Ladies and gentlemen, welcome to the IHG Q3 Results Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to your host, Heather Wood, to begin. Heather, please go ahead.

Thanks, Jordan. Good morning, everyone, and welcome to IHG's 2019 Third Quarter Trading Update Conference Call. I'm Heather Wood. I'm Group Financial Controller, and I'm joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer. As in previous quarters, we won't be holding a separate call for U.S. investors, but we'll be making the replay of this call available on our website. I therefore need to remind you that in the discussion today, the company may make certain forward-looking statements as defined under U.S. law. Please refer to this morning's announcement and the company's SEC filing for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. I will now hand the call over to Paul.

Thanks, Heather, and good morning, everyone. I'll begin with a review of our trading performance before providing you with an update on our strategic initiatives and outlook. Starting with RevPAR, which for the group declined 0.8% in the third quarter. Excluding the Hong Kong market, where trading conditions have been challenging, RevPAR was down 0.5% in the quarter and is up 0.1% year-to-date. In the Americas and the U.S., RevPAR declined 0.6%. Through the quarter, we observed a meaningful drag on our reported RevPAR from hotels under renovation as our owners invest heavily behind our brand refresh activity. There is always some impact. But when demand is lower, this impact is more pronounced. This accounted for some 40 basis points of our U.S. RevPAR decline. At the same time, and as we mentioned at our interim results, we continue to face a headwind from small groups business, which Holiday Inn and Crowne Plaza are overweighted to and where demand has reduced, with group-driven revenues for those brands down some 3% in the quarter. Holiday Inn Express, with its different mix of business, grew RevPAR and outperformed the upper midscale segment. Overall, our RevPAR performance year-to-date is in line with the segments in which we compete. Europe, Middle East, Asia and Africa RevPAR was up 0.2%. In the U.K., RevPAR was up 1% in the third quarter. London was up 3%, helped by strong international inbound demand while the provinces were flat. Year-to-date, we continue to outperform the industry in the U.K. RevPAR in Continental Europe was up 1%. France saw 1% growth whilst Germany was down 7% due to the lapping of the European Athletic Championships and the number of significant trade fairs last year. Middle East RevPAR was down 1% with increased supply and continued political unrest in the…

[Operator Instructions] Our first question comes from Vicki Stern of Barclays.

Yes, 3 questions, please. Just first, going back to the renovations, you took that as sort of 40 bps drag. And you related that to the fact that obviously it's tougher in a tough demand environment. I guess if the demand situation stays in line with how it is currently, how do we think about that drag persisting? Was it sort of a particularly heavy quarter? Or should we just think about that 40 bps drag as something that might sit for a number of quarters? Second question, [indiscernible] growth obviously noted your comments on the ambition to continue to accelerate from current levels. As we look into 2020, are you still expecting that net system growth can actually accelerate in 2020 versus the 2019 [ money ]? And just finally on fee-based margin growth, just sort of where you -- where this also leads you versus the 80 to 120 bps range both for this year and as you're looking forward next year.

Okay. Thanks, Vicki. And actually, I think that I'll take those in reverse order. Yes, look, no change to what we're thinking about in terms of margin. That's our aspiration for this year and into medium term. In terms of system growth, I think that we've been pretty clear that what we're trying to do and have been for some years is make sure that we've got the right offers for our owners in our markets. And so we've launched the new brands that we've spoken about with avid now having 200 signed up and 80 either under construction or in final planning, voco, and most recently, Atwell. And that's all going to help us for, yes, really long period of time to continue to grow our net system size growth. We're probably seeing a lower benefit from that in 2020 than we will in further out years. So the openings out of those will really start to accelerate. But that said, I mean 2020 is again looking to be a good year for system growth. We, as we've talked about before, did get some benefit from the Macau signing that we called out in 2019. But even excluding that, 2020, we would see some underlying growth, I think, on 2019. In terms of the refurbishment activity, so we called it out in particular because although we are always working with our owners to ensure that the quality of our product is absolutely as good as it can be and owners are -- have been -- are investing behind our hotels, so particularly the Formula Blue new room product for Express and then our Crowne Plaza Accelerate program where we're lifting the overall quality of the estate there. In a lower demand environment, you can see a little bit more of an impact on that. I suspect our owners will want to continue to invest behind taking our hotels up to even higher levels of quality. So I think we'll continue to see that. Exactly what impact it has really depends on the demand environment that we see. And as we've spoken about before, we have a pretty short booking window, so we then actually have a great deal of visibility on that. But perhaps that's something we'll be able to come back and talk about more at the full year results.

Our next question comes from Jamie Rollo of Morgan Stanley.

Three questions, please, again. First, Paul, just sort of general comment about the RevPAR environment. Is this part of a synchronized global downturn, do you think, or it was just some sort of one-off political macro issues? And if it is part of the former, is the reaction you're taking to sort of change the model or to reduce the cost base? Secondly, on China, it's got the highest mix of incentive management fees, I think at about 1/3 of fee revenue there. So could that have sort of more of an adverse impact on the bottom line, particularly as you go into next year? And then finally, I note that your third quarter signings are down quite sharply in the Americas and they didn't grow in China. So are there any sort of signs of developers or lenders getting cold feet there?

Thanks, Jamie. So look, in terms of the overall RevPAR environment, we did call out in our release that it is a little weaker RevPAR environment and that is held back by the impact of the protests in Hong Kong and in China more broadly by what's going on there with the U.S.-China trade deals. I think in the U.S., we've seen sequentially lower levels of RevPAR across the quarter. And with this being our lowest level at 60 basis point reduction, though most of that being from the refurbishment activity. There's 2 areas we've called out in the U.S. where we are seeing a bit more challenging: the small groups bookings, and we're seeing a reduction there across Holiday Inn and Crowne Plaza in particular, that's down around 3%; and then in terms of sectors, we're seeing the automotive and the manufacturing sectors in the U.S. a little weaker. And that's really in line with the overall U.S. economic activity data. So look, I'm not going to try and be an economic prognosticator, but I'm going to tell you what we're seeing. In terms of China and our contracts there, yes, that is where we have the most managed contracts as a proportion of our business. Of course, a lot of the new signings coming through our franchise contracts for the Holiday Inn Express model. So that will change a bit over time, but the contracts there are a little bit more straightforward, shall we say, than they are in the U.S. So it typically is just a share of revenues and then a share of gross operating profit at the hotels. So although you may see a little bit more operational leverage in the fees, it's not as significant as it can be in other parts of the world. And then in terms of the signings, actually I'm very pleased with the signings performance. It's almost bang on what we did by this time last year. And it's -- if we end up for the full year with, as we did last year, signing nearly 100,000 rooms, I mean that's going to continue to build very strongly towards our ambition of industry-leading net system size growth. So we've got a lot of rooms in our pipeline that will open up over the next few years and that's a lot of stored growth. So although you may have some differences quarter by quarter and region by region, there's an awful lot of growth to come.

I was trying to get at, really on the first point, is there any action on taking down costs, if this is part of more of an underlying slowdown?

Thanks, Jamie. So as you'll recall a couple of years ago, we did do quite a big corporate restructure to take a lot of costs out of our, if you like, out of our back office and put it into our front office. So we've got some more brands to invest behind and investing behind our capabilities, putting 2 of our business units together and combining our commercial and our technology functions. So that has given us a lot to invest and that's being deployed effectively. We're very pleased with what we're seeing from that. In -- our focus is on growth. Our focus is on the long term, continuing to invest behind those initiatives, which are so important for the long-term health of the business. So no current intention that we'll be taking money away from those very important strategic initiatives and just taking it down to the profit line.

And if I can just follow up with 1 more, if I may. It sounds that you're also happy with consensus around $860 million including the $10 million one-offs, so $850 million underlying, which is about 2% growth. How do you think about consensus expectations for 2020, which I think is sitting at 9-1-5, which is up about 8%, again stripping out the $10 million in 2019?

So in terms of -- to the 2019 financial expectations, we said that we're broadly happy and have called out the potential impact in Hong Kong through the second half of the protests there. I'd say that's potentially around the $5 million mark. In terms of 2020, it's a really broad range in terms of expectations there. So a little early to comment on that. I would say that if we saw a similar level of disruption in Hong Kong into the first half of 2020, we might see a similar level of impact to profit. So that may well continue over into 2020. But beyond that, it's a little hard to call.

Our next question comes from Tim Barrett of Numis.

Paul, I had 2 things, please. Firstly, just going back to your group comment. Totally appreciate you have a short booking window, but was the comment on groups in relation to bookings in the quarter for the quarter? Or are you just trying to flag a bit of group softness from here onwards? And then secondly, I don't know if this is pedantic, it might be a rounding error, but the IFRS 16 adjustment, does it have any impact below the EBIT line, please?

Thanks, Tim. In terms of the groups, whether it's in the quarter, for the quarter, I mean what I'm really just trying to pull out is where the -- where we're seeing a little bit more challenging, where the demand is coming off. As to whether those were booked in a short window or a longer window, there is always a mix. Because they are slightly smaller meetings, they're not the sort of very large incentive conferences, for example, that are booked a long way out into Vegas, where you need the capacity to take 3,000 delegates. These do tend to have a shorter booking window. And in terms of the IFRS 16 question, I mean there's some very technical aspects of the accounting around that. Happy to sort of follow up with it offline, but -- and we will, of course, put out all the detail around it at the full year results.

How much of the $10 million is it, roughly?

It's a little bit more than 50%.

Our next question comes from Alex Brignall of Redburn.

Just 1, really. You guided and have guided historically that you would expect RevPAR growth to remain positive whilst GDP growth is positive. But I guess in the U.S., that hasn't been the case for at least a couple of quarters and you talked about timing and how Q2 might be better, but it hasn't been. Has your expectations changed at all? What else is happening that means that RevPAR growth is worse than really macro factors would tell us it should be? And how does that affect your expectations for next year? Should we just assume that the old formulas come back and we get RevPAR growth again? Or should RevPAR growth just stay worse?

Thanks, Alex. So I think we've spoken previously about it. If you go back over the long run and you look at how RevPAR trends to GDP growth, it does tend to trend ahead of GDP growth over the long run. And that's what we've seen for many years in the cycle. I think in referencing a weaker RevPAR environment in the third quarter and pulling out the particular segments where we are overweighted to and both in segments in terms of those manufacturing and auto segments and in terms of the groups area where we are overweighted to again because the nature of our full-service Holiday Inns and Crowne Plazas. We're trying to give a little bit more color as to if there's any movement away in current quarters from that long run trend, what could be driving it. I mean I can't give you based on a quarter analysis of whether we'll see a longer-term deviation from that trend. I can only give you the most latest color. So I think we'll need to look over a period of time and if there's any deviation, try to get our heads around that, but that's all I've got for you today.

I guess just 1 quick follow-up. The OTAs recently have been saying that should there be a downturn, they expect hotel pricing to be worse because transparency is higher. Is that something that you would have within your expectations?

Look, it's an interesting question. I wouldn't necessarily agree with that. I mean the OTAs were around the last time as they went through it. And I think that what you tend to see in an event of a downturn is that the midscale -- upper midscale brands do outperform. We certainly saw that last time round. And consumers are very attracted by strong loyalty offers, which of course, we have the largest loyalty program with IHG Rewards Club. So I would actually expect to see even more business come to us in the event of any sort of downturn like that. And we've expanded since 2008 the penetration we have into those segments. So I guess we shall see. Revenue management is what comes into play at that point. As -- if occupancy does slacken in a market, what do the general managers of the hotels on the street corner do? Do they reduce pricing? Or do they accept that occupancy is slackening from a level that we've never seen before in the industry and just let that slack slacken off a little bit but hold pricing, which would be the most rational response. And we have very sophisticated revenue management algorithms, price optimization tools in our Concerto tool that we have spoken about we rolled out together with the GRS program, which should support that.

Our next question comes from Richard Clarke of AB Bernstein.

Yes. Three questions for me, if I may. So you flagged that you've got a substantial liquidated damages inflow coming in. Presumably that's the Macau Holiday Inn or maybe the London Holiday Inn. But any trend there? Why are owners paying to get out of IHG contracts? Or are these just one-offs? And second question was cash return. I think the last cash return was at Q3 last year. So any update on when we might be able to expect the next cash return? And then the third one on Saudi Arabia. So Saudi Arabia's opening itself up. IHG, I think is the #1 hotel chain in Saudi Arabia. So what's the potential upside from that move by the Saudi government?

Thanks, Richard. So look, in terms of liquidated damages, our contracts are very strong. And there may be a reason why an owner will have a better use for a hotel. And sometimes, it may be there's redevelopment on the site, it may be lots of different reasons. Actually, although we don't call out individual hotels in which it is, it is indeed the ones that you referenced there. But that's not -- we won't get into a guessing game. So you've had your 2 guesses. In terms of cash returns, yes, we did announce at the third quarter last year, nothing to announce today, obviously. But the philosophy around the business model has not changed. We continue to be very cash-generative, we continue to be very focused on our margin, on our cost efficiency and on driving our long-term growth. So absolutely no change to our philosophy there. Saudi Arabia is an interesting market. As you say, we are very well represented. We have the best location in [ the city of ] Makkah, for the InterContinental there. We have quite a number of signings in Makkah. We've got the new voco coming in, in Jeddah as well. So we've got very strong reputation for our brand there. And I think there'll be an opportunity for more hotels in due course. And we are actually continuing to invest behind our operations or on-the-ground support teams there to make sure that, as we always try to do, that we can support our owners to the very highest level, which is what they expect of us.

Our next question comes from Monique Pollard of Citibank.

Paul, 3 questions from me, if I can. Firstly, so the $5 million Hong Kong fee reduction in the second half, I'm assuming that, that annualized is going into next year, all else being equal. And also related to that, could you give us an update on how long we should expect Hong Kong to be a drag once the protests have ended in the region? Also could we talk a bit about, if the environment were to get materially worse from here, understand your point that at the moment you continue to invest for growth for the long term. If it were to get materially worse, what kinds of cost-saving measures could you look at? I know in the past you've mentioned things like staff bonuses and wage increases, traveling expense budget. But perhaps, if you could put some numbers around that, that would be quite helpful. And then finally, just coming back to the cash returns question. I guess leverage range at the moment stays unchanged in terms of target. If the environment gets worse from here, do you think the scope, that you take a more cautious approach to leverage or still happy with where it is?

Okay. Thanks, Monique. So in terms of Hong Kong and the fee reduction I called out for the second half, if conditions stay similar to what we're seeing today, if they stay at that sort of level into the first half of 2020, then yes, I think we will continue to see an impact and it could be proportionately around the same. If there's any difference in that, then we'll call it out at full year results. But I wouldn't think that it's going to be materially different from that. In terms of how long the drag might last, obviously, after the protests would stop because you wouldn't expect me to have a perspective as to when they might stop, then based on our experience with the Occupy Central protest a few years ago, there was a continued -- there was a lag before business picks back up again. So it didn't just come -- business didn't just arrive back at the doors as soon as the protest finished. So it could be different this time around, so we'll keep a close eye on that. But that would be our historical experience. Then in terms of your question as to, I guess the resilience of the business model, as you know, it is a very resilient business model, helped firstly by the fact that we are opening up a lot of hotels around the world. So that's the first dynamic. So even if you saw a RevPAR environment which was tougher than we're seeing today, then with 5% growth in our system size, which is what we expect for this year, which would then annualize into next year and then a further strong performance in our system size growth in 2020, that brings in a lot of new hotels which…

[Operator Instructions] Our next question comes from Jarrod Castle of UBS.

I'll just limit it to 2. One, any change in kind of thinking on M&A? And in this environment, are sellers becoming more realistic in terms of multiples? And then secondly, any comment on -- you touched on GRS [ countries ], so on kind of up-selling auxiliaries, how that's going in terms of squeezing out some further revenues?

Thanks, Jarrod. So in terms of M&A, really, our thinking hasn't changed that the strongest return on capital employed for us is from launching new brands, and that's what we've done in most cases. So if you back in time, I mean even Holiday Inn Express was a brand launch for us. And more recently avid, which is performing very strongly, voco, Atwell Suites, et cetera, et cetera. In the luxury segment where it's more difficult to create a brand from scratch because we'd really have to buy the real estate to put our brands onto it, makes more sense to buy something that is -- that has a lot of growth opportunity. So we don't like necessarily to buy a brand that's ex growth, that's so large, maybe hundreds of properties and in most of the territories it can be at because I think that that's a very expensive way to get into that opportunity. We'd rather buy something and then take it internationally, like we did with Kimpton or buy something that has very strong brand equity but really needs more investment behind it, like with Regent, or buy something that is the industry leader but with the benefits of being plugged into a global system, can expand even further like Six Senses. So really no change to the philosophy there. We are very picky, I would say, and our pickiness has not changed. In terms of GRS, yes, really pleased with the rollout there and the opportunity that it's going to offer for us being the first hotel company with a cloud-based GRS. And the great benefit of that is that we can beta test new initiatives, just put them down into a certain subsegment of our hotels and brands or different locations and try to see how that works, take it back and rework it if we want to. I'd say there's a lot of opportunities in that and there'll be more updates on that in due course. But nothing in this trading update, Jarrod.

We have no further questions, so I'll hand back.

Okay. Well, thank you, Jordan, and thank you, everybody, for listening in. I appreciate your time and hope you all catch up very soon. And just to remind you that we do have our China educational event on the 31st of October in London and there will be an opportunity to see that over the Internet as well. Thank you very much. Bye for now.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.