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Intercontinental Hotels Group (NYSE:IHG)

Interim Q1 2013 Results Conference

May 08, 2013 10:00 am ET


Catherine Dolton

Thomas D. Singer - Chief Financial Officer and Director


Steven E. Kent - Goldman Sachs Group Inc., Research Division


Ladies and gentlemen, good afternoon, and welcome to the InterContinental Hotel Group Conference Call. My name is Andy, and I'll be your coordinator for today's conference. [Operator Instructions] I'll now hand the call over to Catherine Dolton to begin. Thank you very much.

Catherine Dolton

Thanks, Andy. 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 first quarter interim management statement and Q&A, 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 will now turn the call over to Tom Singer.

Thomas D. Singer

Thank you, Catherine, and good morning, everybody, and thanks for joining us today for our First Quarter Trading Statement Conference Call.

You will recall at our full year results, we announced our intention to stop reporting quarterly financial statements. As a result, our trading statement this morning and the comments I'll make on this call do not include data on revenues or profits. We are instead focusing on our key metrics of RevPAR, system size and pipeline.

I'll start by making a few remarks on our recent performance and the trading environment as we see it, and then open the call up for your questions.

Overall, we've had a good start to the year with strong signings and solid RevPAR growth and on the 1st of May, we completed the sale and manage back of the InterContinental London Park Lane.

Global RevPAR in the quarter was up 3.1%, driven predominantly by rate, up 2%. The earlier timing of Easter had an adverse impact in the Americas and Europe in March and on the quarter as a whole. As expected, April has shown a corresponding benefit, with provisional RevPAR up 6.2% compared to just 0.6% in March.

In the Americas, Q1 RevPAR was up 4.1% and up 4.6% in the U.S. Provisional RevPAR growth for the U.S. in April was 8.1%, reflecting the reversal of the Easter impact and the continuation of our good underlying trading. Our performance in the U.S. in the first quarter was strongest at our InterContinental and Hotel Indigo brands but also reflects our weighting towards the upper mid-scale segment with Holiday Inn and Holiday Inn Express. Across the industry, this segment is far more stable through the cycle, with smaller peaks and troughs than those experienced by the upscale and luxury brands.

Overall, the favorable supply and demand dynamic in the U.S. remains very supportive for RevPAR growth.

In Europe, the trading conditions are more difficult across the industry. Our RevPAR was down 2.2% in the first quarter. April RevPAR growth of 3.3% also reflects the reversal of the Easter shift as expected. Low single-digit RevPAR declines in the U.K. and Germany were partially due to Easter. The U.K. was also impacted by the increased supply that came on in London last year for the Olympics, and Germany has tough comparatives this year due to the strong trade fair calendar in 2012. France's first quarter RevPAR growth of 2.7% is encouraging and reflects strength in Paris, partly offset by some weakness in the provinces.

In our Asia, Middle East & Africa region, we had a strong quarter with RevPAR up 5.5%, driven predominantly by 3.1 percentage points of occupancy growth. Trading in the quarter was led by high single-digit RevPAR growth in Southeast Asia and Japan, a mixed performance in the Middle East but with strength in Saudi Arabia and the UAE and ongoing resilience in Australasia. This good performance continued into April, with RevPAR up 7.1%.

In our Greater China region, Q1 RevPAR growth of 1.8% shows an improved trend from the fourth quarter of last year. Even so, trading in the region does continue to be impacted by a number of factors, including slower economic growth, the political leadership change and tightened government spending. We do hope to see a return to more normal conditions as the year progresses and the new leadership becomes established.

Looking at trading in the region in more detail. Performance in Beijing, Shanghai and West China was particularly impacted by the change in leadership, with a greater proportion of government business in these regions. Trading in resort locations was stronger in the quarter, benefiting from the timing of holidays.

Our April RevPAR decline of 2.1% in Greater China reflects the continuation of these factors, plus effects of the Szechuan earthquake and concerns around bird flu. The impacts of these worries has so far been limited to hotels in the Shanghai area where we have seen some events in meetings postponed until later in the year. We continue to monitor the situation for signs of any broader impact.

Despite these short-term headwinds, the longer-term demand drivers in Greater China remain highly compelling, and our market-leading position leaves us well placed for future growth. Importantly, the continued strength of our hotel development activity in the region demonstrates that our owners also feel this way. We signed over 4,000 rooms in the quarter, up more than 50% year-on-year, and these signings included our 16th HUALUXE Hotel.

For the group as a whole, we also had a strong quarter for signings, adding 14,500 rooms into the pipeline, including almost 4,000 rooms on U.S. Army bases. This good pace of development activity takes our total pipeline to 176,000 rooms as of the end of March, 1% higher year-on-year and 4% higher than at the close of 2012.

Let me now turn to net system growth. In what is typically our slowest quarter for hotel openings, we added just over 4,500 rooms to the system. However, we also removed some 6,500 rooms, over 1/3 of which relates to the FelCor exits we talked about in February. This takes our total system to 674,000 rooms at quarter end, up 1.9% year-on-year, but slightly lower than at the end of 2012. We are making good progress towards our strategic priority of building preferred brands. This is particularly so in the Holiday Inn brand family, where in the quarter, we entered into an agreement to debut Holiday Inn Express in Russia. In addition, of the 34 hotels opened globally in the first quarter, 29 were Holiday Inn brand family openings.

We're driving guest preference and awareness with increased appetizing investment from our powerful system funds. In the U.S. in March, we launched a new television campaign for Holiday Inn Express. This saw the return of our iconic Stay Smart TV commercials after 4 years off air. And we have further advertising campaigns planned across all regions for Holiday Inn later this year.

We also recently announced changes to our 73 million members strong loyalty program. In order to bring our family of brands closer together and drive increased cross-selling, from this summer, our loyalty program will be renamed IHG Rewards Club and will have added new benefits. One of these is free Internet access for all our members, which is a first for the industry and something we know is very important to our guests.

Let me now comment briefly on our progress as regard to asset sales. As I mentioned before, we completed the sale of the InterContinental London Park Lane last week. We have secured a management contract of up to 60 years and established a strategic relationship with a great new partner. Gross proceeds of $469 million, are significantly above net book value, and $95 million of this will be used to provide security for the U.K. pension liabilities that were previously secured against the hotel. This deal highlights the value of our asset portfolio, the attractiveness of the InterContinental brand and is another step in our long-standing commitment to reduce the capital intensity of the business.

Regarding InterContinental New York Barclay, over the last few months, we've taken the opportunity to pull together more detailed refurbishment plans. Although discussions with interested parties have been continuing during this time, we have recently started to actively market the hotel again. We will, of course, update you when we have any further news on this disposal.

We remain committed to an investment grade credit rating and efficient balance sheet. We continue to use our cash in 3 ways: investing for growth, paying a sustainable ordinary dividends and returning surplus funds to shareholders. We have a long-standing track record in this area and have made good progress with our existing $500 million share buyback program, completing $109 million -- $149 million to date.

Finally, let me make some comments on outlook, where we remain confident despite the challenging economic conditions in several of our markets. Overall booking pace is up, with increases in both demand and rates. Remember, though, that our forward visibility is only around a month, so this represents a fairly small proportion of the total rooms we expect to sell.

Data collected from guests about their travel intentions remains very encouraging. Around 2/3 of guests say they will travel more or the same over the next 12 months for business and even more for leisure. This is particularly important as we head into the key summer leisure season.

Despite the medium-term economic uncertainties in many countries, the travel industry continues to benefit from good, long-term sustainable growth trends. And our high-quality pipeline, with 50% exposure to developing markets, positions us well to capture this growth. We have a strong business with a resilient fee-based model, diverse geographic exposure and a robust balance sheet. This gives us confidence in our outlook for the year ahead, and trading is on track to deliver full year results in line with expectations.

With that, I'll now happily take your questions. Andy, would you like to facilitate the Q&A session, please?

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Steven Kent of Goldman Sachs.

Steven E. Kent - Goldman Sachs Group Inc., Research Division

So a couple of questions. First, the March, April split, which you did say was due to Easter, it seems more dramatic than maybe some of our other hotel companies have commented. Is that because of your leisure business split? Or is there something else there? Second, repositioning of the Crowne Plaza brand. I don't know if you had any color on that and where you are on that process. And then the IHG Reward Club, which is interesting, which is the -- because of the offers that you're giving to your customers throughout the whole system. What percentage of the bookings now are from these members? And what do you hope to gain from increasing that membership and offering more benefits?

Thomas D. Singer

Okay. Well, thank you, Steven for those 3 questions. In terms of the impact of Easter, it's hard to be entirely scientific about it. But we estimate that probably, the impact in the Americas and Europe of the switch of Easter was of the order of 100 to 150 basis points. And I think that what we're really encouraged by is the way that the business has come back strongly in April, which is exactly what we expected. In terms of your second question on the Crowne Plaza brand, we've now completed our quality audits of the Crowne Plaza hotels in the U.S, and where appropriate, we've put in place remediation plans or asset improvement plans for individual hotels. We're now moving on to test some of the new hallmarks for the brand, which will test over the remainder of this year before sharing those with the owners at the back end of the year. And then of course, it will take a couple of years to actually roll out those hallmarks across the estates. But we always said it would be a 3- to 4-year process, and we are where we expected to be. Finally, on IHG Rewards Club, we think this is an important step forward in terms of our branding strategy for the group. We think associating IHG Rewards with our underlying hotel brands will encourage guests to stay more frequently with us and to trial additional brands that they're not familiar with within our portfolio. And in the round -- IHG Rewards Club accounts for around 40% of our system delivery into hotels. So we think this will be a great opportunity to increase that figure over time. Just to be clear that the comment I made about the impact of Easter, 100 to 150 basis points, that's on the quarter, not just on March.


Thank you very much, and we currently have no more questions coming through. [Operator Instructions] Thank you. We have no further questions coming through.

Thomas D. Singer

Okay. Well, thank you very much, ladies and gentlemen, for joining the call. We appreciate your time and we look forward to speaking to you later in the year. Have a good day.


Thank you very much, ladies and gentlemen. You may now disconnect from your call.

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