InterContinental Hotels Group PLC (IHG) Q3 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the InterContinental Hotel Group 3Q IMS Conference Call. My name is Fay, and I'll be your coordinator for today's conference. [Operator Instructions] I will now hand you over to your host to begin today's conference. Thank you.

Good morning, everyone. This is Paul Edgecliffe-Johnson, Chief Financial Officer at IHG. Thank you for joining us today for our third quarter trading statement conference call. I'll start by running through some of the key highlights in the period, before touching on each of our regions in turn. And I will then open the call to questions. We have delivered a strong third quarter performance, reflecting the continuing momentum in our business, and the success of our focus on developing preferred brands on an asset-light basis in scale markets. We grew RevPAR across our business by 7%, our best quarterly performance in over 2 years; and in the U.S., by 8.7%, the highest growth we have delivered for 8 years. We opened 8,000 rooms, with over 75% of them in our largest 2 markets of the U.S. and China, and 2/3 from the Holiday Inn brand family, which continues to be a core driver of our growth. After removing 4,000 rooms, primarily in our Americas region, we've grown our net system size by 2.7% year-on-year. We signed 16,000 rooms into our pipeline, taking year-to-date signings to over 45,000 rooms, which is our best underlying performance since 2008. Around 90% of these were in our top 10 priority markets, which are the focus of our growth ambition. I'd like to give you an example from the quarter of how we drove growth in these markets and talk a little bit more about how we are strengthening our long-term relationship in Mexico with Grupo Presidente, one of the most highly respected hotel operators in the region, and who we have been partners with for more than 20 years. We have now agreed to invest in a joint venture with them to take advantage of the economic growth Mexico's experiencing and expand our presence in key city and resort locations there across more of our brands. This will enhance our market position in one of our priority markets and highlights how we like to use capital selectively and with a view to future recycling to grow our business. And we are seeing strong momentum right across our brand portfolio. In the quarter, we signed 2,000 new rooms for InterContinental Hotels and Resorts, further cementing its position as the largest and most global luxury hotel brand. This was the most we've signed in a quarter since 2008, and included a fantastic 900-room, new build hotel in Los Angeles as part of the USD 1.1 -- the USD 1.1 billion Wilshire Grand redevelopment. This will be our largest InterContinental hotel in the United States when it opens in 2017. Our extended stay brand, Staybridge Suites, reached a key growth milestone with the opening of its 200th hotel. And with another 95 hotels in the pipeline, it's well positioned for future growth. We opened our 60th Hotel Indigo in a great location, just next to the Opera house in Paris. Hotel Indigo is the largest branded boutique in Europe where we see particularly strong demand from owners for the high return on investment it provides, particularly from conversions in the high ADR market. Our 2 newly opened EVEN Hotels in Norwalk and Rockville are trading well, with guest reviews praising the innovative wellness focus design and great service culture. And we remain on track to open our first [indiscernible] hotel around the end of this year. We'll share more on the progress of both of these new brands with you at our full year results. I'll now move on to talk about the performance in each of our regions in a little bit more detail. In the Americas, RevPAR was up 8.4% as a result of strong rate growth, up 4.6%, and high absolute levels of occupancy of over 74%. Trading was particularly strong in the United States, which is the key driver of our growth in the region. RevPAR in the U.S. continued to benefit from favorable supply and demand dynamics. Industry room nights sold have now beaten monthly records for 3.5 years. And absolute occupancy of 75%, and over 80% mid-week and Saturdays, is now 2 percentage points above the prior peak in 2007. Rate growth of 4.5% in the quarter was our strongest for over 2 years. But in real terms, our rates remained 3 percentage points below their prior peak, so they continue to offer headroom for further expansion. These conditions reflect the continuing imbalance between demand and supply growth, which is expected to continue for some years. The latest forecast from Smith Travel Research shows supply growth remaining below 2% until at least 2017. When we do see supply start to pick up, given that our fee-based model is 85% linked to hotel revenues, our revenue growth will swing more to be new unit-driven. We have 17% of the active pipeline in the U.S. versus 7% of existing supply. And we continue to sign a high proportion of all new hotels being developed. Against this strong backdrop, all of our brands performed well this quarter. This was driven by good growth in group demand, particularly in our Holiday Inn and Crowne Plaza hotels, where our weekend group business was especially strong. Our Holiday Inn brand family have maintained its leadership position, with a $5 RevPAR premium for the upper midscale segment and total U.S. RevPAR growth of 9.4%. Meanwhile, Crowne Plaza outperformed this segment with double-digit RevPAR growth in the quarter, reflecting the progress of our ongoing program to reposition this brand in the U.S. Moving on now to our Europe region where we drove RevPAR growth of 6.1% against the mixed macroeconomic background. The U.K. was particularly strong, with double-digit RevPAR growth driven by rate up over 7%, and with performance in the U.K. region as the highlight, with RevPAR growth exceeding 12%. Demand continues to be strong. And occupancy in the quarter, up 85%, was boosted by a number of events in the Commonwealth Games, the Ryder Cup and the NATO Summit. In Germany, high single-digit RevPAR growth was driven mostly by rate, with the strongest performance seen in Munich, Frankfurt and Berlin, helped by a favorable trade fair calendar this quarter. In France, our own InterContinental Paris Le Grand Hotel had a strong quarter, with RevPAR up 7.3%, benefiting from its newly refurbished ballroom. Performance elsewhere in Europe has been mixed, with good RevPAR growth in Southern Europe, offset by RevPAR declines in Russia. Turning now to our Asia, Middle East and Africa regions, where RevPAR in the quarter was up 4.4%, with each of our key subregions seeing growth. The Middle East benefited from strong occupancy in Saudi Arabia and Qatar. Growth in Japan was driven by robust group demand, particularly in resort location. While in Australia, we saw a slightly more subdued RevPAR growth, reflecting fewer citywide events in Sydney and Melbourne this year. I mentioned before the performance in some of the more volatile markets in the region. For example, in Thailand, RevPAR remains down year-on-year. But as the political situation in Bangkok improves, it is returning to a more normal level. And in Egypt, RevPAR was up significantly against weaker comparables last year. Excluding these 2 markets, RevPAR for the EMEA region was up 3.5%. Finally, our hotels in our growth priority markets of India and Indonesia also drove good RevPAR gains, both up over 6%, with increased business confidence in India following the recent election. Turning now to Greater China, where RevPAR in the quarter was up 0.8%, with solid occupancy growth offset by rate decline. Our business in China continues to grow at a fast pace, with 14% year-on-year growth in our room count. And we now have 227 open hotels in our 30th year of operating in the country. We have a well-established presence in primary markets on the Eastern Seaboard. And we delivered a strong quarterly performance in Tier 1 cities, such as Guangzhou, Shenzhen and Shanghai, with RevPAR up high single digits across these markets. Our strategy for future growth in China includes building our scale position in secondary and tertiary markets, which is a part of the government's Go West policy, and are expected to contribute around 40% to China's urban GDP growth to 2030. These markets now deliver around half of our room revenues in the region, but near-term trading conditions are likely to remain challenging, reflecting the impact of increased supply as our competitors follow us; and the continued impact of the government's austerity measures, particularly in Northern China. Our only owned hotel in the region, InterContinental Hong Kong, reported RevPAR up 5.4%, driven by occupancy, with increased group business and corporate events. Although disruptive in the short term, the redevelopment of the site around the hotel is progressing well. And when complete, it will greatly enhance the local area and be very positive for the hotel. And just in case I get asked the question, the recent protest in Hong Kong have only had a marginal impact on bookings for October. Moving back now to the group as a whole. In July, we completed the payment of a special dividend. And together with the payment of ordinary dividends and share buybacks, total returns to shareholders this year have been over $1 billion, and are now $10.4 billion since our formation as a stand-alone company back in 2003. Our strategic review of opportunities to further asset sales continues to make very good progress. We've now received favorable guidance from the relevant employees' representatives in Paris and are moving forward to finalize the transaction with Constellation Hotels. We'll make a further announcement on this in due course. So in summary, trading in the quarter and year-to-date have been strong, particularly in our Americas and Europe regions. While some of our markets faced heightened uncertainty and risks, we continue to see strong momentum in the business, and are encouraged by current trading and positive booking trends. We remain confident that we are well placed to continue to grow market share in the future. And with that, I'll open up the call for questions.

[Operator Instructions] And our first question is from the line of Tim Ramskill from Crédit Suisse.

Three questions for me, please. The first is, obviously, you sort of ran through a number dynamics around China. I just wondered if you could explain to us. As obviously, the Chinese market has been a bit more challenging in the last few years. Have you adjusted, in any way, your approach towards the growth dynamic to sort of the pipeline opportunity at all? Or were you just going to take the longer-term view that you just got to be in it, so sort of head down and carry on? And secondly, Marriott shared some pretty useful information at their recent Investor Day around incentive fees, which is -- it was quite difficult to sort of get visibility on. I just wondered if you could update us on kind of where you're at, particularly in the U.S., as regards to the number of hotels earning incentive fees within the management portfolio, and how that might evolve? And then the final question is, obviously, you've sort of commented that sort of trends generally look pretty good, but given the recent sort of macro uncertainties in Europe and, obviously, Ebola dynamic as well, is there anything you'd pull out from any forward-looking data at all that gives you any cause for concern about the fourth quarter?

Okay. Thanks, Tim. So I mean, taking those in turn, in terms of China, as you know, we are focusing on building a scale business there, and so we've got the Eastern Seaboard well covered, great representation. They're in good locations, and then we'll be moving further west into secondary and tertiary cities. And we went in there earlier than our competition. We've secured great representation with great owners. And our brands are well known in China, both with consumers and owners, which is a great place to start from. And we are continuing with that. We are going to build up a domestic scale business there. As I said on the call, we're -- if you look at the unit growth we are achieving, taking our business up 14% year-on-year, it's adding an awful lot of growth into the business from that unit accretion. Some of those hotels are still in ramp-up, so there's an occupancy growth there. Rate was more challenging this quarter, particularly in some of the secondary and tertiary markets. We did well on the Eastern Seaboard, but it was a bit tougher there, so yes, we'll keep an eye on it, but absolutely no adjustment to the strategy. Certainly, very confident in what we're doing in terms of building out the business. In terms of incentive fees, obviously, it's a lot less of an earnings proportion for us than it is to, say, Marriott. And 85% of our business is linked to revenue, so it's the top line. We don't give the specifics that Marriott do really because it isn't that relevant. And so I think outside of the U.S., about 3/4 of paying incentive fees and a little bit less than that in the U.S. So -- but about half and half, so -- and that's remaining pretty stable really, it's not moving around too much. In terms of the trends and booking patterns that we're seeing, we do highlight in, what I would say, in the stock exchange announcement, that we are aware of the macro uncertainties out there, but equally, our booking trends are strong. And everything we are seeing about momentum in the current business gives us confidence. So that said, we are aware it has become a more uncertain macroeconomic environment.

Okay. And just to clarify, so half of your U.S. hotels are paying incentive fees. I thought it was much less than that but...

No, it's not far off that.

Our next question is from the line of Jamie Rollo from Morgan Stanley.

Three questions, please. First of all, a year or so ago, when the upper midscale segment was underperforming the overall U.S. market, you said you'd expect that sort of trend to continue. And yet this year, it's been pretty strong, if not slightly stronger than the market. I was wondering why that particular segment has come back so strongly, given it's got a little bit more supply pressure. Secondly, if you look at your gross openings year-to-date, you are pretty sort of flat year-on-year; and Q3, you're flat year-on-year as well, despite the signings really starting to pick up at the beginning of last year and some of the signings to conversions, I was wondering when that's going to convert to stronger openings. And then finally, the Chinese press is reporting you put the Hong Kong hotel up for sale. In the past, you said you probably wouldn't do that until the development next door was complete. I was wondering if you can say anything about the timing of that potential hotel disposal.

Thanks, Jamie. When we talked about in terms of the upper midscale, particularly Holiday Inn and outperformance again [indiscernible], was really to demonstrate that as the brands were already running at a big premium and they hadn't fallen so much in the trough of the last cycle, you won't necessarily get to see the same level of growth coming through. As you say in, actually, I think in the first quarter and then in the third quarter, we did grow in line with the segments. And I can't predict it quarter-on-quarter. And we maintained our RevPAR premium of $5 to the segment. I think that -- if you look at where occupancy rates are, they're extremely high. And there is not a lot of spare capacity out there, so that is driving demand for what are those strong brands. And so it's a good performance and one, hopefully, that we'll see continuing. I think what we were saying previously was just to give some of the macro background to it. In terms of the openings, and I think when you compare it against last year, you have to strip out -- so when you look at the signings first, you have to strip out some of the signings that were coming through the -- there are many rooms that got signed there. Signings have been very strong, and they will come through in a few years, but it does take a while to go through permitting, break ground and get the hotels open and opened and trading. It's a little better this year in terms of net rooms' growth than it was last year. 2.7% year-to-date, and that was with a higher level of exits in the first quarter than we'll see in the run rate. So that's, as I say, quite encouraging there. And look, in terms of Hong Kong, when we announced that we were doing the strategic review of the assets back at the first quarter, we said, yes, that would cover all the owned assets. And we got Paris done and -- nearly got it done, bang on interims a couple of days later, but we weren't -- we've got nothing to say on Hong Kong for now other than the strategic review is progressing very well.

So is it not up for sale?

All we're saying, Jamie, is the strategic review is progressing very well.

And our next question is from the line of Jarrod Castle from UBS.

I was wondering, could you maybe quantify kind of what Africa RevPAR was in the third quarter. Obviously, Accor came out with their number of minus 5% for the quarter, so just wondering if you're seeing any weakness, probably the mix of the business is different in that market. And then secondly, just in terms of Europe, you've done a number of removals during the course of this year. Can we be expecting kind of broadly flattish kind of rooms this year? I guess what I'm trying to ask is, is there any further pruning that needs to be done, any material pruning of rooms? And then lastly, you spoke a little bit about Le Grand. Do you have any kind of date in mind when it could close or do you still have to kind of get sign-off from the union?

Thanks, Jarrod. In terms of Africa, I guess the first thing is, it's a very small part of our business. If you look at Western Africa, there's only a couple of hotels there that we've got. And really, across the whole of Africa, it's less than 1% of our revenues, well under that. I mean, we've got 20 hotels right across Africa which makes you down in South Africa. So I can give you the numbers, but they are very hotel specific. I think in the third quarter, those 2 hotels were down 11.5%, and year-to-date, they've been down sort of 7%. So I don't really think it's representative of anything. And in terms of Europe -- was your question actually was, were there more rooms that would come out in Europe or more -- or across the business?

No. It's more about Europe, and then just giving a bit of color in terms of where you're taking out rooms.

Okay. Well, across the business, we do continue to take out rooms where we see an opportunity to get better representation for the brand, and that's not region specific. I mean, it has obviously been more in the U.S. over recent years, just because we've been operating there longer. But equally, we will take out rooms if we can add something that's better in there. And so there's nothing specific that comes to mind that is large in Europe that will be coming out. But you'll always see some attrition there. And in terms of Le Grand, when we announced the deals back in August, it was an irrevocable deal, just had to go through certain steps. And we've now got the Works Council approval, which is one of those steps, which means that we can now exercise our -- effectively, our push onto the purchaser, and then it's just the legals have to go through. So exactly when that will all progress to us receiving the cash, I can't exactly say. Might be by year-end, might be shortly thereafter, but sometime in that order of magnitude.

And we have no further questions, so I'll hand you back to your host to conclude today's conference.

Thanks, Fay. And thanks, everybody, for dialing in. And I'll speak to you all soon. Bye for now.

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