InterContinental Hotels Group PLC (IHG) Earnings Call Transcript & Summary

Hi, everyone, and thanks all for joining us today for our Gaming and Lodging Conference. For this session, we are happy to have IHG with us and to be joined by Paul Edgecliffe-Johnson, Group CFO and Group Head of Strategy at IHG. Hi, Paul. Thanks so much for being with us today.

Hi, Geoffrey.

So today is really about better understanding and getting your thoughts on the RevPAR recovery, net system growth and development and also about the brand strategy of the company. So just before to kick off, I just wanted to remind the audience, you will have the opportunity to ask questions. So if you want to, if you have any questions, please e-mail me or send me an IB chat. Paul, I guess before going into questions, I guess you are going to start with a quick intro. As a reminder, you have reported your first half results early August. So please go ahead. Thank you, Paul.

Thanks, Geoffrey, and thanks, everybody, for joining. So I would imagine that many of you over the last 18 months or so have spent less time in hotels than you used to. And so I'll do a bit of a refresher as to what IHG is. I'm sure you'll be very familiar with our brands, but let me just talk a little bit more about our business. So we're a leading global hospitality company, nearly 900,000 rooms, 6,000 hotels in more than 100 countries. We've been around for 80 years or so, pipeline of 270,000 rooms, many of which are under construction. We have a portfolio of 16 brands. We have 4 categories that we operate the brands within: suites, essentials, premium and luxury. And we've recently added a new collection brand called Vignette as our 17th brand. And we'll come back to that, I'm sure, in Q&A. Two thirds of our system is in what we call mid-scale and upper mid-scale. We have the market-leading brand Holiday Inn Express. And 1/3 is across the upscale and luxury chain scales. Our model is pretty much asset-light. And that's split 70-30 in terms of franchise versus managed. So we make a fee rather than owning the property. Less than 1% of our hotels are asset-heavy, whether owned or leased. And that's a very deliberate strategy. We used to own quite a lot of hotels, and we've sold them down over the last 20 years or so. Very geographically diverse, 58% of the current system is in the Americas, 25% is in our EMEA region and 17% in China. For our pipeline, though, it's actually much closer to parity across the 3 regions. China, in particular, is growing very fast. And of those 270,000 rooms that we have across the business, about 40% of them are currently under construction. Whilst obviously we are in a global industry, it's worth noting that in terms of demand, we are mainly a domestic business. In an ordinary year, around 95% of our U.S. business is domestic. In China, it's about 80%. And in the EMEA region, it's more like 60%, but most of that is intra-regional travel. So for example, in our Gulf business is people shuffling backwards and forwards between the Emirates. So maybe different countries, but it's not very long-haul travel. We're 1 of the 3 majors in the industry. It's still a relatively fragmented industry. So although we are 1 of the top 3, we haven't bought that market share, so a lot still to go for. So we have a high-quality income stream that's based on fees, low utilization of capital to grow and a very resilient business. We generated cash flow last year despite our challenges and we're bouncing back quickly this year. Just in terms of RevPAR, and I'm sure we'll come on and talk about this more. I'm sure, Geoffrey, you have some questions. Our RevPAR in the first half saw a very strong improvement. Second quarter was 36% down on the 2019 level. The first quarter had been 51% down. So you can see the trajectory of recovery there. And that be basically all of our peers. So as I said, we have a very resilient business. Greater China, second quarter RevPAR was down 16%. So obviously, there's been some COVID flare-up there, which have then impacted demand a bit as things have been shut down somewhat there. In EMEA, the second quarter RevPAR was down 65%, but a lot of lockdowns are now being released, and we've seen a lot of demand come back into that market. July, we saw further improvement after that second quarter improvement. And actually, in July, we said 50% of our hotels were actually above the 2019 level of demand. So in terms of how we grow as a business, there's 2 levers of growth really. It's growing our RevPAR and then it's adding new hotels into the system and it's our development activity. And at the first half, our gross system growth was up 5.1% from last year, but we've removed a lot of rooms. We have a program going on at the moment to remove some hotels in 2 large brands, Holiday Inn and Crowne Plaza, which those hotels are not in a post-COVID world right or some of them aren't. So we're working with the owners to either see those hotels taken to the right level for a post-COVID world or to leave the system. So there will be some exits from that, which means that our exit rate will be a little higher this year than it normally is. But what it also means though is in future years, we're going to see a lower level of removals or removals over the last, say, 4 years. And that's one of the things that holds back our total growth rate as you have hotels that open, hotels that leave. The hotels that leave had been about 2.2% of our system over the last 4 years or so pre-COVID. Going forward, we see it being around the 1.5% level. So if we get back to the same level of openings that we saw in 2019 with a 1.5% removal rate, then we'd be achieving industry-leading levels of net system growth, which is our ambition and which we absolutely expect to get back to in a few years' time. In terms of profit and cash, we generated an EBIT of $188 million in the first half, and that was ahead of expectations. We did last year kick off a cost reduction program of $75 million, and we're well on track for that. So that's being delivered. Free cash flow for the first half was $147 million. This is a very cash-generative business. And that's just the nature of the model, generate a lot of cash, don't have to invest a lot back in to grow. And actually since listing the business as an independent company, we have returned $13.6 billion to shareholders through a combination of ordinary and special dividends. So recovering fast, a lot of confidence in the future, a lot of growth from both growing RevPAR and adding new units in, got more brands that are coming, and we're very well positioned for the future. With that, Geoffrey, happy to take any questions.

Amazing. Thanks, Paul. Maybe let's start with the cycle recovery and the RevPAR recovery. So as you said, of course, we've seen some improving RevPAR trends through the summer and you said in August, you had about 50% of your hotel achieving RevPAR above 2019 levels in July. But overall, can you give us your view on the trajectory of the RevPAR recovery, please?

So the Americas, which is, as you know, our largest market, has had a phenomenally strong summer. July for the industry was the strongest July on record. And August has continued to be very, very strong for the industry. Rate recovered remarkably quickly. Demand has been very good. It is predominantly leisure demand. And there's a lot of people who want to travel. They love to travel. So a very strong July, a very strong August for the industry. The question, of course, is going to be in the more business travel orientated months, the October, November time, and when there's probably a little less leisure demand out there. How much of the business, how much of the corporate and group has come back. Group, of course, is a small part of our demand, but corporate business travel is important to us and encouraging signs. We are seeing a return of bookings. Our bookings are good. And they're pretty much at par with where they were back in 2019 on forward bookings. So a lot of positive indicators, but until guests turn up and stay with you, you don't know that they haven't canceled or something can happen so, but we see a lot of signs that make us confident in the future. Of course, we also remain wary as to what could happen. In China, since the second quarter results, there has been a flare-up of COVID as we know. That's meant that, say, Beijing has been basically closed off from the rest of the country, so no travel there. But that does seem to be coming to a close. Certainly, over the weekend, there were no new cases in Shanghai, which augurs very well for that market getting opened back up again. And previous flare-up, it was really back to 2019 levels of demand and rate, so a very strong recovery story there. EMEA actually had a better summer than I thought it would. The markets that opened up have seen really strong demand, so some good stories there. I mean, of course, EMEA is a very large market. So you've also got some of the more challenged markets like Australia, which is going back through its lockdown, although they do seem to be changing the strategy there somewhat from a no COVID model to a live-with-COVID model, which hopefully will help things in the future. So encouraging signs right across the business.

Excellent. That's clear. Maybe a question because, of course, we've got a lot of questions regarding the Delta variant impact. How does Delta and the shifting landscape for return to the office impact this full year view?

Yes. So I think Delta, as you say, has meant that fewer companies have come back to the office than otherwise would have been the case. It certainly does not seem to have impacted leisure demand in any way that we can see. People are still traveling very strongly. Will it have any impact on group business or corporate travel in the fourth quarter? I guess we'll have to see. Let's just say, our bookings are good. And we are seeing conferences coming back. There's been a number of hotel industry conferences, physical conferences which have been held, which has been great, and more inquiries for group business coming through. But we remain watchful, but confident, I guess, we would say on that.

Maybe a quick follow-up on your, I would say, on the business demand and maybe focusing on the MICE demand. What are you seeing for the next coming months? Would you expect to see, I would say, big seminars coming back quite shortly or it's much more a next year story?

Yes. And I mean, group is around 15% of our demand, and that's split across corporate and leisure groups. And that came down to about 10% last year. So it's still a relatively small part of the business. We don't have a lot of hotels that are very big conference houses, where you have 800 guests in-house and then they'll take a big exhibition hall, et cetera, et cetera. So it's less of our business. But those very large meetings, I mean, just logistically, they take a long time to set up. So they typically book a couple of years in advance those blockbusters. What we are seeing more coming back is the small meetings, which actually we are more orientated into, both on a leisure sort of social group bookings and the business bookings as well. Some of them, they won't happen until next year because the larger meetings do take a lot of preparation. Others, I think, will continue. The smaller ones, I think, will continue. So I think it's unrealistic to think that it's going to be the same level as 2019's level of demand for group, but I think that next year we'll see a strong recovery in group.

Amazing. Very clear. And maybe a much more long-term question, which is also a question we got from investors given the development of the, let's say, virtual meetings, virtual tools. I would say, would you expect that development impacting the long-term trends for the lodging business?

Well, in terms of will physical meetings be replaced by virtual meetings. I think possibly some and I think others will happen more. I think that with fewer offices existing and a lot of companies saying that nobody needs to come to the office, they will still need to get people together because people have a need to socially interact. You need to build the culture. And so I think that we will see more demand coming from that, that otherwise wouldn't have existed. Will there be some international business travel that doesn't happen as a result because people can say, actually, I can do this on a Zoom call? Maybe. Remember, we're mainly a domestic business. So it doesn't really impact us that much apart from the margin in some hotels. So we'll monitor that. And you can always change your mix of business. I think that's what this last 18 months has shown that you need to work out where the pools of demand are and then how to tap them. And that's what we do with our business and our revenue management and our systems. We agglomerate huge amounts of demand and then we push them through our channels down into our hotels. So that's what we're very skilled at.

Amazing. Thank you. Maybe moving to the, let's say, the next bucket, which is the RevPAR sensitivity to EBIT, which is also something we touch base with investors. So I guess your sensitivity to EBIT was about $15 million last year. You said you've seen some improvement in the first half of the year. How do we need to think about the RevPAR sensitivity for the year and maybe for the next coming years? And maybe the follow-up would be, what would you need to return to the $13 million sensitivity you've seen before COVID-19, please?

Yes. Thanks, Geoffrey. So it's a metric that I think sometimes people think it's a little bit more scientific than it really is, I mean, because our franchise business and most of our business operates in a very linear way. So you think about the fees, a 1% move in RevPAR, it changes what comes in by 1% in a normal world. And so pre-COVID, most of our business being franchise and actually most of our managed business are giving us more of a fee based on revenues than a fee based on profit. Anyway, you had very little operational gearing in the fees that would come through. What we then saw through the COVID period is that although we only have a really small number of owned and leased hotels and then we had a small, we have a relatively small number of managed hotels, they had a disproportionate impact. So we saw the $13 million go up, as you said, to sort of $15 million. Those managed hotels, we're now starting to see more of them paying incentive fees in the market. And then the owned and leased, the performance there is getting better. They're obviously the most operationally geared hotels. So then that is reducing. In due course, it will come back to normality because with a bigger system with more revenue, it will go up beyond -- if you have a 50% larger business, that is not still going to be $13 million per 1% because it's linear. So there will be a larger impact. But that's not a 2022 change. That's just over time you'll see that. And broadly, it will come back to being linear once we get back to a more normalized environment.

Thank you, Paul. Maybe moving to, I would say, net system growth and development, which is also, of course, a key topic for investors. Well, how do we need to think about net system growth for you? So you touch base a bit at the beginning of the chat, but well, if we look at the last 2 years, including 2021, you were broadly flat in terms of net system growth. So of course, you had the SVC impact, the Crowne Plaza and Holiday Inn review, but well, will be good to get your thoughts on net system growth and what are the levers you've got in order to go back to the industry-leading growth you are targeting, please?

Yes. So thanks, Geoffrey. I mean, we talked a few years ago about the fact that the nature of our business, the brands we've got mean that we should be targeting being industry-leading in our net system size growth. We've got some absolute category pillars in our brand portfolio. We have, I think, the best geographical weighting in the industry. We've got a very strong business in China. Some of our competitors have effectively given away their business in China by master franchise agreements they make their money from. We don't. We're operating a very large and fast-growing business in China. So we should be able to grow at a faster rate than the industry with the brands that we've got and all of our advantages. And back in 2019, we were very close to that. And 2020 without a pandemic would have exceeded that. So we were well on track. Obviously, things have changed with the pandemic, but we see 2022 and 2023 being much more similar to 2018 and 2019 levels of performance. With the additional benefit, of course, as I spoke about earlier, that we're going to have a lower level of removals. That is predicated, of course, on the owners of our hotels getting all of their hotels open and trading. And that's where we spend a lot of time with. It has slowed down in the last few years. The people who will open a new Holiday Inn Express, they are typically a relatively smaller business enterprise. It's not a real estate investment trust in most cases. And they have a lot of things to focus on, focus on their banking relationships, focus on their people, rather than necessarily focusing on getting their next hotel open. I think that there's definitely been a change there and quite significant change. You can see the rates that hotels are getting and they want to have their next business up and running and operational. So their focus is very much back on that. Of course, they've got to navigate all the supply chain issues that I think we all hear about in the press every day that it's getting harder to find materials. It's getting harder to find construction crews. It's getting harder to hire people. But that's what they do because they're businesspeople. They're very good at it. It's a real advantage of our model that you have thousands of entrepreneurs out there growing our business with us. So I have every confidence in their ability to continue to do that.

And maybe just a quick follow-up. So you said you would expect probably to have lower removals going forward compared to the past. So if we're breaking down the net system growth between the gross system growth and removals, what about the gross system growth?

Well, I would expect our gross system, I mean, our system, our gross system growth in 2019 was the highest in the industry. No one really beat us on that. And I don't see why we would not get back to that. And then helped by a lower level of removals that I think will help us get back to being industry-leading. We've got a great track record in getting hotels open. We've got brands that owners love, that make very good returns for them and lenders like to lend against. And they're actually very well positioned in many of these brands because they require a low manning model. And we know people are going to get more and more expensive and clearly harder to find them. So if you open an avid, if you open a Holiday Inn Express, if you open a Candlewood Suites, if you open a Staybridge Suites, they're all very high GOP margin, high cash-generative businesses that require very few people to operate them. So we're really well orientated or at the top end, we've got the best luxury brands where the customer coming in is less price sensitive and they'll pay you for what it costs to operate the hotel, whether an InterContinental or a Regent or a Six Senses or a Kimpton because you're delivering a real experience there. Where you don't want to be is in that middle part where it's very expensive to operate but you can't charge the rate, and we are well orientated away from that.

Amazing. Very clear. Thank you, Paul. Maybe a follow-up on development and maybe the conversion opportunities, you spoke about that in the last few months. I guess, you said you are seeing increasing opportunities for conversions. Any thoughts you can give us about that, please?

Yes. Conversion has always been quite a significant part of our growth story. So independent hotels that decide that they want to come under one of our brands and have the benefit of the very significant levels of system revenue demand that we can deliver to them from our booking channels, our loyalty program, our very attractive OTA commission rates, et cetera, et cetera. All the things that make their hotels more profitable. And if a hotel has the right physical characteristics, then they'll be able to join. But there are some hotels who are good hotels but didn't have the right physical characteristics because we required some brand specifics that they didn't have and really couldn't retrofit to. So in recent years we launched voco, which actually allows many more hotels to come into the system because it's a relatively light physical requirement. Although the hotels are going to be really good, but it's not as specific as some of our other higher brands. And that's seen really strong growth, a lot of interest around the world. And then most recently we launched Vignette, which is aimed at really good hotels, so upper-upscale and luxury hotels, but often that have a strong brand identity already. So they don't want to move away from their strong brand identity, but they do want to be part of our system for the benefit they get. And so that's going to be another attractive lever of growth for us. We're already the #2 in the industry in terms of the number of luxury hotels we have. So we're really well recognized for this. And having something else that owners can work with us on has been very well received by the owners and there are a lot of really positive responses and inquiries from owners.

And maybe a quick follow-up regarding Vignette Collection because you just spoke about that. So you launched the brand, I guess it was last week. So it's a new brand in the luxury and lifestyle segment. Could you talk a bit about the opportunities you are seeing in this part of the market, please?

Yes. I think, Vignette, these hotels have strong brand identity. For example, you've got some hotels that want to build and they want to be the InterContinental Frankfurt, as an example. But there may be a hotel that is very well known in the Frankfurt environment. And actually moving away from that brand name and what they built up over time, both for personal reasons, it may be a brand that was established within a family for some generations or because people know and they cause confusion, doesn't make sense to move away from it. So now you'll be able to keep that brand positioning but still be part of the collection. We certainly we've never had before. And quite a few owners that would talk about their hotels, it was the sticking point, that their grandfather established the brand identity or it's very personal to them, and they don't want to move away from it. So being able to keep that but still come within the IHG umbrella is attractive for them. And we're seeing demand really all across the world. We've signed up hotels in Australia and Thailand already, a lot of opportunities in the EMEA market, opportunities we see in United States, opportunities in China. So there's many hotels that I think that now have the ability to get all the benefits of being part of the IHG system. And there's a lot of independent hotels at this level in the market. And that's why we launch something. I'm not interested in brands that can't achieve at least $50 million of fee income from. It just doesn't make any sense, too small. So we're very picky as to what we launch because some of these opportunities do have a long lead time to get there, but I've got to be confident that they can get to at least $50 million in due course.

Very clear. Thanks, Paul. As a reminder, if you have any questions, please feel free to e-mail me or to send me a Bloomberg message. Just maybe a follow-up on your brand strategy. So you add a few, a couple of brands over the last few years. So you add, well, Six Senses. So you just announced Vignette. Do you think you still need to close gap in your brand portfolio or you think you have now a good number of the brands?

Well, I would never say never. I think that we've probably filled the most attractive gaps for now, but consumer demand and consumer interest does change. So it's something we continue to monitor to see what the opportunity. Maybe in a post-COVID world, as we look at the landscape, we see, actually, there's now an opportunity to do X, Y or Z. Again, with the proviso that, I don't want lots of subscale brands that have a few hotels. It's just a distraction. We've got to be able to get up to this $50 million of fees. It's got to be a brand of scale for us. avid clearly will get up to. It's already with pipeline and open hotels at multi-hundred. And I would expect it will be in due course over 1,000. Holiday Inn Express had more than 3,000 hotels. That's the direction I'd travel. I would expect voco to be in the hundreds. Atwell Suites, again, I think multi, multi-hundred opportunities there. With Regent, I would expect 40 to 50. Six Senses is certainly 50-plus, and they all make a higher income for us, so a lot of opportunity.

Very clear. Thank you, Paul. We just have questions from the audience. So it's basically about the mix between business and leisure. Given the strength we see in leisure demand in the last few months, would you expect to change a bit the mix of your portfolio towards much more leisure brands?

So when people come and stay with us, they don't tell us for sure, am I here on business or leisure. So we have to extrapolate from the data. And historically, it's been about 60-40 business, leisure. And that actually, even last year, didn't really move, which is quite surprising. But a lot of our business travel is nondiscretionary business travel. It's people whose job involves travel all the time, the road warriors. So it's not people going to the Bank of America Securities Conference. It's people who have to go to site to do work. So that hasn't really changed. So I think that there is a great leisure opportunity with our brand. Absolutely, there is. And is there more that we can do to make our brand even more attractive to the leisure guests perhaps at the weekend? Absolutely, there is. And that's something that we continue to look at to see, how do we capture the greatest share of leisure demand because it's not going away. The people who love to travel, they have money in their pocket and they want to stay at our hotels. So we're always seeing how we can enhance their stay. I don't think that means that it's going to be a change to that 60-40 over time actually. I think we'll just continue to drive demand from all segments.

Amazing. Thank you, Paul. We just got another one regarding your loyalty scheme. If you can maybe give us an update on the loyalty scheme. And maybe any impact coming from the COVID-19 outbreak and the way you're operating and managing the loyalty scheme?

So the loyalty scheme is one of the greatest assets that we have, well over 100 million members and an ability to personally target people with marketing. And having a lot of data on them, so we understand their stay behavior and what matters to them. So enormously valuable and something that we've built up over many decades. In terms of what changed over COVID, it's actually been harder to sign up members physically because passing across a form and passing across a pen and asking people to fill a form, people are less comfortable with that. I think that's a temporary thing. I think that actually we're trying to orientate as many people as possible the use of the app anyway. You never see that in the numbers, but that's sort of, it's an interesting phenomenon that it's harder to interact sometimes with people and get them to sign up to a program with you in this environment. I think it's that personal relationship that the loyalty program allows, allowing personalized offers delivered digitally that is going to be really exciting for us in the future and allow us to drive even better returns out of the hotels for our owners.

Excellent. Thank you, Paul. So we are nearly at time. So maybe we have time enough for very last questions. And I guess another question has come up, which is about China. Given we've seen some weakness in trends in the last few weeks, do you see that as a kind of temporary phenomenon and did you expect to have a kind of a quite quick pickup in terms of trends?

Yes. I mean, what we saw last year was once restrictions were lifted and people could travel, the business came back incredibly quickly. And we were back basically at full demand. And even last summer in leisure destinations, it was better than 2019 demand. So if you owned a hotel in Sanya, you were doing very, very well. And we've seen that continue through most of the period then from. With localized shutdown, the last shutdown has been a bit broader, as I think we're all familiar with. But they do seem to really be putting the lid back on that. And then I think once that's lifted, we will go back to business, which is travel back to normal life. And I think then we'll see very much a return to what we saw before late July came around.

Amazing. Well, we are now at the end of the session. So well, thank you very much, Paul, for your time today. It was a very informative session. And thanks again for joining us today.

Thanks, Geoffrey. Thanks, everyone. Hope to see you all in person before too long.

Thank you very much, and we can now move to the next session. Thank you. Bye-bye.

Thanks.