InterContinental Hotels Group PLC (IHG) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to the InterContinental Hotels Group Quarter 1 Results Conference Call. My name is Rosy, and I’ll be your coordinator for today’s conference. For the duration of the presentation, you will be on listen-only. However, at the end of the call you will have the opportunity to ask questions. [Operator Instructions] I will now hand it over to your host Catherine Dolton to begin today’s conference. Thank you.

Thanks Rosy and good morning everyone. This is Catherine Dolton, Head of Investor Relations at IHG. I’m joined this morning by Paul Edgecliffe-Johnson, Chief Financial Officer. Before I hand over to Paul for the discussion of our results, I need to remind you that in the following discussion, the Company may make certain forward-looking statements as defined under 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 Paul.

Thanks Catherine and good morning and possibly good afternoon to you all. Thanks for joining us today for our first quarter trading statement conference call. I’ll begin with some of the highlights in the period before covering each of our regions in turn and I’ll then open the call up to questions. So we made good start to the year driving RevPAR up 1.5% against a backdrop of weak oil markets and the earlier timing of Easter which affected several of our key markets. We increased net rooms count by 2.7% year-over-year opening 5,000 rooms in what is typically our slowest quarter for openings, and we signed more than 15,000 rooms into our pipeline, our fastest first quarter rate for 8 years taking into 220,000 rooms. This gives us a 13% share of the active global industry pipeline which is around 3 times our share of open rooms means we remain well set for organic market share gains. At the same time, we continue to focus on the quality of our portfolio exiting rooms as and when necessary to ensure that our brands remain attractive to get to menus. In line with previous years we anticipate that the run rate for exits will decrease from the level we’ve seen in the first quarter and for the full year we continue to expect the removal rates of between 2% and 3% of opening rooms count. Looking now at our brands, while we focus our development efforts, not just on expanding the presence of our existing brands, but also in gaining momentum and traction for our newest brands, the Holiday Inn brand family continues to be our engine for growth. It accounted for around two thirds of our openings and filings in the first quarter, the best signings performance for the brand family since 2008. We’ve continued to expand our luxury and upscale presence, particularly in key city locations. Just last week we reopened the flagship InterContinental New York Barclay after its extensive $180 million refurbishment program. During the quarter, we signed five further landmark properties for InterContinental hotels and resorts, the world’s largest luxury hotel brand. New signings included InterContinental Venice in Italy and InterContinental Chongqing in China. Our pipeline for the brand now includes over 50 properties almost half of which are in Greater China. Together with our open properties in the region, we’re on track to have almost 60 InterContinental hotels in Greater China over the next few years. Our boutique business is also growing fast, reinforcing our leadership position in this attractive segment. We opened and signed a record number of Hotel Indigo rooms in the quarter including the Hotel Indigo Tel Aviv at City Centre. Our expansion plans at Kimpton are progressing well as well as signing a further 2 hotels in USA market, Kimpton’s global rollout has commenced, with our first signing at Amsterdam and with multiple leads on the discussion in prime global destinations. Our extended stay brands have more than doubled in size over the last 10 years and remain very popular with guest and owners. Signing over 20 properties made this our best first quarter since 2008, 40% on the same period last year and double of what we achieved in quarter 1 2014. Our pipeline now contains over 100 Staybridge Suites and over 100 Candlewood Suites properties with significant runway for further development. To ensure, we will maintain this strong level of guest and owner preference we’re continuing to innovate behind our brands and revenue delivery systems. Evolving and enhancing our leading loyalty program, is an important part of that. Building on the launch of our new top membership level Spire Elite in 2015, earlier this week we announced that IHG Rewards Club members will now be offered exclusive preferential rates when they book to our direct channel as well as free Wi-Fi, special offers, priority check-in and extended check-outs. This new benefit bolstered our loyalty offering while driving more direct bookings to hotels. The rollout will start in Americas and Europe regions and follows our pioneering and successful direct channel pricing trials last year. I’ll now move on to talk about trading performance in each of our regions starting with the Americas where RevPAR was up 1.9% in the quarter and 1.5% in the U.S. the earlier timing of Easter had an adverse impact on the quarter as did the low oil price. While we saw good RevPAR growth, just over 3% in non-oil markets, oil market RevPAR continued to be weak declining 10% in the first quarter. As a reminder we are overweight in these markets with 14% of our rooms there compared to 11% for the industry. But outside these more challenging markets conditions remain pretty favorable. Our hotels are driving occupancy levels of almost 65% in the U.S. marginally down from the third quarter of 2015 but still our second highest occupancy ever for this quarter. Outside of the U.S. Mexico continued its strong performance with double-digit growth for the fourth consecutive quarter but Canada was also impacted by the low oil price. Our revenue share is driven by both rooms and RevPAR given our pipeline share of new rooms in the U.S. is almost double our current market share and with 10,000 rooms added to the pipeline this quarter we remain confident in our ability to deliver continued growth in the Americas region. Moving onto Europe where we saw RevPAR growth of 1.4% also impacted by the earlier timing of Easter with mixed growth rate across the region. Germany one of our priority markets continued its long-term growth trend with a 4% RevPAR increase, aided by favorable trade fare calendar in Berlin, and Hamburg. Russia and the CIS after a tough 2015 saw RevPAR up 6% reflecting stronger trading in the Ukraine and solid growth in Russia where the weaker ruble has led to increased domestic travel and greater inbound Chinese visitors. Paris and London saw RevPAR decline Paris due to the November attacks and London due to a higher supply environment, but there is good growth across the provinces in both the UK and France. Turning now to our Asia Middle East and Africa region where RevPAR decline 1.1% again with some very different performances across the region. The low oil price and ongoing supply growth in the UAE meant the RevPAR for our Middle East region fell 10% in the rest of the region RevPAR grew 5% with some really encouraging performances. In Japan the weaker yen continued to drive increases in international visitors particularly from China and helped deliver double-digit RevPAR growth. Australasia and Southeast Asia performed well up 6% and 3% respectively. India had a good quarter benefiting from rising consumer spending, the growth of low cost carriers and stable government all of which helped us deliver 10% RevPAR growth. Moving now to Greater China where RevPAR was up 2.2% in aggregate. In Mainland China our industry leading capabilities enabled us to once again outperform the market with RevPAR growth of 6.2%. This was driven by tier 1 cities up 8.3% and tier 2 and 3 cities also delivering mid single-digit growth aided by strong business demand and greater leisure travel. Hong Kong and Macau continued to be impacted by market specific issues and was down 12% creating a drag on RevPAR for the region as a whole. So to summarize, we drove good performance in the quarter delivering solid RevPAR growth despite a number of industry wide headwinds and we signed our highest number of rooms in the quarter since 2008. Looking ahead despite economic and political uncertainty in some market current trading trends and the momentum behind our brands give us confidence for the rest of the year. With that Rosy, please could we open up the call for questions?

Yes of course. [Operator Instructions] And the first question comes from the line of Steven Kent from Goldman Sachs. Please go ahead.

I wanted to have a broader conversation with you about unit growth opportunities and your pacing as RevPAR continues to slowdown, are you seeing either a lower propensity of developers to want to build your hotels and on the same time maybe some issues on the financing front?

So development continues to be a very significant part of our growth story, so we've got the RevPAR growth but also the new units additions and certainly in the first quarter the signing that we saw around the world with 15,000 rooms were very strong, so in the Americas we signed 11,000 rooms and that was 20% up on first quarter 2015, 4,000 rooms in China which was 10% up on the same quarter of 2015. So that continues to be really strong, you remember that we talked about at the prelims that we were investing more behind in development resources because we felt that there were some deals that we weren’t able to fully take on because we just didn’t have enough people out in the market. The performance that we've seen in the first quarter is not advantaged by that investment yet, so we do still see a lot of demand for our brands and I think if you think about where we play and the strength of our brands, I think it's earlier perhaps to get financing for them limited service brands are named by lenders to performed very well on a cash on cash basis and they were picking a lot of locations. So perhaps they are an easier sell than some other brands out in the market.

And then just because I am intrigued by it you said you have a next generation guest reservation system, can you -- I didn’t hear you discuss it what are the enhanced features that you're going to be focusing it on?

So this is the program that we've been talking about a little time with Amadeus. Where Amadeus building a new engine if you like for the guest reservation system and we’re bringing our ecosystem on top of that, so that’s being going on for a little while. And that is going to launch in 2017, industry wide potentially industry wide platform and that the engine will be available to other market participants and our proprietary software for our revenue optimization software, revenue management software et cetera which is ours will not be available to others but the back end will be.

The next question comes from the line of David Katz from Telsey Group. Please go ahead.

So the two things I wanted to ask about are one Kimpton you know that you call out is starting to accelerate and it looks like at the moment it’s entirely an Americas brand. Is that something that you think you can grow internationally and is that in the works and something that just takes a little longer to accelerate?

And yes when we bought the brand, I guess at this time last year it was very specifically because both the Kimpton team and ours felt that there was an opportunity to take it internationally, create a major platform in the U.S. but taking it onto the next level did require to linkup with a global operator. That was the plan then and that continues to be the plan now. We’ve signed the first one outside of the U.S. in Amsterdam. We’ve actually got one signed up in Canada I am not sure if that really counts particularly as international but…

I think it does yes.

Okay. And then there is a number of other prime global cities where we are in discussions with owners to take Kimpton and also expect to see more progress on that through the year. So an awful lot of interest but we’re making sure we’re getting them into really good real estate locations. That’s the focus rather than just allowing them to be signed anywhere they work best when they’re in really strong on the locations.

And what kind of level would you consider, where is the tipping point in terms of scale on a brand like this, is it 100 hotels, is it a couple of 100 hotels?

I mean considering together we think about the penetration we’ve got in the U.S. market and you think about the number of hotels that the brand has in say Washington DC and had in San Francisco and it is a brand that often is relatively smaller hotels so you could have multiple ones in big cities. You got to have the right guests staying there who wants to stay at Kimpton, but the guest needs date is something that is there across Europe, I think it would be really successful in Europe people are looking for boutique brands and in Asia in China let’s say there is an awful lot of demand so I can see it getting to a decent unit count every time. And it’s never going to get up to the level of a Holiday Inn express I mean we’re not trying to take it there to be ubiquitous but it’s certainly got a lot of runway for growth.

Now just comparing the tone of what you’ve put out and the numbers that you’ve put out with some of the other large competitors that have already talked to us. In one case, a competitor used the term I guess a great thaw for the remainder of 2016 versus 1Q where there is a lot of concern about whether the cycle was really over and much more discussion about the downside but I think it would seem from them that their tone was relatively positive. How would you classify the tone of your outlook for the remainder of the year?

Unfortunately we don’t give guidance as you know David but what we’ve tried to do is help the underlying performance we’ve seen and so in the U.S. in particular which I know is there are a lot of people have focused their attention. In the first quarter, you’ve got oil market down 10% the non-oil markets up 3.3% and with about in the 100 basis points impact from Easter. And then as we think about what sort of comp we are lapping, if you think about the first quarter of 2015 with those oil markets were maybe 1% down and then quarter 2 and quarter 3 and quarter 4 of 2015 got worse. So minus 5 minus 5, minus 10, so as we move through the year we are going to be lapping against the easier comp and for the second quarter you got to have the Easter impact coming back in. So I think that there is plenty to be sort of confident about and we’re not providing specific guidance but there is certainly some things that hurt the first quarter more than we expect them to hurt the rest of the year. If you look across our business as a whole, you’ve also got in the Middle East you’ve got the negative 10% growth there shading the strong performance in the other market so for those 1.5% in RevPAR if you take out any market that are oil impacted you’re up at 3.4% even after that Easter impact.

And just lastly if I can ask about, kind of the M&A landscape I am certainly not going to ask you what you want to buy or what you would buy but if you could just give us your overall view about the industry and the M&A landscape and what opportunities are looking like presumably you look at everything, but what kinds of things you're seeing and how that's evolved over the past couple of quarters?

I would certainly try to David I guess we kicked off the M&A cycle with the acquisition of Kimpton, and we bought back because really strong brand a lot of brand equity there and very clear in terms of the management contact so that was something that then we could take internationally and that is what we like, it is something that got scale in one market, but then a lot of opportunity and a lot of guest requirement and owner preference for it so we could build around the world. Frankly something else comes up, but like that like a Kimpton we would look at it very-very hard and equally we're quite disciplined in how we look at acquisitions and we do want to make an appropriate return on capital employed. So we don't have to pay, so it got to be something that as we look at the growth that we can add onto a potential acquisition it penciled out for us and we look at everything and we are already the largest player in the luxury segment, we're of course by far the largest player in the midscale segment and the mainstream segment, we've got the biggest loyalty programs in China. So we play in all the large markets there, so there is a lot of organic growth for us if we can add to that where good M&A opportunity like another Kimpton then we absolutely well.

[Operator Instructions]

We have got no further questions, then thank you very much everybody for dialing in, really appreciate your interest and Rosy I think that we can close out the call. Thank you very much.

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