result.

Moving onto the third pillar, our strong direct channels, technology and direct booking channels were at the core of our strategy for delivering value for our guests and owners. Our digital business is significant scale and is growing fast. Our combined web and mobile business generates in excess of $4 billion over the last 12 months including $740 million of gross bookings on mobile devices, which is up around 50% in the first half. This business is a scale of a top 10 US commerce retailer, and each year at IHG, we look after some 34 million unique guests staying more than 160 million nights.

Our websites are now across 14 languages and are accessed by over 130 million potential customers annually. They now account for over 20% of our gross room revenue delivery, up around 1 percentage point each year since 2005. It's difficult to measure success in such a fast-moving area, so we're pleased that our hard work has been recognized externally. For example, the IHG mobile app is the highest rated hotel and travel app on iTunes.

So, summing up, this is an industry that is compelling long-term demand drivers in which IHG is well-positioned to continue to outperform. We have a clearly defined strategy to deliver high-quality growth into the future. At the heart of this are our preferred brands. These are some of the biggest and best in the world, and they are demonstrating strong momentum. We will continue to invest intelligently behind our brands and technology. But as Paul has outlined, this will be done with recyclable forms of capital wherever possible.

It's vital that we innovate as we've done in the past to meet changing consumer behaviors and sustain our industry-leading position. We've once again demonstrated our commitment to shareholder returns at around $1 billion returned so far this year. We remain focused on continuing this track record into the future.

Looking forward, leading indicators remain positive. Booking pace is up across the group with increases in both rate and rooms on the books for the rest of the year. The favorable supply and demand dynamic in the US continues to support good growth in our largest region, which combined with our winning strategy, gives us confidence in the outlook, despite the economic uncertainty in several of our key markets. Thank you.

So, with that, Paul and I will be happy to take your questions. Operator? Questions, please.

Thank you.

(Operator Instructions)

Steven Kent, Goldman Sachs.

Hi, good afternoon. Three questions, and some of it you've partially addressed, so I admit that. But can you just review, again, the -- for the US, the RevPAR growth of roughly 6.6 versus industry-wide data more in the 8 plus range? That's one question, just give me some color on that. Second, in some of your -- just in the number of rooms under construction still remains very high. Are you finding that you need to add or provide any financing? Are the franchisees able to get financing, maybe most importantly? And then the third question is just on China, broadly. I just found it interesting when I read your paragraph about China that some of the revenue drivers, some of the current RevPAR increases in revenue and food and beverage are a little bit soft due to austerity. Yet you're still able to get some building, and you have plenty of rooms under construction. I'm trying to balance austerity today on current trends versus the ability to get construction going and getting hotels being built. Those are my three questions, feel free to push back on any of them.

Good questions, Steve. Let me take the last one on China, and then Paul will pick up the other two. So, look, on China, I think we've talked on occasions about our leadership position in China, and I think you're seeing the results of that coming through. We've been there longer than anybody, and we are significantly larger in terms of global players. So, where there has been some austerity, some of -- it's been a little more extreme at the really top end of luxury, and InterContinental does not play in that space. Because of our scale, particularly our domestic scale where 75%, 80% of our businesses is domestic, we've been able to substitute business for some government business, which hasn't disappeared completely, but it's just been less. Then there's maybe an ongoing extravagance in it, so whether that's substituting it with weddings or more sort of traditional businesses besides government business and so on. So, we've managed to do that. And of course, we've added a lot of hotels. As we've said, we signed -- we've continued to sign more hotels almost year on year in China that we have in the past, and we've opened more.

And the reality is that there's -- we have remained very positive about the long-term in China, as do a lot of our owners. I think in a market like that, working with the right owners who are well financed, well funded and very professional puts one in a much stronger position. And without going into any more detail, the infrastructure investment, the GDP growth, the optimization, all of them are very important drivers for hotels. I think as we perform well and have gained significant share through the sum of austerity, we're really well positioned to continue to grow ahead of the markets. I remain very positive about that business. Paul, do you want to pick up?

Sure, thanks, Steve. Around the -- our competitive performance in the US in the first half, we talked a little bit about Crowne Plaza and how its distribution to some of the cities that have seen slightly lower levels of demand impacted that. When you're looking at a small period and you're looking year on year when the previous year was a little bit impacted by some of the sequestration events and the impact on some group and government business, you're won't necessarily get an exact read quarter on quarter. Holiday Inn, in the first half, out performed the segment and Crowne Plaza in the first quarter did too. I'm not sure that we'll do that every quarter, particularly when we're already running at big premiums to those segments. And particularly when you got occupancy levels at such a high level, our Holiday Inns and Holiday Inn Expresses are running very, very high occupancies now, and it's -- and at a premium to their segment. I'm not sure they can take on more business to quite the level that some of the hotels perhaps haven't been doing as well can.

Looking at rooms under construction, your question around that, is financing available? Financing is available for good credit through our trying to build in the right locations where lenders want to lend and when they're coming up with sensible loan-to-cost ratios on that projection. It's not available in the same quantum as it might've been back into 2007, but I'm not sure we're going to come to that coming back anytime soon. For trading hotels, then debt is available at very competitive rates. There's a little bit of a difference between new builds and conversion there. But for us, what's most important is that there's more finance available in the upper midscale segment than in some of the other segments because the lenders like the returns you make there. So, that's playing out well for us.

Okay, thank you.

Patrick Scholes, SunTrust.

Good morning. Several questions for you, why don't we start with the first one here. Can I get a little bit more color on the scope and details of the Barclay closing. You said 18 months, is that going to be the entire hotel closed for that time? And additionally, what do you as a Company plan to spend out of pocket for the renovation?

To answer your questions, Patrick, more than one, but or is that it?

That was the first one. Why don't we go with that, and then I'll jump on.

Okay, Patrick, let me jump in on that one. I think we've talked before about this, the scale of the refurbishment, we're going to be spending $175 million -- $175 million will be spent on the refurbishment. And we have a $0.20 stake in that, so we'll be making a proportion investment. The hotel will close in its entirety. Whether it then reopens in phases, we'll have to see how that goes, we'll make a call on that as we work through it. But yes, it will close, it will get renovated, and it will be a fabulous product when it reopens. You know the location, you know the hotel well. It will really be better than anything else that's available in Midtown, so we're looking forward to that day.

How is the, what we talk about in lodging, our RevPAR premium, how was the hotel prior to -- how is the RevPAR premium in tracking on that hotel, and what would your expectations be after it reopens?

Patrick, it's going to be kind of a different product. We're bringing in more social ballroom space, and of the rooms are all being significantly upgraded. It's going to be a different sort of experience, I'm not sure that it's that comparable looking at it pre and post.

Okay. Secondly, you've recently completed your buyback authorization, what is your general sense for going forward dividends versus repurchases?

We've done a mix across the last ten years on capital return through (inaudible) gains through special dividends and share buybacks. And I think we will continue to evaluate each time the size and what's most appropriate in all the circumstances. I think that's wait and see in what happens in the future.

Okay. And then lastly here, I'm just curious, gauge your appetite or perhaps openness if you were to receive an attractive buyout offer from a bidder. What are what are your thoughts on that?

Patrick, it's Richard here. We've got a very crisp, clear strategy. We're growing the business well, we've got great momentum. But at the end of the day, we're a public Company. So, we're here to maximize value for shareholders, which I think we've done a decent job of, and we'll continue to focus on that in the future.

Okay, thank you, that's all.

David Loeb, Baird.

Good morning, I have two also, let me just start with one. I should say good afternoon for you. The termination in the first half, was that mostly the InterContinental Westminster? I know you addressed this on the call this morning, but wasn't really clear on answer.

Termination? Well, we obviously had quite a few terminations, but certainly, no, that's not that large a hotel. There is obviously one in London that we are more than replacing with a new InterContinental which will open next year near the O2 Arena, to the east of the city.

Great, so were there any other big lumps besides that one?

No, no, just the usual sort of cleanup.

Okay. And I know you spoke extensively this morning about the Paris and Hong Kong assets, so I don't really want to beat that dead horse. But I wonder if you could give us some metrics on value in those markets like market cap rates, things like that, for hotels like those in Paris and Hong Kong?

A bit difficult to do, honest, David, because they are such individual assets. You can't just apply multiples from other hotels there. These are very unusual pieces of real estate that attract very specific purchases. I think if you look at our track record of sales of these chosen assets, we've done a good job for shareholders. And that's where the strategic review nets out, but it does involve them being sold then. It was our best to get the maximum price that we can.

Okay, totally fair. And Richard, maybe just one more that you're welcome to not answer, but can I just ask straight out, did you receive an offer or an overture from a US company about selling your Company to them?

There was some rumors and speculation in London from a journalist, and we never comment on speculation, David.

Fair enough. Thank you.

Thank you.

Thank you, and we have no further questions coming through, so I will hand you back to your host.

Thanks, and thank you. Thank you, everybody, for calling in, and obviously, if you've got individual questions outside, you can contact the team here. Tanks very much, look forward to speaking soon. Bye.

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