InterContinental Hotels (IHG) on Q3 2016 Results - Earnings Call Transcript

| About: InterContinental Hotels (IHG)

InterContinental Hotels Group PLC (NYSE:IHG)

Q3 2016 Earnings Conference Call

October 21, 2016 09:00 AM ET

Executives

Heather Woods - IR

Paul Edgecliffe-Johnson - CFO

Analysts

Stephen Grambling - Goldman Sachs

Chris Agnew - MKM Partners

David Katz - Telsey Group

Dan Wasiolek - Morningstar

David Loeb - Baird

Operator

Welcome and thank you all for standing by. At this time all participants will be in listen only mode until we reach the question and answer session. [Operator Instructions] Today's call is being recorded. If you have any objections you may disconnect at this point.

I will now turn the meeting to our host Mrs. Heather Woods, Ma'am you may begin.

Heather Woods

Thank you Anjay and good morning everyone. This is Heather Woods interim head of Investor Relations at IHG. I am joined this morning by Paul Edgecliffe-Johnson - CFO. 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.

Paul Edgecliffe-Johnson

Thanks Heather. Good morning everyone and thanks for joining us today for our third quarter trading statement conference call. I’ll begin with some of the key highlights in the period before covering each of our regions intern and then I’ll open up the call to questions.

We delivered a solid performance in the quarter, executing against our winning strategy and leveraging on global scale. This drove net system growth of 3.8% year-on-year and global RevPAR growth of 1.3%. We continued to broaden up portfolio of brands, adding more than 19,000 rooms into our pipeline, our fastest third quarter signing rate since 2008. This takes our pipeline to 230,000 rooms which represent a 14% share of the global industry pipeline, more than three times our existing supply share, they sets us up well for continued organic market share gains.

We opened 7,000 rooms in the quarter and removed 3,000. Consistent with previous years, we expect our pace of openings to accelerate in the fourth quarter. Our ongoing focus on the quality of our portfolio means we have continue to exit rooms from the system and we expect fourth quarter removals to be in line with the average of the previous three quarters.

Looking now to our brands, where our development efforts are focused on both broadening of footprint of our established brands as well as gaining traction for our newest once. The HolidayInn brand family is our main engine for growth and our innovative new design solutions Formula Blue for HolidayInn Express in the Americas and Open Lobby for HolidayInn in Europe and the Americas are driving good momentum. We signed more than 13,000 rooms for the HolidayInn and brand family in the third quarter, our best performance for nine years.

In its 70th anniversary year, we are reinforcing InterContinental Hotels & Resorts position as the world's largest luxury hotel brand. We have signed 12 properties year to date with three in the third quarter, including our first hotel for the brand in the Maldives.

Our boutique business is growing rapidly, strengthening our portfolio in this fast growing segment. We delivered our best third quarter signings performance in nine years, a Hotel Indigo and opened the first for the brand in Poland. We are also expanding our Kimpton portfolio with the opening of the Grey Hotel in Chicago, our fifth brand this year.

Looking at our Crowne Plaza in the latest phase of the brand refresh is already driving success, with those having recently being known the best Upscale Hotel Brand in North America by Business Travel News. Our extended stay brands remained very popular with both owners and guest and are positioned well for future growth. We have signed over 7,000 rooms so far this year, taking our extended stay pipeline to more than 24,000 rooms, some 40% of our exiting rooms in this segment. Our well in this brand EVEN Hotels now has five hotels open in the U.S., including our first franchise property. Building on this brands wide ranging appeal, we have a signed a deal with our long term partner Pro-invest to develop a portfolio of EVEN Hotels in Australia and New Zealand leveraging the gap in the market for wellness oriented brands.

Our preferred brands are supported by IHG Rewards Club and by our strong direct channels. These are underpinned by digital innovation and our new guest reservation system, which remains on track to phase rollout from late 2017. While it's still early days, our preferential member pricing initiatives Your Rate by IHG Rewards Club it delivering very encouraging results. Since the loans, we have seen the growth rate of our direct channel double with that of the OTA channels flowing, and it’s helped us drive record enrollment in our loyalty program. As expected we are seeing no diminution in average daily wages result of the initiative. And we are continue to innovate.

We recently signed a global partnership agreement with Alipay, China’s leading third party online payment solutions company. This will make IHG the first global hotel company to give our Chinese guests the ability to pay via Alipay, available through all of our online and mobile channels, as well as across our full estate of hotels globally.

I’ll now move on to talk about the trading performance in each of our regions starting with the Americas where RevPAR was up 1.9% in the quarter. U.S. industry demand remains at record highs and our revenue delivery systems are driving close to peak occupancies of more than 75%. In this environment we are able to deliver solid rate growth taking U.S. RevPAR up 1.4% in the third quarter. This did include a small industry wide net benefit from the timing of holidays.

Our performance continued to be impacted by our over weighting towards the oil markets where RevPAR was down 7.3% compared to the non-oil markets up 2.5%. We will start lapping easier oil market comparables from the fourth quarter, although above average supply growth in these markets will continue to weigh on their performance. Elsewhere in the region Mexico delivered 12% RevPAR growth, the sixth consecutive quarter of double digit growth for the market driven by the weak peso and steady industrial growth driving business in key cities. We drove a solid performance in Latin America and the Caribbean and Canada was up nearly 7% due to increased domestic and inbound travel over the summer months.

Moving on now to Europe where overall RevPAR was flat. However our three priority markets all delivered solid growth. Germany continued its strong start to the year with RevPAR growth of 5% in the quarter driven by the favorable trade back [ph] calendar. Our targeted development strategy means we now have 100 hotels that have been signed or opened in Germany. In Russia and the CIS RevPAR was up 20% predominantly driven by Chinese inbound travel and by increased domestic business due to the weaker ruble.

UK RevPAR growth of 2.5% reflects solid trading in the provinces where we were up 4% although we expect tougher comparables in the fourth quarter due to the 2015 Rugby World Cup. We saw flat RevPAR performance in London, with strong demand over the summer from increased Middle Eastern guests due to the timing of Ramadan offset by industry wide supply increases which are expected to continue into 2017. Ongoing changing trading conditions and geopolitical events impacted several markets in continental Europe. In France RevPAR was down 16% while Turkey and Belgium also suffered significant decline.

Turning now to our Asia, Middle East and Africa region where RevPAR was down 0.1% in the quarter. In the Middle East RevPAR was down almost 8% due to the ongoing impact of low oil prices and high supply growth in some markets. However performance in the rest of the region was strong with RevPAR up almost 4%. India, one of our priority markets delivered RevPAR growth of 21% driven by the favorable macroeconomic environment and a double digit increase in foreign tourist arrivals. Japan RevPAR was flat as domestic travelers took advantage of the recently strengthened yen to holiday abroad and as we lapped very strong comparables. Australasia and Southeast Asia were both up 3%, the latter led by Thailand, [indiscernible] Vietnam where changes to visa requirements are driving inbound travel from China and Korea.

And finally Greater China where RevPAR was up 0.9% in aggregate. Mainland China grew 2.2% with Tier 1 cities up nearly 6% driven predominantly by strong corporate and transit demand in Shanghai and Beijing. By comparison we saw flat performance in Tier 2 and Tier 3 markets with strong trading in larger cities offset by the impact of typhoons in resort locations and heightened security in Hangjo during G-20 summit. Macau continued to be effected by industry wide market specific conditions including the impact of high supply growth with RevPAR down 14%.

Hong Kong experienced a low single digit RevPAR decline, an improvement from the first half but with ongoing industry weakness expected into 2017. We continue to have a strong pace of signings in Greater China, recording our best ever third quarter and year-to-date performances adding over 6,000 new rooms to our pipelines since June. This includes 11 HolidayInn Express properties signed under our new China franchise model, demonstrating the strong demand from owners since we launched it in May.

So to summarize, in recent months there has continued to be economic and political uncertainty in some parts of the world. Not least the U.S. and the UK with significant unrest in others, including the horrific terrorist events in Europe. Against this backdrop, while industry growth has slowed against record levels of RevPAR, IHG has delivered another solid performance including our best signings for eight years, this demonstrates not just the truly global nature of IHG's business but also the strength of our cash generative model, our portfolio of preferred brands and our revenue delivery systems.

Looking ahead the drivers for the hotel industry and for IHG remain compelling. This combined with our clear long term strategy which we continue to execute against will enable us to generate sustainable growth. We look forward to the future with confidence.

And with that I’ll open up the call for questions. So Anjay perhaps you can do that for us. Thank you.

Question-and-Answer Session

Operator

Absolutely sir, thank you. We will now begin the question-and-answer session [Operator Instruction]. Our first question is from the line of Mr. Stephen Grambling of Goldman Sachs. Sir, your line is open.

Stephen Grambling

First, one clarification I think in response to the earlier call, you had mentioned an impacts from Your Rates on ADR and ability to average up the overall rate. Can you just flush out the puts and takes there, is it simply a neutral impact with growth and loyalty, any color will be helpful.

Paul Edgecliffe-Johnson

We have highlighted this few times, including when we piloted Your Rates last year with HolidayInn Express in the UK to say, although through this discounted rates we are offering a lower rate to be able take it up. It's not impacting on the overall ADR of the hotel through revenue management. So we are revenue managing all of the channels to take out some cheaper business and we’ll replace it with the Your Rate channel. So it's not having an overall reduction on to rate in the hotel.

Stephen Grambling

Great and then maybe a bigger picture question on yield management, when you look at rates realize for any given night, where would that be versus where it was trending one week or one month in advance? And how is that trajectory evolving?

Paul Edgecliffe-Johnson

It's complex question Stephen. It is -- the nature of our business is that we don’t have as much group as say some of our U.S. competitors. So we tend not to have as much business on the books. So we do have shorter booking windows. So perhaps we won’t have as much visibility as we might get if you asked some of our U.S. peers. Not a lot of color that I can actually really give you on that right now.

Stephen Grambling

And then I guess one last follow than up if I could, it’s just on the roll out of the cloud based reservation management program. Can you just talk about some of the expected impact, what you are trying to get out of that?

Paul Edgecliffe-Johnson

Yes, sure happy to. There is some more information on our Web site from our recent capital markets day around this. Our new program with Amadues will allow us to market the attributes of the room more effectively, once we bring it on the stream and it's coming in 2017 in pilots and then it will be rolled out after that. So we will be able to revenue manage better rooms, for example have a better aspects of a higher floor, there is particular features to that room and both in terms of offering guest precisely a room that they want, but also when there are attributes to that room that will allow us to price it higher or differently, not allowing us to do that. After adding an additional feature more easily additional services to rooms and events, et cetera. So there is a lot of benefit it will bring in overtime.

Stephen Grambling

Thanks. I’ll jump back in the queue. Thanks so much.

Operator

Our next question is from the line of Mr. Chris Agnew of MKM Partners. Sir, your line is open.

Chris Agnew

First question, can you quantify or approximate the impact that the holiday had in the third quarter in Americas?

Paul Edgecliffe-Johnson

Sure, do you want to go through with your questions and I’ll tell them in time.

Chris Agnew

Yes sure. And then I was wondering HolidayInn franchise business in Americas under performed in the quarter, I mean HolidayInn Express, it was a little bit better. Just wondering if you could maybe give a little bit of color on the performance there?

And then final question is on the oil markets, you mentioned that you are starting to run into easier comps, but supply will still be a headwind, should we expect to still see RevPAR declines in oil markets as heading into '17? Thanks.

Paul Edgecliffe-Johnson

Yes, so taking that last one, the oil markets. When you look at sequentially the impact we had last year fourth quarter 2015, the big impact, we were sort of down 10% and change there. So we are in the fourth quarter 2016 coming up against an easier comparable, but what we're also seeing is that supply is higher in the oil markets than it is across the rest of the U.S. business and you are up at about 3% supply there.

As we move into 2017, maybe we'll see flat demand, but we also may see supply up around the 3%. So that's going to continue to push down on the RevPAR in that market. Exactly how much, hard to call, but we do see that continuing to be some negative pressure there. In terms of your first question on the holidays, I mean there’s a balance there between the holiday shift the Jewish holidays moving between September and October. But then is also the timing of the 4th of July, essential [ph] was 4th of July, it’s just whether it's a weekday or a weekend. So the balance between those two is pretty small, I mean you're talking at 10-20 basis points something like that.

In terms of the brand performances I mean HolidayInn Express is more exposed into the oil market, it’s got an 18% penetration into oil. So it was more impacted, so we did see some underperformance against the segment performance there and HolidayInn outperformed with a lower penetration to the oil market.

Chris Agnew

Got it, thank you.

Paul Edgecliffe-Johnson

Thanks Chris.

Operator

Next question will be from the line of Mr. David Katz of the Telsey Group. Sir, you may proceed.

David Katz

So with respect to direct bookings which is one of the key trends that the whole industry is focusing on at this moment. Do you disclose what percentage of our room nights or any metrics around the OTAs and the degree to which you're using them and where is that number moving? Is it higher today than it was a year ago and where might you expect it to be a year from now.

Paul Edgecliffe-Johnson

We try and put out information, not as quarter-by-quarter because that just don’t think that’s that meaningful around what's going on with the ATAs and what's going on with our direct web channel, and what we've seen since we launched Your Rate is that the growth in our direct channel contribution has been increasing and so it's faster than the growth that we're seeing in the OTA channel. So still seeing growth in the OTA channel, but the growth in our direct channel is going faster than that.

David Katz

So the OTA growth is still positive but at a decreasing rate since you launched more direct.

Paul Edgecliffe-Johnson

Exactly, you got it, [multiple speakers]. And you know we’re talking about it, we're happy to get some OTA business when it's not displacing business that should come through our direct channels. It's a good sort of business for us.

David Katz

With respect to RevPAR as we get into the lower RevPAR growth portion of the cycle, is there a point at which irrespective of your unit growth you are at essentially earnings equilibrium. You know the point at which you know earnings growth is negative relative to RevPAR growth, are we sort of at that point now?

Paul Edgecliffe-Johnson

I guess if you look at the shape of what's been going on in our business, so we’ve always talked about the multiple drivers of growth. So we’ve got new unit [ph] additions and that's been reasonably good so far this year. And then there is RevPAR and then there is the benefits that we bring to our continued margin accretion into the business that drives our top line growth down to a better EBIT number and then your over time, the cash that we return to shareholders and the stock that we retire all adds into that model which is self-reinforcing.

And I don’t think we're seeing anything particularly different to that in the numbers we’ve put out today. If you look at the underlying U.S. performance away from those oil markets we continue to see a reasonable growth 2.5% up and third quarter of 2015 and 2014 were strong quarters with 6% RevPAR growth in each. And then in Europe, absent the drag from the markets impacted by terrorism actually we saw pretty strong growth there, Asia, Middle East and Africa. Outside the Middle East we saw 4.5% growth there and then China continued to grow nicely.

So there is lot of growth in the business, both same store sales and new unit and then we continue to add to that through our efforts on efficiency and driving the bottom line.

David Katz

Okay. Thanks very much. I may have more but I’ll come back around.

Paul Edgecliffe-Johnson

Great, thanks David.

Operator

Our next question is from Mr. Dan Wasiolek of Morningstar. Sir, you may proceed.

Dan Wasiolek

Just looking at the pipeline on a year-over-year growth trends here, I was wondering if you might be able to provide some outlook commentary specifically and the AMEA segment, whether you seeing some cancellations there or hesitation that’s been impacted by the oil markets? Thank you.

Paul Edgecliffe-Johnson

So as you imagine with a pipeline the size of ours there are always some contract that move faster than others. Our fastest rooms through the pipeline, will that would be the conversion, but in terms of new build of our fastest will be our HolidayInn Express in the U.S. market that’s moves through pretty quickly. And then our larger boxes in Middle East and Africa and Greater China that bigger real estate so they take longer to build.

In some markets in the Middle East you are seeing a bit of slight down, people are being more cautious. It's at the margin, it's not something that I would say is a particular drag on where our net system sized growth is going. And we have seen some really strong signing coming through in other markets which are been going well in South-East Asia, in Vietnam, Thailand and India and Australia, where we are seeing good growth coming to that. So I think that will sort of balance each other out.

Dan Wasiolek

Okay thank you very much.

Paul Edgecliffe-Johnson

Thanks Dan.

Operator

Our next question is from Mr. David Loeb from Baird. Sir, you may proceed.

David Loeb

I just wanted to ask about the financing environment for franchisees and to follow that if you are seeing industry consolidation particularly the Marriott Starwood combination and the basically the concentration of select service brands within Marriott and Hilton have any effect of franchisee appetite or lender appetite to do construction on most of the franchisees?

Paul Edgecliffe-Johnson

Thanks David, I think when we look at the capital market environments for real estate financing for hotels, the large ticket lending is getting more challenging. Loan to value is probably coming in a little. But that says its still guessing financed, it’s just maybe with little less debt in the capital stack than you might have seen a few years ago or in the last cycle. The availability of capital to our franchisees which is mainly through the regional banks, actually we haven't seen a big change in that, these are avenues that have strong covenants and strong banking relationship and they are still able to access financers. We have seen through our -- continued very strong rates of signing right throughout the year which we haven’t really seen any slowdown in that at all.

But they are selective going to the brand owners with the best brand, the best system, et cetera and brands that offer strong cash on cash returns like HolidayInn Express HolidayInn and our extended stay brand. So we see that as a long term advantage for us. In terms of anything we might see with Hilton and Marriott, I don’t think that’s anything that you’d expect to see at this point so closed into the Marriott merger with Starwood that would be meaningful. And Hilton’s brand and our brands are being financed largely by very similar lender, don’t think there is anything I can call out there either.

David Loeb

Okay and one quick follow up, if you don’t mind. As you look at constructions starts given the uncertainty in the environment, are you seeing any slowdown or some of these franchisees that have financing, have franchise license, are they slowing down their starts or do you think that starts stay pretty much on scheduled?

Paul Edgecliffe-Johnson

We do monitored that pretty closely as you can imagine and we are seeing the starts continue as they have been. So we've seeing no sequential slowdown through the year and -- but we are certainly keeping that under observation, but I've seen no sign of a slowdown.

David Loeb

Great, thank you.

Paul Edgecliffe-Johnson

Thanks David.

Operator

I would now like to open Mr. David Katz of the Telsey Group to proceed with his question, sir you may go ahead.

David Katz

My question was really around David's first question which is around the population of limited service brands that will now be under the Marriot and brands in general quite frankly that will now be under the Marriot umbrella and presumably their distribution should accelerate in some cases and or in other cases certain brands may you know be moved within their positioning or even go away. Do you have an expected impact on your business or benefit for that matter? How are you thinking about that deal as your development people go to market?

Paul Edgecliffe-Johnson

I am sure that [indiscernible] in due course we'll come out and say what it plans for -- for their brands are, and how that's all going to fit together. I don't think it'll be appropriate for me to -- even if I had a view to comment on how that's going to turn out. Certainly we have some of the strongest brands out in the industry and we have owner who've been with us a very long time and they enjoy the very strong success that our brands deliver. So I don't really see a whole lot of change, certainly in the near term in that environment, but certainly something that we'll keep our eyes on and if we do see anything that's worth commenting on then we'll come back and comment on that in future quarters, but nothing really that I can pull out right now David.

David Katz

Understood, along the same vein with respect to your rewards program and I know there was some discussion about it in the release today. But do you see a change in how companies use or utilize their loyalty program and you know what implications might there be for that, do you think it's something that may cost you more over time as the use of loyalty programs continues to accelerate.

Paul Edgecliffe-Johnson

I think the loyalty programs are going to be more and more important going forward to us, our peers, other industries as everyone tries to get closer and closer into that customer and understand that customer better and have more personalized offers. Actually of course the cost of delivering the loyalty program that is part of our system fund diving through the P&L and actually as you get more and more personalized with what you're doing, with your customers, you get a better return on investment from what is being deployed and you become stickier with your customer, they want to bring more of their business into you. So those are all net benefits to my mind and certainly we see, I see Reward Club continuing to be the largest and highly preferred loyalty program in the industry.

David Katz

Perfect. Last one if that's okay.

Paul Edgecliffe-Johnson

Go for it, David.

David Katz

The two issues that you know continue to be raised by investors when we talk about the industry overall, are one the shared economy/airbnb dynamic and where you see that going and what its impact is and two cancellation policies and how the industries evolves those as the transparency of inventory online becomes greater and greater. If you could just comment on both of those that would be it from me, I promise.

Paul Edgecliffe-Johnson

Okay, thanks David. So I think we've spoken quite a lot about our perspective on shared economy/airbnb dynamic and relative rates of growth between our business, branded hotels and the shared economy and the branded hotel market still continues to grow more rapidly, we’ve seen that over an extended period of time and obviously it's much larger, it’s different, it's a different stay occasion, it's a different offering and certainly for business travelers is much more suitable accommodation provision.

There's been quite a few notes written recently as to whether it has some impact on the high occupancy nights and I think that sort of broadly, people seem to be saying that it's very difficult to identify anything and I'll probably correlate with what we see, quite difficult to isolate particular impact on those compression nights, maybe in some individual markets and where there is particularly higher concentrations. But we are not seeing anything on a systematic basis that we could pull out.

In terms of cancellation policy, actually we already have a range of different offers out there, best flexes on purchase rates, et cetera. Not the biggest issue for us that we are currently focused on. So not seeing a big impacts from it, but we certainly keep observing it and I think some of the things you could do to customers, we just need to be careful that they see that’s in their best interest rather them holding them back. So we will keep it under review.

David Katz

Understood. Thanks very much.

Operator

I would now like to open Mr. Stephen Grambling of the Goldman Sachs's line. Sir, you can proceed with your question. Sir, you can proceed.

Stephen Grambling

Just a follow up on the net benefits of the Rewards Club, is there an opportunity to further improve terms in the co-branded cards that you have, or is that term locked in?

Paul Edgecliffe-Johnson

What we launched a new contract on the co-branded cards earlier this year, and as we grow out the number of people who have the co-brand cards and there may be some benefit from that. But I wouldn’t be putting anything through the P&L in terms of that note. And I think it’s got a -- it's a very good relationship that we have there and I think that will continue to be successful. But having reinforced the loyalty program, but I wouldn’t expect to see that coming through and giving a direct financial benefits.

Stephen Grambling

That’s helpful, and one other follow up on your comment of the length kind of you have had some of your franchisees, what is the average length of the tenure of your franchisees and how does that compare to those who have been removed from the system? Thanks.

Paul Edgecliffe-Johnson

Some of our franchisees have been with us 50-60 years, very long standing relationships through HolidayInn and the InterContinental brand. As you would expect [indiscernible] with the same hotels, but very long term relationships, we still have a relationship through the HolidayInn club vacations business with the founding family of HolidayInn, the Wilson family, so that goes back to the 50’s.

In terms of the age of hotels, that’s a hard statistic to really evaluate. Because once you have a hotel and it’s fully refurbed when you take it from the date it was built, date it was refurbed, what we have done more recently is moved out the length of our contracts from a 10 year contract to a 20 contracts, which will take a while to cycles through our entire system. But we think that will beneficial overall in terms of removals, in terms of CapEx spending to those hotels.

In terms of age of hotels when they leave, well the hotels we are taking out overtime do tends to be the age old hotels and the ones that remain, I mean that we have a very young system actually the HolidayInn system has a very young average age compared to that of other brands out in the industry given all the pruning that we’ve done through the HolidayInn relaunch and our continued very high focus on quality.

Stephen Grambling

That’s very helpful. Thanks so much and best of luck.

Paul Edgecliffe-Johnson

Thanks Stephen.

Operator

At this time speakers, there are no questions in queue.

Paul Edgecliffe-Johnson

Okay, well thank you Anjay and thank you everybody very much for dialing in. And is there any follow up questions, please do get in touch with us. We will speak with you soon. Thanks very much, bye for now.

Operator

And that concludes today's conference. Thank you all for joining. You may now disconnect.

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