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

Good morning, and welcome to today's third quarter trading update to 30th of September 2022. My name is Bailey, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Stuart Ford, Vice President and Head of Investor Relations. Please go ahead when you're ready.

Many thanks, Bailey. So good morning, everyone, and welcome from me to IHG's Conference Call for the third quarter of 2022 Trading Update. So I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Paul Edgecliffe-Johnson, our Group CFO. Just to remind listeners on the call that in the discussions 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 filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. For research analysts and institutional investors who are listening via our website, can I remind you that in order to ask questions, you will need to dial in using the details on the bottom of Page 2 of the RNS release. The release, together with the usual supplementary data pack, can be downloaded from the Results and Presentation section under the Investors tab on ihgplc.com. I'll now hand over the call to Paul.

Well, thank you, Stuart, and good morning, everyone. Before turning to the trading update, I just wanted to acknowledge the other statement out this morning regarding my stepping down as CFO. It's been a huge privilege to spend almost 2 decades at IHG and be part of the many achievements and successes that the business has had so far and to have played a role in setting up a very bright future with the breadth of our portfolio today, our scale and the strength of our enterprise platform. But now is the right time for me personally and professionally to take up a new career opportunity. I will be here for another 6 months. So in that time, just like today, it is very much business as usual. And when it comes to my leaving, I know that I'm doing so with IHG very well positioned for further success. With that, let me turn to the subject matter of the call, our third quarter trading update. I will start, as usual, with a review of our trading performance. You will have seen that we're still providing monthly RevPAR data in our release as well as giving you both the year-on-year movement and the performance relative to 2019. RevPAR for the quarter showed further strong momentum. On a group-wide basis, it was up 28% on last year and up 2.7% on 2019. The latter compares to quarter 2, which was down 4.5%, while quarter 1 was down 17.7%. So we've seen another quarter of excellent sequential improvement. Within the quarter, all 3 months were positive. In our data, seen through the period and continuing in the most recent weeks since, demand has remained robust. And we know from the long history of industry data that there are strong correlations with employment, and globally, these measures remain high. We also know there is still more recovery to come in segments such as business and group, both of which are making strong progress, but not yet back to 2019 levels on a global basis. Clearly, there is also still more recovery to come in countries such as China as well as a number of locations in the EMEA region. Looking at the breakdown of global RevPAR for the quarter, average daily rate was up 11% on 2019, while global occupancy of 68% was down just 6 percentage points. Clearly, leisure has been an important factor in our strong quarter 3 performance, with rooms revenue from this driver up 12% on 2019, but business demand saw global rooms revenue down only 8% in the third quarter, whereas it was down 25% back in the first quarter of the year. In the U.S., it was particularly pleasing to see rooms revenue now back to 2019 levels for the business category. Looking now in more detail at our regional performance. For the Americas, RevPAR was up 6.8% versus 2019 and by 6.2% in the U.S. This represents the first quarter since the start of COVID that the wider region has been stronger than the U.S. driven by the catch-up in demand from the later timing of restrictions being lifted in Canada and a very strong performance in Latin America and the Caribbean. The Americas region has seen RevPAR ahead of 2019 levels for 6 straight months now, with September the strongest month to date, with RevPAR up 9%. Contributing to that, U.S. Labor Day weekend was ahead of 2019 by 16%. And for the quarter overall, leisure rooms revenue was 13% higher. As I've mentioned, progress on the recovery across business travel in the U.S. saw rooms revenue go back to flat on 2019 levels for the quarter, whereas it was down 12% back in the first quarter. Revenue from group's activity has similarly recovered well. It was down 14% in the third quarter, which is half the deficit it was in the first quarter of the year. With what's on the books, we can see that in the coming months, group's activity is expected to turn positive on 2019 level. While plenty can change before we get there, it's also the case that both the Thanksgiving week and the December holiday period are tracking to be up on their equivalent 2019 benchmarks. As more demand has come back for business and group's activity, together with the return of international travel to the U.S., the gap has narrowed between urban and nonurban performance. In January, the top 25 U.S. markets were 24 percentage points behind the rest of the country in RevPAR versus 2019. By September, that gap had narrowed to only 8 percentage points with the top 25 markets now up 4% and the rest of the country up 12%. It has also been interesting to see the development of demand over days of the week as the recovery has become more embedded. Looking at data over the last 6 months, RevPAR index to 2019 is strongest at weekends, as you'd expect, and second strongest on the shoulder nights of Thursday and Sunday. Meanwhile, RevPAR has most recently got back to flat across the weekdays of Monday to Wednesday. This improvement in Monday to Wednesday has been driven by occupancy rising back towards 2019 levels, whereas rate on those weekdays over the last 6 months has been stable at around 5%, ahead of 2019. This more recent improvement in weekdays performance gives us confidence of more recovery still to come as the world continues to revert back to much the same pattern of doing business as it did before. Moving on now to our Europe, Middle East, Asia and Africa region, where RevPAR was back to flat on 2019, a substantial improvement from down 33% in the first quarter of the year and down 10% in quarter 2. In the U.K., RevPAR was up 7%. And in Continental Europe, it was up by 11%. Clearly, these markets represent those that have had restrictions fully lifted, and they enjoyed a strong seasonal leisure period. Trading was tougher in Southeast Asia, Korea and Japan, which together are around 20% of our EMEA system. Here, the return of international travel has been much slower, with Japan, for example, only lifting international travel restrictions this month. Finally, moving to Greater China, where there was significant improvement in this latest quarter. RevPAR was down only 20% against 2019, having been down more than 40% in each of the prior 2 quarters. RevPAR-related travel restrictions eased compared to the first half of the year. And the RevPAR performance is seen in July and August where the best region has seen for 12 months. However, there were some restrictions reintroduced once again in September, and just over 100 hotels were still being repurposed for quarantine use or temporarily closed at the end of the quarter. RevPAR performance in Tier 1 cities continue to be the most impacted in the latest quarter. Whilst these are feeder markets to travel into other domestic locations, Tier 4, which includes a number of key resort destinations, was able to achieve RevPAR ahead of 2019 levels. Whilst we don't know what the future pattern of restrictions will be, what we've seen numerous times is that whenever restrictions are relaxed, demand sharply returned thereafter. Turning now to net system size. Just over 8,000 rooms were opened in the quarter, an amount similar to the second quarter and ahead of the 6,600 in the first quarter. Nearly 3,000 rooms were removed in the quarter, equivalent to 0.3% of our system. The underlying removals rate, which excludes the impact of last year's Holiday Inn and Crowne Plaza review as well as our exit from Russia, was 1.7% on a year-on-year basis, which annualizes to 1.3% year-to-date. We're, therefore, seeing the expected lower level of removals, which reflects the success of our prior actions to further improve the quality and consistency of the state. Underlying net system size growth was 2.6% year-on-year. You will recall that I talked at the start of the year about targeting for 2022 a net system size growth of 4%, noting that doing so, we'll be stretching. And back in August, I said that given at the half year stage, we were at 3.0%, achieving that target would require a considerable acceleration of openings in the second half of the year. Conditions for opening new hotels have continued to be challenging for the industry, particularly in China. For example, there are around 20 hotels or 3,500 rooms in China that we'd originally expected to open in 2022, but which have slipped into next year. We do, though, still expect openings to step up in the fourth quarter, and we continue to explore a number of organic opportunities to help deliver on our ambitions for net system size growth. Turning to signings. We added more than 13,000 rooms into our pipeline in the quarter, which was similar to the second quarter of this year and also to the third quarter last year. This takes the pipeline to 278,000 rooms, which is an increase of 2.9% year-on-year. The strategy we have been following for stimulating growth is evident in the signings performance. Our current system is 2/3 weighted in mid-scale segments and 1/3 in upscale and luxury. However, of the signings in the quarter, more than half were across upscale and luxury. On a regional basis, in the Americas, we signed over 5,000 rooms, which was 40% more than the prior quarter and well ahead of the same 2 quarters in the last 2 years. Signings included the first in the region for the Vignette Collection brand, the first all-inclusive property for Kimpton, which will be in Playa del Carmen in Mexico and 4 more Atwell Suites as momentum builds for this new brand. When we look at signings year-to-date in 2022, we are up more than 40% compared to each of the last 2 years. Signings this year in the Americas have also continued to push upwards in chain scale terms. Currently, the region is weighted around 80% mid-scale and 20% upscale and luxury, but around 1/3 of signings this year have come from upscale and luxury. In EMEA, there were 2,500 rooms signed, a drop on the prior quarter. A significant increase in signings is expected in the final quarter of the year, though, just as we saw last year. We continue to see strong owner interest in conversion opportunities, including multi-brand portfolio deals similar to a number of which we have signed in the EMEA region over the last 12 months. In Greater China, signing has picked up to 5,400 rooms from 4,500 in quarter 2, though COVID restrictions still continued to be a challenge to development activity. That said, signings have still outstripped openings by over 2:1 with 39 openings versus 79 signings year-to-date. Of the signings in Greater China as well as 24 Holiday Inn Expresses, it's been a particularly strong performance with 10 Hotel Indigos and 20 Crowne Plazas added to our pipeline. Finally, just to point you to a few other updates that we included towards the end of today's statement. On the criminal cyber attack that we suffered in September, we issued an initial announcement when it first occurred, and an update statement towards the end of the month. Today's statement just summarizes these for you. Key to our update statement was that no evidence of unauthorized access to systems storing guest data was identified. On the disruption caused to booking channels and revenue-generating systems. This first occurred on the 5th September and 2-day data by the 7th of September, we had reactivated our website and mobile app, along with most of our other channels and systems. During that time, the hotels continued to operate and were able to take reservations directly. Secondly, on the share buyback, we've included an update we're currently 59% through the $500 million program, which so far has reduced our share count by just over 3%, the weighted impact for the year of which will benefit our earnings per share calculation. And third, we have included a reminder on our debt facilities and net currency exposure. In terms of what we hold in Sterling, this is approximately GBP 1.6 billion of net debt for each GBP 0.10 movement in cable as the balance sheet date results in a translation impact of approximately $160 million. The movement drove a favorable net foreign exchange benefit at the half year. And if today's rate was the same at the end of the year, the translation impact will be closer to $400 million. There's also an equivalent translational benefit on the interest cost of the bonds. The blended borrowing cost is 3.1%, and the annual interest charge is around GBP 66 million. So each GBP 0.10 movement in the average rate for the year results in a translational impact of approximately $6.6 million. Along with other movements, our adjusted interest expense for the year should, therefore, be approximately $130 million for 2022 compared to $142 million for 2021. So to summarize the third quarter. Strong trading has seen our group-wide RevPAR exceed pre-pandemic levels, with Americas well ahead and EMEA broadly flat, but China is still lagging. Net system size growth was 2.6% year-on-year on an adjusted basis. We expect openings to pick up in the final quarter of the year, and we continue to explore opportunities to help deliver on our ambitions for net system size growth. The pace of signings, driven by a pleasing increase in the Americas, led to growth in our pipeline of 3%. With that, I'll now pass this back to Bailey to open up the call for questions.

[Operator Instructions] Our first question today comes from the line of Jamie Rollo from Morgan Stanley.

Paul, congrats on the new role at Flutter. Three questions, please. First of all, just on the 4% for this year, net unit growth, you talked about organic opportunities. In the past, the company has signed some sort of lumpy business in terms of alliances with casino operators, U.S. Army hotels, but they've been quite low revenue generators. I'm just wondering what the sort of fee contribution might be from these organic opportunities, whether that should be in line with like normal organic openings? Secondly, you talked a bit about signing stepping up in Q4, but how are you feeling about the sort of 5% net unit growth aspiration for next year? And then finally, just on the technology breach. I was really wondering whether there's any implications for the relationships you've got with some of your owners. Any sort of additional CapEx or they might need to go in? And also whether there was any impact on your U.S. RevPAR? Because I think you said you were up 6%. The market was up more like 12% for upper mid-scale. So was it some sort of one-off impact affecting that?

Thanks, Jamie. And yes, thank you for your comments on the Flutter movement, but 6 months still here, so plenty to do. In terms of growth this year, so we're pleased with the openings that we've had, and we're really pleased with the success we've had in reducing removals, which I think we know has held back our net unit growth compared to some of the peers. So the work we did last year to remove some of the Holiday Inns and Crowne Plazas is really paying dividends for us. So openings coming through, and more openings will come through in the fourth quarter. And then we're working on a number of opportunities, where owners are talking to us because they've seen all the work that we've done on our systems, on our enterprise platforms. They know we've got the industry-leading tech capabilities, all the work we've done on the loyalty program with the relaunch there. And there's just a lot for them to like. And particularly through the pandemic, some owners have said this is just harder than it used to be. So we would like to have access to the platform. In terms of the fee contributions that we'd make from a deal like that, yes, they are sort of at or above what we would make on an average room. So this isn't sort of low-value bulking up, if you like. And also, we have said this is organic, so i.e., we're not going out and sort of buying something. So it's genuine rooms, additions, but on a larger basis. Not done yet, so I can't be 100% certain it will get down by the end of the year. But I'm very hopeful, let's put it that way. And in terms of 2023, look, there's a lot of rooms in the pipeline and a lot of openings coming through. We had some of the China openings be delayed into next year. And the opportunities I'm talking about, for people to join the platform, there are quite a few of them. So I think that this can be almost sort of another leg to the stool, if you like, that we can bring in our portfolios of people wanting to access the platform. And I think that can help us get up to those even more aspirational levels of growth. I mean that said, I'd also sort of put the little proviso out there. We've always said we want to have industry-leading levels of net system size growth. So if what industry-leading looks like in 2023 is lower than 5%, then that's what we will be targeting rather than sort of 5%, specifically and numerically. What's always been important for us is that we are leading the industry, as we used to. When you look at it on a gross basis, we had the highest level of openings back in 2019 in the industry. In terms of the tech breach, I think the important thing to remember here is that we had to close off some of the booking channels for a short period of time. Hotels were still able to take bookings. So you could call the hotel or turn up at the hotel and make your booking. So we had to close out some of the remote access to systems to ensure that we could get these criminals out of the system. And as I look at the data, it's actually very difficult to tell because we don't have all the competitors' numbers to compare against. But I can't see anything that tells me there's been any meaningful revenue shift or any meaningful loss of revenue. So I think different segments have done better depending on how fast they've come back and which geographies they're in, but I can't see anything in the numbers that tells me that we had any meaningful loss of business.

And the relationships with owners and if CapEx will be needed to touch up the bridge?

Thanks, Jamie. No, I mean the owners, I think, understand because they know that all companies are constantly being subject to criminals trying to infiltrate their systems. So I don't think it's news. And in terms of additional CapEx, no. I mean we have a very strong tech platform. We're in the cloud ahead of our competitors. And so there's an awful lot of investment that's gone in over the years, which, as you know, some of our largest competitors are now having to face into the need for them to make that investment, but we're ahead on that. So nothing -- no further investment required that I've identified to date, at least.

The next question today comes from the line of Vicki Stern from Barclays.

Just firstly, coming back on the sort of outlook for openings next year. How are you thinking about signings and openings against the backdrop of higher interest rates now and just generally tougher financing? And perhaps you could sort of answer that with a bit of comment on how that plays out differently perhaps across the different regions. I imagine U.S. owner profile is slightly different, for example, to those in Asia. And then just related to that, what proportion of your pipeline is actually financed? And actually, what does an owner need to sort of prove to you in terms of financing before you're willing to sign them up? And then just finally on the balance sheet. So you've got potentially an additional GBP 400 million or so of cash, thanks to FX movements. Just how are you thinking about the group's capacity to use that as we go into next year? You previously mentioned that you're happy to sit at the higher end of that leverage target range in normal economic times. I'm not sure how normal these are, but just any comments on how we should think about your objective within that range as we look into next year.

Thank you, Vicki. Yes. So in terms of how owners are going to respond to a higher interest rate environment, I mean this is going back to the interest rate environment that I think many of them are used to before we were in a period of super low interest rates. And hotels can make a very strong return. So they can still make, even if you're paying debt costs 400 basis points ahead of what it used to be to get debt for either construction financial permanent debt, you can still make a very good levered IRR on that. The challenge is getting hold of debt, and that is -- it's definitely harder than it was. And I don't think that's going to ease up in the very near term. So what we'll then see is the best brands that are getting the finance. And we do have the best brands. And if I wanted to have one portfolio of brands to take into an environment like this, it will be ours, because they're very proven on an ROI basis, we have a lot of extended stay brands and brands in the upper mid going towards the lower end of that with Holiday Express and avid, which are very good cash generators. So I think that we're going to do on a relative market share base is very well there. And you are right that the difference of that around the world will be slightly varied because it tends to be mostly in the North American market, where owners are accessing sort of regional banks versus in Asia. It tends to be more personal relationships with banks and perhaps linked to other business interests. So there may be more access to financing out there. So I think that we'll do well on a relative basis, but owners have got to work harder than they used to, to get access to that debt capital in the U.S. In terms of the order of how a hotel gets signed up and what happened first. So you won't be able to get financing for a hotel project without a brand. Lenders won't sign you off without knowing that it's going to be a strong brand. So first of all, the owners will get their franchise contract with us and then they'll go to the lenders and say, look, I'm signed up with IHG. Can we discuss some financing? So that's the sequencing. And we don't keep a day-by-day record, if you like, of how many of the hotels through the pipeline are financed. But we don't sign up a deal as we scrutinize it and talk to the owner, we're not confident that they are going to be able to get financed because it doesn't make sense for us to do so. It would lock out a location for us. And the owner member has to pay significant signing on fee, which they have to pay to get into the pipeline. So they don't do that lightly, and they don't do that without a high degree of confidence that they will be able to get their financing. And then, I guess, on the IHG financing front, then yes, as you say, the position we've taken on our corporate debt of keeping that in unhedged sterling has meant that the net debt of the group has reduced by GBP 400 million over the course of the year, with the movements in cable. Obviously, the company is highly cash generative, and we translate through our EBIT typically over 100% into cash. So we did the $500 million return at the half year, and we're at 60% or so through that, and we'll have that done by the time we go into the full year, by which point net debt will have fallen, both through translation and through the further cash generation of the business. And that clearly gives us capacity within that. 2.5 to 3x net debt-to-EBITDA range to make further returns, if that's the call at the time. But we'll certainly have a very strong balance sheet at that point. And where we would choose to go within the 2.5 to 3x, I'm not to guess right now. But our track record of returning surplus cash to owners, I think, is well understood.