InterContinental Hotels Group PLC
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Intercontinental Hotels Group Conference Call. My name is James, and I'll be your coordinator for today's conference. [Operator Instructions] I will now hand over to Catherine Dolton to begin today's conference. Thank you.

[Catherine Dolton:]

Thank you. Good morning, everyone. This is Catherine Dolton, Head of Investor Relations at IHG. I'm joined today by Tom Singer, Chief Financial Officer. Before I hand over to him for the discussion of our third quarter interim management statement and Q&A, I need to remind you that in the following discussions, 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 will now turn the call over to Tom Singer.

[Thomas D. Singer:]

Thank you, Catherine, and good morning, everybody. Thanks for joining us today for our third quarter trading statement conference call. I'd like to start with a few remarks on our recent performance and the trading environment as we see it, and then open up the call for your questions. We had a solid quarter with growth in all 4 of our regions and a continued strong pace of signings. Global RevPAR was up 3.3%, driven mostly by rate, and up 3.6% for the 9 months to the end of September. In the Americas, third quarter RevPAR increased 3.7%, with 3.5% in the U.S. Occupancy levels of 72% is in the U.S are almost 1 point higher than the 2007 peak for the same period. Along with the whole industry, RevPAR growth softened in September, with group's business slow to return after the earlier timing of Labor Day and Jewish holidays in the month. Our U.S. performance was led by robust RevPAR growth for our InterContinental and Hotel Indigo brands, but also reflects the more modest growth we've seen for our upper mid-scale brands, Holiday Inn and Holiday Inn Express. As we mentioned before, across the industry, this segment is more stable through the cycle, with smaller peaks and troughs than those experienced by the upscale and luxury brands. Looking ahead, industry commentators are forecasting U.S. demand growth to be well ahead of supply growth for at least the next 2 years. In fact, U.S. industry demand has reached new peak levels for the last 31 months, and supply growth remains well below the historical 2% per annum average. Europe RevPAR was up 1.3% in the third quarter, despite facing some tough prior year comparatives in our key markets. In the U.K., RevPAR grew 1.5%, despite the year-on-year impact in August of the 2012 London Olympics. Our hotels outside the capital traded particularly well with RevPAR gains of almost 4%. In France, our growth of 0.4% was more than 2 percentage points ahead of the industry. Germany continues to trade well, but the strong trade fair schedule in 2012 resulted in third quarter RevPAR down around 3% year-on-year. This is a market with robust demand drivers, and in early October, we signed a multiple development franchise agreement for 5 new hotels with 1 owner across a number of our brands. In our Asia, Middle East and Africa region, we continued to see good growth, with RevPAR up 5.4%, driven almost entirely by rates. In the Middle East and Africa, growth remains mixed, with some countries, such as Egypt and Lebanon, experiencing ongoing high levels of political unrest. However, we continue to see good performance in the UAE and Saudi Arabia. In Southeast Asia, the demand drivers remain highly compelling. A 10% RevPAR increase in the 3 months to September was driven by strong trading in Indonesia and Thailand. Performance was also strong in Japan, with RevPAR up 12%, reflecting increased international travel helped by the favorable exchange rates and the relaxation of travel visas. Australasia was up 4%, with Australia experiencing good corporate and group demand in Sydney and Melbourne. Sydney is an important city with significant business and leisure travel flows, where we've recently signed a management agreement to convert the renowned Double Bay Hotel to be an InterContinental Hotel. This demonstrates the continued global success of the InterContinental brand, and we look forward to the hotel reopening early next year, following its refurbishment. Greater China RevPAR grew 0.7% in the third quarter, driven by strong transient business, particularly from leisure guests. We again outperformed the industry, reflecting the scale and breadth of our portfolio and dedicated local infrastructure. At our half-year results, we talked in some detail about the compelling drivers for both domestic and outbound Chinese travel into the future. Continued growth in leisure travel amongst the increasing population of wealthy and middle classes with high disposable income was seen in our resort hotel performance, up almost 20% in the period, excluding 2 hotels in areas impacted by natural disasters. We remain confident that the measures being taken by the Chinese government to rebalance the economy away from investments and exports and towards consumption will drive long-term sustainable economic growth in China, and are therefore positive for IHG. We signed 12 hotels in Greater China this quarter, taking our pipeline to 179 hotels as of the end of September. And this is testament to the confidence our owners have in the prospects of the industry and the strength of our market-leading position. Let me now turn back and make some comments about the group as a whole. We opened 8,000 rooms in the quarter, including 5,000 for the Holiday Inn brand family, mostly in the Americas. China also had a good period for openings with 2,000 new rooms added across 5 of our brands. In line with our commitment to high quality growth, we removed 7,000 rooms in the period. We now have 679,000 rooms in our system, up 1% since last September. We often expect to open more hotels in the back end of the year, and we have a strong opening program scheduled for the fourth quarter. Our pipeline continues to be of high quality, with 180,000 rooms, of which over 40% are under construction. Our pace of signings has remained strong, and at 16,000 rooms, is almost 20% higher than the same 3 months last year. In the first 9 months of the year, we've signed more than 1 hotel a day on average, adding some 47,000 rooms, clearly showing the strength of our brands and the depth of our relationships with owners. This includes 28,000 rooms for the Holiday Inn brand family, up over 1/3 on the comparable period last year, demonstrating the continued popularity of the 60-year-old brand with our owner community. Our preferred brands are at the heart of everything we do, and most recently, we're particularly proud of our InterContinental brand, which has swept the board at[ph] a number of awards. Of the Business Traveler Awards, InterContinental won Best Business Hotel Chain Worldwide, and our new InterContinental Hotel in London Westminster took the title for Best Newcomer. These accolades are particularly gratifying as they're voted on by guests. Our new brands have also kept up good momentum, with 21 HUALUXE Hotels and 4 EVEN Hotels in the pipeline, and we continue to expect to open the first hotel of each of these brands next year. We remain committed to an investment-grade credit rating and an efficient balance sheet. In October, we paid the $350 million special dividends that announced at our half-year results, and we continued to make good progress with the $500 million buyback program, which has around $130 million left to complete. In August, the trustees of IHG's U.K. pension plan entered into an agreement to ensure the group's U.K.-defined benefit obligations with Rothesay Life. This is a great deal for IHG, as it de-risks our balance sheet by transferring investment, interest rate and longevity risk to a third-party and removes the need for IHG to fund the plan into the future. As a consequence, we are no longer required to pay GBP 45 million of previously-agreed contributions to the plan, and we've been able to release GBP 27 million that we had set aside as security when we sold the InterContinental London Park Lane. Although the plan had an actuarial deficit of GBP 132 million as of the last triennial review in 2012, under accounting rules, we have had to recognize a surplus that has now been eliminated as a result of the buy-in. And as a consequence, in the second half of this year, there will be an exceptional accounting charge of approximately $150 million, of which about $10 million would be a cash outflow. Finally, let me make some comments about the outlook. Current trading trends give us confidence for the rest of the year, despite the ongoing challenges in some of our markets. Overall booking pace is up, with increases in both demand and rate for the rest of the year. Remember though that our forward visibility is only around 1 month, so this represents a fairly small proportion of the total rooms we expect to sell. Future travel intentions data collected from guests staying in our hotels is also encouraging. Just over 60% of guests are saying they will travel more or the same over the next 12 months for business, and around 85% for leisure. Our strategy for high quality growth and the considerable strength of our business model, including our resilient fee-based income stream, position us well for continuing success into the future. Finally, I'd like to remind you that we're holding an educational event, entitled Delivering High Quality Growth, on the afternoon of the 19th of November, which will be webcast live. With that, I'd be delighted to open up the call to take your questions.

[Operator:]

[Operator Instructions] We have a question from the line of Patrick Scholes from SunTrust.

[Charles Patrick Scholes:]

I wonder if you could give us a rough idea how the government shutdown impacted your results in the fourth quarter. I know you certainly are making a big push in -- with your brands into the military bases and imagine that probably was a rough month there, but a little bit of color would be appreciated.

[Thomas D. Singer:]

Sure, Patrick. I mean, we haven't quantified it. We're not going to give any commentary on October at this point in the year. But we have a small element of government business, less than some of our competitors who've got a concentration of hotels around the Washington area. It didn't really have a significant impact on the overall performance of the business. We saw some slowdown, but not a marked slowdown.

[Operator:]

We currently have no further questions coming through. [Operator Instructions] We now have no further questions coming through. So I will hand it back to your hosts to conclude today's conference.

[Thomas D. Singer:]

Okay. Well, thank you very much for joining the call today. If you have any further questions, please feel free to get in touch. Otherwise, we look forward to talking to you again at the prelims. Have a good day.

[Operator:]

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