InterContinental Hotels Group PLC
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good afternoon ladies and gentlemen, and welcome to the InterContinental Hotels Group Interim Results 2015 Conference Call. My name is Dave, and I’ll be your coordinator for today’s conference. For the duration of the call, you’ll be on listen-only. However, at the end of the call you will have the opportunity to ask questions. [Operator Instructions] I’m now handing you over to David Kellett, Head of Investor Relations to begin stage conference. Thank you.

[David Kellett:]

Good morning, everybody. This is David Kellett, Head of Investor Relations of IHG. I’m joined this morning by Richard Solomons, Chief Executive and Paul Edgecliffe-Johnson, Chief Financial Officer. Before I hand over to them to discussion of our results, I need to remind you that in the following discussion, the company may make certain forward-looking statements as defined under U.S. law. 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’ll now turn the call over to Richard Solomons.

[Richard Solomons:]

Thank you, Dave. Good morning, everyone. Thanks very much for joining us and welcome to our 2015 call. Before I hand over to Paul, let me just start with a few highlights and perspectives on the market. We delivered strong underlying financial performance in the first-half, driving global RevPAR growth of 5.1%, and signing over 40,000 rooms our best signing performance with seven years. July month is a significant month-end for us, as we finalized our major owned asset disposal program, with the agreement to sell InterContinental Hong Kong for $938 million. Once that transaction completes over 95% of our operating profit will be generated through our fee business, but the vast majority of earnings are tied to hotel revenues. I’ll talk later about how we’re growing this revenue through our winning model, but first I’d like to step back and consider the broader market environment. As we’ve seen for sometime effective tailwinds remains very favorable with continued GDP growth driving the globalization travel and a growing number of outbound travelers from emerging markets. Meanwhile, in our largest region in the U.S. economic growth is leading to record levels of room night demand. So let me just hand over to Paul, who will talk in more detail about our financial performance. And I’ll return later to discuss execution against our broader strategy.

[Paul Edgecliffe-Johnson:]

Thank you, Richard. And good morning, everyone. We’re pleased to report another strong financial performance in the half year, with solid growth in fee revenues across each of our four regions. As in previous years the year-on-year comparability of our total revenue and operating profit are distorted by the impact of our own total sales significant liquidated damages, the performance of managed leases and foreign exchange movement. Details of these items are included on Slide 36 and 37 of the presentation we have released today. I will focus my attention this morning on our underlying performance using constant exchange rates to provide the best explanation of our financial performance. And on that basis, we increased our fee revenue by 9%, and underlying profit by 10%. Our fee-based margin for the half of 46.8% increased a 180 basis points year-on-year, reflecting the benefits of our global scale, but also that our costs this year will be weighted more towards the second-half. Consequently, we expect our fee-based margin to normalize to reflect an approximate 100 basis points increase for the full year. High interest charges, we’re offset by 8% reduction in weighted average shares and in aggregate is enabled us to deliver 25% growth in underlying earnings per share year-on-year. On 9% growth in fee revenue was resulted continued increases in both RevPAR and net system size in each of our four regions, which grew by 5.1% and 4.5% respectively. Excluding Kimpton, we delivered 2.8% growth in that rooms. We maintain our disciplined approach to quality, and expect to our removal rate to remain in the range of 2% to 3% of system size in the near-term. Each of our four regions, increased that the revenues, with strong performance is across the Americas, Europe and Greater China. This reflects the quality of our earnings and our fee-based model. Our fee revenue growth is a product of the change in both RevPAR and rooms. Despite it having the lowest half-yearly increase in RevPAR for the regions in which we operate. Greater China delivered us the greatest fee revenue growth at almost 11%. To give some more color as to where and how we drove this growth, I’ll now talk to the performance of each of our regions in more detail. Starting with the Americas, where demand in the United States have been at record level for 52 months, we’ve capitalized on this to drive all-time high occupancy across our Americas portfolio with reached almost 68% at the end of June. Both our Holiday Inn and Holiday Inn Express rents are also operating at record occupancy level. We’re focused on optimizing our revenue management system, which allowed us to increase average rates in the U.S. by 4.2% and allowed Holiday Inn Brand Family to maintain its $5 RevPAR premium to the segment. This generated comparable U.S. RevPAR growth of 5.6% in the half. From a competitive standpoint our performance highlights are existing high levels of occupancy. And the distribution of our portfolio towards the oil producing states such as Texas, Oklahoma and North Dakota, which were negatively impacted by lower oil prices and resulting industry spend. These three markets represent approximately 13% of our U.S. portfolio, and together they delivered flat RevPAR of the half year. Excluding these markets our U.S. RevPAR growth would have been 6.5%. Elsewhere in the Americas RevPAR in Mexico was up 9.4%, driven by double-digit growth in key cities, whilst RevPAR growth in Canada is 1% was also impacted by performance in Canadian oil producing areas. Underlying profit of 8%, reflecting the performance of our franchise business which increased underlying by 10%, partially offset by an increase in regional overhead. On net rooms growth of 4.6%, or 2.1%, excluding our acquisition of Kimpton, with our best in the region for five years, we signed 21,000 rooms up significantly year-on-year, an increase for the fifth year running and almost double the number of rooms signed back in 2010. Moving on now to Europe, where our key markets continue to perform well. Growth was strong in the UK, where RevPAR was up more than 6%, driven by trading in the UK provinces up 8%. And our second largest market of Germany, RevPAR increased 5% with Holiday Inn Brand Family continues to outperform the industry. From what is a relatively small [Technical Difficulty] 200 hotels the gross proceeds of approximately $8 billion, over the same period we have returned more than $10 billion to our shareholders. I have talk in detail over the past year, on our capital expenditure and I won’t go through that again today. We will highlight the change we made to our system funded capital investments in April, following our announcement of our strategic partnership with Amadeus. At that time, we flagged our systems on the capital investment are expected to increase to around $100 million in 2015, up from approximately $60 million in 2014, reflecting our investments and involving our end-market leading technology, otherwise our reported CapEx numbers for the first half are in line with our guidance, which remains unchanged in the medium-term. To conclude them, I’ll reiterate our focus and executing our capital allocation strategy and maximizing return to shareholders. We generate significant cash from operations, which we then use to invest in the growth of the business. We have also announced today a 10% increase in our interim dividend for the half year to $27.5. I’ll now pass over to Richard, who will talk more us, how we are driving our strategy.

[Richard Solomons:]

Thank you, Paul. Our winning model remain at the core of our success and continues to deliver high quality growth, of our brands are leading loyalty program and effective channel management to key components of the model and form the basis of our commercial strategy, which I introduced this time last year. Effective commercial execution ensures a superior guest experience, and we’ve made significant progress across all of our three - all three of our focus areas, as well as continuing to innovate with our digital solutions and developing the market leading Guests Reservation System or GRS. Before I talk more about technology, I’ll touch in the progress of continuing to make that our brands. I’ll start with Holiday Inn and Holiday Inn Express, the world’s only truly global mainstream brands, which we re-launch eight years ago and we’ve made significant strategic progress with since then. The brand refresh remains the world’s largest ever achieved. And since it started we re-launched 3,300 hotels, opened a further 1,500 and removed over 1,000, reducing the average age of the estate to lower than our major competitors. The positive outcome from these actions and our emphasis on quality has driven guest satisfaction levels to an all-time high. And this has been recognized across the industry with Holiday Inn winning the prestigious J.D. Power award for guest satisfaction in mid-scale food service, for four years in a row. This guest preferences driven consistent industry outperformance with our 5 percentage points growth in the brand U.S. RevPAR premiums since the refresh launched. It’s this delivery which makes the brand families attractive to guests and owners driving 10% annual growth in signings in the last four years. This growth is established the Holiday Inn Brand Family is the leading global hotel brand. Holiday Inn has over 100,000 rooms outside of the U.S. more than four times out of its nearest competitor. And we have more than double the non-U.S. presents the Holiday Inn Express since 2007 adding more rooms and all three of its closest competitors combined. Together we’re driving scale, we continue to drive innovation across the brand family. Let me talk briefly about three initiatives, which are all deeply rooted in our guest insight and tailored to local needs. The Holiday Inn open lobby creates a next generation profit space, but guests can both work productively and enjoy leisure time. The solution is already in place and maybe 30 hotels in the Americas and is live at 17 properties across Europe, where it’s already driving an 8 point increase in guest satisfaction. Our next generation bedroom design quality an express has been developed in conjunction with our guests and our owners to deliver a maximum contemporary look which provides an efficient place to sleep. The elements of any design already implemented in 42 years properties and around trial in Europe. Holiday and club vacations is a great example of how we’ve leveraged the momentum behind the Holiday Inn brand family to develop a new offering which perfectly meets our guests to meet for family time. Our asset light vacation ownership business was launched in 2008 and is going quickly to have 4000 villas across 12 resorts in the US. So, I’ll now talk about our boutique business which is in the fastest growing industry segment. From the Kimpton and Hotel Indigo we’re uniquely positioned to benefit from this increasing demand. Our boutique portfolio already has 128 open properties and 79 in the pipeline, nearly 18% of the estates of Caribbean and the US. But we tripled the present to hotel Indigo else way in just over three years. Along the side, we have already received a number of contemplating enquires from outside the US where we have over 50% of the hotel Indigo pipeline. At an operation in commercial level the content transition into IHG were launched. The brand continues to be love by its guests and we’re committed to building on its success, which is people driven. And I’m therefore pleased we’ve retained key Kimpton talent as well as the San Francisco headquarters. We saw in 12 boutique hotels in the half including the landmark hotel indigo, Los Angeles which is been developed by Greenland USA. Greenland group already owned 8 IHG properties in China but it’s not the first time we partnered within in the US, demonstrating the benefit of our global level reach and reputation. Our boutique growth will be somewhat offset by higher than normal removals in 2015 due to the exit of seven Kimpton San Francisco properties in July. These are driven by specific issue and will not impact broader growth plans in US or overseas. Crowne Plaza is another branch which is significantly increased its presence outside the US. More than doubling scan in the last 10 years and having more rooms in any other branch in the segment. The demand for Crowne Plaza is particularly evident in growth of China where we have nearly 40,000 rooms either open or in the pipeline the highest of any programs in the region. And this growth is complimented by a number of new initiatives as we continue the multi-year refresh program with an emphasis on delivering a great guest experience and making business probably work. Good adapt to the brand and we change the consumer needs growing our complimentary Wi-Fi to our hotels in Americas and Europe and launching a selection of new energy focused food offerings. Later in the year, we’ll begin policing on unique next generation work-life forum. As we continue introducing new innovations which support business productivity. Moving on now over to IHG Rewards Club, which drives 40% of bookings in our hotels, I told before about the growth in personalization and extensive researchers highlighted just how much value on the mid place on individual and rewarding experiences. To enable guest stay we’ve implemented new customer relationship management capabilities at all of our hotels. A line of our debt access expensive guest information and all from more personalized experience based on member profile and history. These enhancements ensure IHG Rewards Club continues to be preferred amongst guests and the brand has already won 16 major awards in two years since it was launched. We’re trying to make sure this program is further emphasized by over 4 million new enrollments in the first-half which is more than 25% up on last year. We ensured that all of our members are treated uniquely but in-depth research reveals that really frequent travelers want a little bit more. They want to feel part of the special club and be given an extra level of reward in return for their continued loyalty. And the introduction of a new top-tier to IHG Rewards Club called Spire Elite we’ll do just that. The reward for reaching this status includes earning 100% extra earnings points on qualifying nights, the richest point incentive from the hotel industry. But most importantly, we will use our new CRM capability to deliver unique contained stay experience to these guests ensuring that they were truly recognized in special. The CRM capability I just mentioned is one example of how we leverage technology to enhance the guest experience. Earlier this year, I spoke about how the consumer landscape is changing and to meet these needs you must have market leading technology to adapt. Within this context we maintain control over intellectual property and customer data to deliver a unique guest experience. But partnered all or outsourced where we can leverage third party expertise. Our pioneering relationship with Amadeus demonstrates how we’re utilizing this approach to lead the industry and deliver the first cloud based guest elevation system. Amadeus is a proven expert in travel reservation having already developed to community model used by over 100 airlines, has exclusive loan department to our guest reservation community model. We have unique opportunity to input on the design and functionality as well as being the first to roll it out across our hotels in 2017. In the short time, we’ve already made good progress with what will be an industry changing initiative. Our recently announced collaboration with stay.com is another example of how we partner with third-parties to enhance the guest journey. Stay.com will emphasize to get the functionality to research trips to over 50 of our destinations based on insights with hundreds of delightful influences around the world. This will enhance travel experience within the relationship with our brands particularly in the dream plan and stay phase of the guest journey. Our initiatives to continue in the momentum behind our direct channels driving year-on-year digital revenue growth of over $200 million well ahead of any other channel. Recent in-house developments include the re-launch of our Crowne Plaza, Hotel Indigo and Extended Stay websites, The new pages of content rich compared unique with reach of brand and are optimized to responsive design even beyond across any device. Meanwhile in Europe, we rolled out an IHG Rewards Club lowest the price promise for Holiday Inn Express UK. We already have an internet best price guarantee, which provides the first night of the stay free so guest can find whenever room is cheaper through different website. However, due to the extravagant affirmatives often made by leaders the benefits of booking direct would not voice clear to consumers. Although this price promises exclusive twice towards club members and offering more in price matching, that promises a price up to 10% lower than it is available anywhere else. We’re so confident in this project that we’ve included a unique price comparison tool on our website with the UK holiday and express state. We’re already seeing great growth in this innovation with a 50% increase in number of guests who have confidentially get the best price on our website and it double in the home line loyalty enrollments. Within our business for channels mobile continue to be the strongest driver of growth contributing over 40% of our website visits in the first-half up 7% least points on last year. And we continue to innovate in this area to enhance all stages of guest journey with a particular focus on the stay. Our IHG translator app is now available for Apple Watch making it even easier for our guests to make most of their experience with 13 languages easily translated by speaking directly into the watch. We’re also enhancing mobile checkout with the distant mobile portfolio the service allowing guest to regret the real time on the device of any point you stay. These innovations are number one rated up the driven download up more than 50% year-on-year and we now have more than 4 million app users in total which is helping to drive year-on-year total mobile revenue growth of around 50%. So, to the recap we had a strong half with continued momentum behind our preferred brands, which makes IHG well-positioned in an industry with compelling tailwinds. We continue to innovate from gross scale across all of our brands and we’re making great progress delivering against our technology road map. The finalization of our asset-light transition delivers high quality earnings. And based on current trading trends, we remain confident in the outlook for the rest of the year. So, thank you. And with that and Paul I will be happy to take your questions.

[Operator:]

[Operator Instructions] The first question comes from the line of Steven Kent from Goldman Sachs, please go ahead.

[Steven Kent:]

Hi, just two questions.

[Richard Solomons:]

Hi.

[Paul Edgecliffe-Johnson:]

Hi, Steve.

[Steven Kent:]

Good afternoon. Can you just give us some discussion about our broader discussion about the FX impact to international travel at your hotels? Is that starting to have an impact? And then maybe if you could look at a little further on Europe, how trends are going and are they recovering. It feels - we’ve seen from some of the other hotel companies that leisure travel terms actually were - look like they’re going to be pretty good for this summer. And I just wanted some sense from you on that. And finally, I can’t help but ask because it’s crossing the tape right now, that according to the FP, IHG and Starwood have held early deal talks. I know you’re not going to comment on that, but maybe could just talk about more broadly how you look at acquisitions and how you look at mergers and the accretion or dilution discussion?

[Richard Solomons:]

Okay, thanks, Steve. But let me pick that up and then Paul will talk about Europe and FX. Yes, look, there are big rumors as there have been rumors for years around this industry. So we never comment on rumors and speculation as you’d imagine. I think, we think about the business in two ways, I guess, the first one is that we have an extremely strong organic growth pipeline, which we’re very much majoring. So we signed as I think as we said in a fully 100,000 rooms in the half that’s more than we’ve signed in the last any of the last seven years, in fact, back to LA, which is really quite a peak time. We’ve got 100,000 rooms under construction. So our real focus is on organic growth of our existing business. We’ve always talked about filling strategic gaps and through insight, through understanding the markets, we’ve divided a number of new brands. All our hotels in China, with the first two open this year, as Paul mentioned, even hotels that we opened in the first two last year and several more to come in the U.S. And we acquired some fill-in add-ons like Candlewood Suites back in 2003 and Kimpton just more recently. So, yes, that’s how we think about the business and really our brand development is almost an MPV [ph] question, is it MPV positive to launch a brand and then the time it takes to build up or is it better to buy something. And there are very few things out there that are actually attractive, what would fit within our portfolio in the segments that we are interested in, so very much organic focus and an awful lot of activity on that front. Paul, do you want to pick up the other point?

[Paul Edgecliffe-Johnson:]

Yes. So, Steve, thanks. But two questions around the impact on international cover of foreign exchange movement. We are a mainly domestic business. We have lost - the great majority of our businesses through our mentioning brands, so about 90% of our business in the U.S. is domestic. But we’ll see a bit of impact in very nature, New York and few others. But really it’s around the edge for the whole region and something else pullout is a major contributor in any way to our numbers. In terms of your questions on Europe, we are seeing the UK now strong for few years stocking with London, seeing some real - really good growth and then the problems is more recently coming back and we saw really good growth from the provinces in this half up 8%. And London is back up to its profit and the problem has still got a bit of a way to go there. And Germany, last year it’s been pretty steady around 5% key cities, it’s a key city strategy for us really helpful. We saw business in Europe. And so we are seeing some reasonable growth in some of the southern Europe markets, but [indiscernible] to really cause more part of the business, ys.

[Steven Kent:]

Okay.

[Paul Edgecliffe-Johnson:]

Thanks, Steve.

[Steven Kent:]

Thank you.

[Operator:]

And the next question is from the line of Chris Agnew from MKM Partners. Please go ahead.

[Chris Agnew:]

Thanks very much. Good afternoon. And thanks for the detail on the oil-producing states, Texas, Oklahoma and North Dakota. Next you wanted to follow-up on a couple of things there. Can you give us any sense of have we’ve seen the worst impact from those oil-producing states, or how long do you think that’s going to impact the business? Do we have to lap kind of the impact in the second quarter last year? I am not sure when you started seeing weakness there, and also how much did the - we’ll see Texas and Oklahoma had, I think catastrophic rainfall, I think it was in May, I mean I don’t know you can separate or is that had an impact combining. Just any color around those states? Thank you.

[Paul Edgecliffe-Johnson:]

Hey, Chris. Thanks for that. So we have a little bit more adversely impacted by the oil producing states in the market as a whole, because of our overweighting into those markets, so 13% of our business in the U.S. versus about 10% in the market. It’s going to continue into the second-half and not lapping against easier comps really. So we’d probably say, a bit hard to call the [indiscernible]. It depends on what happens on the oil price. And I’m certain that they’re not making into the guest on that. So I hope that give you some sort of an idea, we probably see the impact coming through into the second half and out into 2016. We can’t really call that one. The rain impact was a bit of negative, but it is small compared to oil. So it’s not something that, we’re particularly pullout, but yet there was some sort of an impact but not major.

[Chris Agnew:]

Got you. Thank you. And then, with occupancy at record levels, I think particularly in the U.S. supply growth low and if we assume that GDP growth and demand remains relatively stable. What are the risks to ADR growth and continuing to improve. I mean is it demand just really the issue here, given supply, are you seeing any risks from, I don’t know alternative accommodations or do you see supply being an issue on the horizon? Thank you.

[Paul Edgecliffe-Johnson:]

Well, we look at the levels new to pilots [ph] coming to the market, and if you look at - the long run as you know, you’re looking about 2% for the U.S. in the forecast for next year around the 1.7 mark. And that’s the same in the midscale areas for the industry as a whole. So below the long run average, obviously, with the level of occupancy we’ve already. Got our focus is on changing the mix in the hotels and strong revenue management discipline and ensuring we got the most valuable guest in there. Our proprietary technology enabled our owners to do that. If we look back to the last cycle that we had this sort of continued economic activity and then supply starting to come through. If you look back to the 90s cycle, you can see that there was a prolonged period of ADR growth really in line with economic growth. So that give us - our indicator we think is to what might happen out in the future.

[Chris Agnew:]

Great. Thank you.

[Richard Solomons:]

It’s worth just adding, I think to Paul’s point and he pulled out some of the free growth that we’ve seen there. For us, given our very small amount of ownership on the platform so much of your income comes from revenues, especially seasoned revenues. That - the overall demand is a much more important driver for us an individual guest, and given that we’ve got five-tenths of room 13% of the pipeline probably in the larger share in America then actually we’re keyed into the demand growth either way, so that’s the important thing. And we know that in the hotel industry that hotel revenues grow ahead of GDP. So, I think, we’re well placed. And as I think you’ve heard from some of our competition actually in terms of the so-called sharing common sharing business, which we’ve really got it, it’s a business, which really rise the margin for an organization like us. So don’t see it impacting our numbers.

[Chris Agnew:]

Thank you. Actually, if I could have one more follow-up..

[Richard Solomons:]

Go on.

[Chris Agnew:]

Just - sorry, just reminded me something there. Can you update us on the strong unit growth in - obviously in the first-half, and some of that was Kimpton. But are there any update to your thoughts on unit growth for the next couple of years either through stronger additions and the pace of dilutions, any changes to those two items? Thank you.

[Richard Solomons:]

No, I mean, we don’t get former guidance on that. And I think the rate that we’ve lost - we’ve seen last year and this year seems about right. I mean, I think if you look at that, I think your room is clearly an important piece, as we say, not the only piece in terms of accessing the demand. And I think we’ve also got the issue of what the quality of this stage, and what you want to bring in. I mean, it’s very easy to add room if you are focused on, I don’t know driving to a million rooms or whatever stack you come out with. We don’t really think that’s relevant. We took refocused on revenue share and we focused on the quality of the stake. So we didn’t really think historically see 3% of the portfolio. Over time that comes down, but we are not going to let upon on driving the quality of the state, which is what creates a long-term value. Currently, the business that we’re in is delivering great experiences to get some great returns to our owners and that require us just to constantly move out the standard of your brands, in order to deliver through your systems. And so that’s a really important thing. And we are not dashing for short-term growth. We really are not slow and steady, because I think we are showing really strong growth with 20% plus any of the share growth, you can see we are focused on it. But we think it’s important, you balance that quality versus growth.

[Chris Agnew:]

Excellent. Thank you.

[Richard Solomons:]

Okay. Thank you.

[Operator:]

We have a question now from David Loeb from Baird. Please go ahead, David.

[David Loeb:]

Good afternoon, Richard.

[Richard Solomons:]

Hi, David.

[David Loeb:]

I’m going to ask another question you probably want to answer. But I apologize in advance for that. You did note the loss of the seven Kimpton hotels in San Francisco, you may year put out their own release about that. Can you just comment on the IHG card check neutrality agreement in San Francisco versus the Kimpton agreement? Do you think the union was correct in asserting that that the IHG agreement does allow grandfathered hotels to have card check neutrality?

[Richard Solomons:]

No, we don’t agree with the intention that they put on it. But I would say, there is a particular situation within San Francisco. The - it’s a disappointment to lose those hotels, so we see not material to the group as a whole, but it’s material to Kimpton brands, to some extent and we just want them to lose them. But the good owners who are in those hotels, we have hotels in other markets. We knew it was a risk when we acquired the business. We just don’t have the sign interpretation as the union. The important thing is that, we are going to open more Kimpton hotels this year in brand. We are signing hotels and we’re quickly moving to grow it internationally. So be of the brand, it’s forming extremely well, and this is a particular circumstance that happened in our business. If you don’t own the hotels, you don’t control the hotels and sometimes this will happen. But as I say, good owners you own good hotels in other markets and we’ll move on.

[David Loeb:]

I totally understand and I appreciate candor about that. Do you have any similar card check neutrality agreements in other markets beside San Francisco?

[Richard Solomons:]

Not that I’m aware off.

[David Loeb:]

Okay. So it sounds like this really isn’t isolated San Francisco incident?

[Richard Solomons:]

In the context, we can say, absolutely, yes.

[David Loeb:]

Yes. That’s great. Well, great. Good luck with the brand, it’s a great brand. Thank you.

[Richard Solomons:]

Thank you.

[Operator:]

[Operator Instructions]

[Richard Solomons:]

Okay. Well, that’s time…

[Operator:]

There are no further questions at this time.

[Richard Solomons:]

Great. Thank you. Thanks, everybody, for calling. And obviously, if you do have questions, please contact the IR team, otherwise, we look forward to talking to you again in the future. Thank you very much. Thanks, David, again.

[Operator:]

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