InterContinental Hotels Group PLC (NYSE:IHG) Q1 2018 Earnings Conference Call May 4, 2018 9:00 AM ET
Catherine Dolton - Head of Investor Relations
Paul Edgecliffe-Johnson - Chief Financial Officer
Ladies and gentlemen, welcome to the IHG Quarter 1 Results. [Operator Instructions]
I will now hand you over to our host, Catherine Dolton, to begin. Catherine, your line is open. Please go ahead.
Thank you. 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 Q1 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 accompanied 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 Paul.
Thanks, Catherine. Good morning, everyone, and thank you for joining us today. I’ll begin with some highlights in the period before covering each of our regions in turn, and then I’ll open up the call to questions.
Now the strong start to 2018 with RevPAR up 3.5%, net rooms growth of 4.3% year-on-year, bring our total system size to 800,000 rooms. We added 8,000 rooms to our system, up 16% year-on-year, which included a record first quarter in Greater China. At the same time, we remained focused on removing underperforming hotels, exiting 6,000 rooms. Whilst these removals were lower than in the first quarter of 2017, we continued to expect 2018 to be towards the top about 2% to 3% range for the full year, before trending back down again the low end of the range over the medium term.
Looking out to future growth. We signed 20,000 rooms or 146 hotels into our pipeline, up by more than 30% year-on-year. Led by new midscale brand avid, this was our strongest first quarter signing pace for 11 years. Our total group pipeline now stands at 252,000 rooms. And with our share of the active global industry pipeline at three times our share of open rooms, we are set up well for future organic growth.
At our 2017 full year results, we set a series of new strategic priorities to drive industry-leading net system size growth over the medium term. These initiatives will be funded by savings to realize from our comprehensive efficiency program. I am pleased to say that this program is well underway and we are on track to deliver $125 million in annual savings by 2020. These will be reinvested behind our growth initiatives, against which we've made some good progress in the quarter.
Starting with our brands and our ambition to expand our global luxury footprint. In March, we announced the acquisition of our new upper luxury brand, Regent Hotels and Resorts. Establish in 1970, Regent has an enjoying reputation with both guests and owners, particularly in China and Asia. Combined with the power of our IHG’s enterprise and supported by increased investments in our luxury capability, we see a significant opportunity to acceleration Regent’s growth and take a greater shape in the $60 billion global luxury hotel market. Our intention is to grow the brand from 6 hotels today to over 40 hotels in key global gateway city and resort locations over the long term.
We also announced the following a major refurbishment, the InterContinental Hong Kong will convert back to the Regent brand in 2021. This iconic property was instrumental to the success of InterContinental in Greater China, and we are confident that bringing back on to the Regent flag will provide a catalyst for the brand’s growth in the region.
Last year, we signed new deals, the Kimpton Hotels & Restaurants in Mexico, Bali and Greater China. In 2018, we have built on this momentum with the announcement yesterday of our agreement to rebrand and operate a portfolio of 13 high-quality hotels in the UK to our brands. A number of these will be Kimpton’s, including prime locations on London, Manchester and Edinburgh. This will establish IHG as the leading luxury hotel operator in the UK with more than 2,000 rooms in this valuable segment. This portfolio deal will also strengthen our upscale presence in the UK, allowing us to quickly establish a position for our soon to be launched new upscale brand. This brand will capitalize on the significant opportunity IHG has identified to offer consumers and informal but differentiated experience in the upscale segment, what offering owners a strong return on investment by converting unbranded hotels. We will share more details on the new brand name and identity later in the year.
In the mainstream segment, avid is going from strength to strength and is on track to be IHG’s next brands of scale. We have now signed more than 100 hotels since launched in September, equating to a deal every other day quite remarkable achievement. This strong demand for avid, just 7 months after the brand was officially launched, has significantly exceeded our expectations, and we expect this to continue although it is likely that the pace will moderate somewhat as we begin to move into a more mature signings run rate.
Moving on to another of our strategic initiatives, focused on evolving our owner proposition. Holiday Inn Express Franchise Plus, our tailored franchise offering for the China market, continues to generate strong demand from owners with further 11 properties signed in the quarter. This was up from 5 last year and what is typically slowest quarter to singings. There are now 8 Holiday Inn Express Franchise Plus properties opened in Greater China and 77 in the pipeline. We expect this strong momentum will continue through the rest of the year.
Looking now to our initiatives to enhance revenue delivery. The rollout of our new Guest Reservation System and cloud-based hotel technology platform, IHG Concerto, is accelerating with more than 1,000 hotels now online. We remain on track to complete the rollout by early 2019.
As we have progress with our new medium-term growth initiatives, we remain focused on delivering fee margin growth. Our comprehensive efficiency program is progressing well. And we continue to expect that associated exceptional cash costs will be around $200 million. With $31 million incurred in 2017, the majority of the remaining balance is expected this year. These costs will be charged to the P&L and system fund, broadly in line with the savings delivered.
I’ll now move on to talk about trading in each of our three regions. Across the group, RevPAR was up 3.5%. Growth in both rates are 1.5% and occupancy up 1 percentage point. The earlier timing of the Easter weekend, which this year was split evenly between March and April, was a slight drag on RevPAR growth, particularly in the Americas and Europe.
Looking first at the Americas, where RevPAR was up 2.9%, with the U.S. up 2.2%. The significant damage caused by Hurricane Harvey continues to result in strong RevPAR growth from recovery and displacement demand in the affected areas, although this benefit is now starting to diminish. Our best estimate is that excluding this hurricane-related demand, adverse Easter impact and other smaller market-specific factors, underlying U.S. RevPAR growth for the quarter was approximately 2.5%, showing continued momentum from quarter four and reflecting broad demand growth across the top 25 markets in the U.S. This upward trajectory is reflected in the fundamentals for the U.S. lodging industry, which are improving. With record demand in 83 of the last 85 months, accelerating U.S. GDP growth, improving corporate profitability and the highest U.S. consumer confidence and employment levels in 17 years, we remain positive in our outlook for the year ahead. Elsewhere in the region. RevPAR in Canada was up 7%, benefiting from a strong convention calendar. In Latin America and the Caribbean, reduced industry supply due to hurricane activity in 2017 helped drive RevPAR growth of 16%, while in Mexico RevPAR was flat, impacted by the strengthening of the Mexican peso against the U.S. dollar.
Moving on now to our other regions. Last year, we announced that from the 1st of January 2018, we would merger our Europe and Asia, Middle East and Africa regions. The newly combined regions span 72 countries, allowing us to leverage our scale, share best practice and operate investments in those markets with the highest growth potential. On the 17th of April, we issued new financial statements and KPI data for 2016 and 2017, reflecting this new regional structure as well as the impact of IFRS 15 and other presentational changes in our reporting. These new comparatives are available on IHG’s investor website.
In the first quarter, RevPAR for our new Europe, Middle East, Asia and Africa region was up 2.9%. In Continental Europe, RevPAR was up 6%, as we continue to see a recovery in markets previously impacted by terror attacks. Both France and Belgium were up high single digits, while Turkey was up double digits. In Germany, RevPAR was down 2% due to an unfavorable trade fair calendar, which is expected to improve in the second quarter. In the UK, RevPAR was down 1% due to strong comparables, a reduction in U.S. inbound travel as sterling strengthened against the dollar and the shift in the timing of Easter. In London, which benefited most from the weak sterling in the first half of 2017, RevPAR was down 3%, while the provinces were up 1%. Elsewhere in the region. Middle East RevPAR was down 6% due to high supply growth, while Australia and Japan were up low to mid-single digits.
Finally, moving to Greater China, where RevPAR was up 11% in the quarter, significantly ahead of the wider market. Typically, we see elevated levels of demand in the weeks building up to the Chinese New Year, which fell 2 weeks later in 2018. As more of this build-up period occurred in quarter one rather than in December, which is a boost to RevPAR growth in the region. In Mainland China, RevPAR was up 10% with double-digit growth in Tier 1 and Tier 2 cities due to high corporate and group demand in these markets. In Hong Kong, RevPAR growth accelerated to 15% due to the strengthening of the renminbi against the Hong Kong dollar, which helped to drive a significant increase in inbound travel from Mainland China. In Macau, RevPAR was up 25%, reflecting the ongoing improvement in market conditions.
Before I wrap up, I wanted to take the opportunity to reflect briefly on the strength of our position in Greater China. This has been another. This has been another exceptional quarter for the region, with market-leading RevPar and accelerating rooms growth and the highest first quarter opening and signing on record. We were the first international brand to enter China more than 30 years ago, and the market has been a strategic focus for us since it was established as a stand-alone region with our head office in Shanghai in 2011. Since then, we have opened 62,000 rooms, increased the region’s system size by 60% and driven fee revenue up 70%. With a pipeline of 75,000 rooms, representing a 22% share of the active pipeline in Greater China and significant demand for our franchising products, this strong growth is set to continue in the coming years. Having consistently invested ahead of the curve in our operational and development teams, with now 6 offices across the country, we have the capabilities to deliver this growth, as well as now experiencing scale benefits with 9% revenue growth generating 16% operating profit growth in 2017. This operational platform has allowed us to take a unique approach to franchising in the Greater China.
Rather than pursuing a master franchise route, we’ve made the strategic decision to retain full control of the franchise development process, keeping 100% of the fees generated from these properties. This is a significant point of competitive differentiation for IHG. We now have 77 franchise properties in our pipeline and expect this figure to continue to grow strongly. As these hotels open up over the coming years and the China market continues to mature, our strategy will sustain the growth trajectory of our fee business revenues as well as ensuring a consistent high-quality product for our guests.
So to summarize. We’ve had a strong start to 2018. Our year-on-year net rooms growth continues to accelerate as we focus on driving medium-term industry-leading net rooms growth. And we’ve delivered strong RevPAR performance across the group with improving underlying performance in the U.S. and double-digit growth in Greater China. We are making good progress with our new strategic initiative that underpins our growth ambition, particularly in expanding our luxury footprint, and our comprehensive efficiency programs is on track.
Finally, we marked a major milestone in the rollout of our new Guest Reservation System, IHG Concerto, with more than 1,000 properties now online. Looking ahead, the fundamentals for our industry is strong. We have the right strategy, and we remain confident in our outlook for the year.
With that, Sasha, let’s now open up the call for any questions we may have.
Well, Sasha, if there are no questions, then we can call…
There are currently no questions.
Okay. Well, we can bring this to a close. So thank you, everybody, very much for listening in. We do appreciate your time and your attention. And I hope everyone have a very nice weekend. Thank you all, and let’s disconnect.