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

Ladies and gentlemen, welcome to the IHG Third Quarter Trading Update to 30th September 2023 Conference Call. I am Alice, the Chorus Call operator. [Operator Instructions] And this conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions] At this time, it's my pleasure to hand over to Stuart Ford, VP Head of Investor Relations. Please go ahead, sir.

Many thanks, Alice, and Good morning, everyone, from me and welcome to IHG's conference call covering the third quarter of 2023 trading update. So I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Elie Maalouf, our Group Chief Executive; and Michael Glover, our Chief Financial Officer. Just to remind listeners on the call that in 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 those analysts or institutional investors who are listening via our website, may I remind you that in order to ask questions, you will need to dial in using the details on Page 2 of this morning's RNS release. The release, together with the usual supplementary data pack for the third quarter can be downloaded from the results and presentation section under the Investors tab on ihgplc.com. I'll now hand the call over to Elie.

Well, thank you, Stuart, and good morning, everyone. As Stuart said, I'm here this morning with Michael. I'll pass over to him in just a moment, and he will review each of the regions for you in more detail. But before that, I would like to thank our teams and colleagues for all their support in delivering what has been another strong trading performance. You will have seen that we are still providing monthly RevPAR data in our release as well as giving you both the year-on-year movements and the performance relative to 2019, given the impact that COVID was still having, particularly in Greater China this time last year. On a group-wide basis, RevPAR was up 10.5% on last year and up 12.8% versus 2019 levels. You will recall that we first saw group RevPAR exceed 2019 in the third quarter last year. The 12.8% we are reporting today, therefore, marks the fifth quarter of sequential improvement ahead of pre-pandemic highs. Our Americas region was already ahead of 2019 from April last year, with EMEA also moving ahead a year ago. In this last quarter, the excellent rebound in Greater China means that it too has now completed its post-COVID recovery. In terms of the component parts of group RevPAR for the quarter, pricing remains very robust, with average daily rate up 4% versus last year and up 15% on 2019. Occupancy of 72% was 4 percentage points better than last year. And at just 1 percentage point lower than 2019, is a further reflection of the near complete return to pre-COVID levels of demand. In terms of the split of stay occasions between leisure, business, and groups, each of these saw rooms revenue ahead of last year. Leisure was already well up on 2019 levels in the third quarter of last year. So it was very pleasing to see that this year, we have exceeded that high benchmark. Business revenue is also above 2019 levels and the further normalization of global working habits has seen the return of more meetings, conferences, and events. Group's revenue, which lags bookings is up 16% on last year and is just now 2% below that 2019 level. More importantly, the forward indicator of booked revenue for groups and meetings globally has accelerated to be 37% of 2019. So we've got very good visibility of a more than full recovery of this activity. Now turning to net system size. Nearly 8,000 rooms were opened in the quarter, which is similar to the same quarter last year. Year-to-date, we've opened 29,000 rooms, which is 25% more than last year. This has led to net system size growth of 4.7% year-on-year. Iberostar has contributed 1.8% of it. So our net growth, excluding Iberostar, is 2.9% year-on-year. Net system size growth year-to-date is 2%. The fourth quarter is seasonally our biggest for delivering net growth, and we have good visibility of the hotels that are due to open in the next 3 months, which should get us close to 4% for the year. Turning to signings. We added 17,000 rooms into our pipeline in the quarter. That's 27% more signings than the third quarter last year and is the same amount of rooms signed as in each of the last 2 quarters. Year-to-date, this means signings are ahead by 16%, and it takes the total pipeline to 292,000 rooms, which is an increase of 5.1% year-on-year. We are making good development progress across our brands and categories of suites, essentials, premium, and luxury and lifestyle. For the latter, our 6 luxury and lifestyle brands continue to grow to be a larger proportion of our business. They are now 14% of the current system, 22% of the pipeline, and 26% of all signings year-to-date. Our Investor Relations team have released the next episode of the IHG Checks On today. And this latest teach-in is all about IHG's presence in luxury and lifestyle across more than 800 open and pipeline hotels. You can find it on the Investors section of our website. Now coming back to the bigger picture for development activity for a moment. Despite some economic uncertainties and challenges to financing across the wider commercial real estate sector that are holding back new development in the short term, our industry is fully expected to return back to prior levels of new supply growth as it has always done in past cycles. The combination of higher room rates and a period of lower supply are stimulants to new development further down the line. In the meantime, IHG's ability to increasingly capture conversion opportunities is an important highlight. Conversions are obviously quicker to market in terms of delivering system growth. And they have increased this year to represent over 1/3 of both openings and signings as well as being a higher proportion. The 125 conversion signings so far this year represent a record level in absolute terms and almost double the level over the last decade. In September, our new midscale conversion brand, Garner, became ready for franchising, and we are very excited about the levels of owner interest, and we are receiving and its growth prospects and further accelerating the number of conversion deals for IHG. We expect the first Garner hotels to open by the end of 2023. And now I'll hand it over to Michael to provide more detail at a regional level.

Thank you, Elie. Starting with the Americas. RevPAR was up 4.1% year-on-year and was up 13.8% versus 2019. For the U.S., RevPAR grew 3.1% year-on-year and was up by 11.8% on 2019 levels. Occupancy of 72% was 0.7 percentage points up on last year and just 0.6 percentage points away from 2019 levels. Pricing power remained robust with average daily rate exceeding last year by 3% and up 15% on 2019. Leisure rooms revenue in total was up 3% year-on-year, driven in part by another strong summer vacation period. The pricing powers of our hotels was already robust in this segment a year ago, and it continues to be so. Business revenue was up 6% year-on-year, whilst group demand, which has been the final area to recover, has shown an even more marked improvement, up 8% on 2022. If you look at this performance on a 2019 basis, group revenue still lags, but now just by 9%, whilst business revenue is up 3% and leisure revenue is ahead by 22%. In terms of system size, 2,000 rooms were opened in Q3. This included 13 more Holiday Inn Express properties, while the most recent avid openings included its first in New York. As with all regions, we expect a significant step-up in openings in the fourth quarter. We signed over 5,000 rooms across the Americas, Mexico, Latin America, the Caribbean and Canada had another strong quarter, demonstrating our growing appeal beyond the U.S. core market and our increased development efforts in these locations. Year-to-date, they represent 1/4 of the signings in the region compared to just about 7% last year. Signings for the region as a whole included 8 avid hotels, 16 across the Holiday Inn brand family and another particularly strong quarter for extended stay brands with 26 signs. In luxury and lifestyle, another 2 fantastic properties were signed for 6 Senses, one at a private island and harbor resort location in Coastal Carolina and the other at an exclusive beach location in Mexico. Year-to-date, total signings for the Americas region are up by nearly 10% on last year. Moving on now to our Europe, Middle East, Asia, and Africa region, where RevPAR exceeded last year by 15.9% compared to 2019, RevPAR was up 17.5% as the region now pushes on past the level of recovery already achieved by the Americas, which is a reflection of the greater amount of rate uplift. Whilst occupancy is still 4 percentage points behind 2019 levels, rate is up by 24%. There's a great amount -- greater amount of inflationary pressure in a number of our -- of the EMEAA markets when compared to the Americas, but there is also a mix effect given how our growing estate of luxury and lifestyle hotels have achieved the highest increases in average daily rate. 2 thousand rooms were opened in EMEAA during the quarter, a seasonally low period, which is expected to be considerably exceeded in the fourth quarter. Signings in the region added almost 5,000 rooms to the pipeline with conversions representing around 40% of these. Luxury and lifestyle also accounted for 40% and included 3 intercontinental and 3 6 Senses properties in what is proving a strong year overall for the EMEAA pipeline, signings are up by almost 40% year-to-date on 2022. But before we move away from the EMEAA region, just to note to say that all of us at IHG are deeply saddened by the tragic loss of life in the Israeli-Gaza conflict and our thoughts are with those affected. Of EMEAA's, just over 1,200 hotels, we have 5 that are in Israel, 3 of which remain open, and we're monitoring the situation closely and alongside of our hotel owners, our colleagues and guests are safe and accounted for. We continue to prioritize their safety and have increased security measures in and around our hotels. Finally, moving on to Greater China. Since the lifting of COVID restrictions at the end of 2022, trading has significantly improved. This latest quarter, as Elie mentioned, is the first that we've seen in the region exceed 2019 levels with growth of 9.3%. Year-on-year, RevPAR was up 43%. Occupancy was 67%, which was up 14 percentage points on last year and was up 2 percentage points on 2019 levels. Rate was up 13% on last year and 6% on 2019. There was particularly strong domestic leisure demand, which is also reflected in July being the strongest monthly performance in the quarter, easing back to more modest RevPAR growth by September. This is also a factor of why the strongest RevPAR performance was across the Tier 2 to 4 cities, which saw RevPAR up 13% versus 2019. Tier 1 cities were still down 3% due to the more gradual return of international travel, which has a stronger bearing on performance in these locations. The start of October is also an important leisure period in China, given the national holidays. Recently published data has shown that domestic travel volumes were ahead of 2019 while the hotel industry saw domestic tourism revenues even further ahead of pre-COVID levels. Aligned with this, IHG saw RevPAR strongly ahead of 2019 through the 8-day holiday period. Development activity is also coming back as the region moves on from the prior COVID-related restrictions. There were 37 hotels signed into the pipeline or nearly 7,000 rooms, which is the highest quarterly signings performance since 2021. In terms of openings, there were 21 hotels added in the quarter, but reflecting the seasonal step-up, we expect a considerably greater number to open in the final quarter of the year. Going back to the pipeline, it was another strong quarter for Holiday Inn Express with 16 hotels signed as well as for Holiday Inn with a further 8. There were also 8 new signings across our luxury and lifestyle brands. The opportunity for conversions continue to grow in the region, with these representing over 30% of hotels signed so far this year compared to less than 20% in previous years. Finally, just to update you on the share buyback. We are currently 94% of the way through the $750 million program for 2023. To date, this has reduced our share count by 5.7% on top of the 5% share count reduction from the 2022 program. As we stated in this morning's announcement, our priority uses for cash generation remain the same, as does our target range for leverage, which is 2.5x to 3x net debt to EBITDA. Because of the strong growth in profitability and strong cash generation in 2023, leverage at December 31, 2023, is likely to be below 2.5x. The Board will continue to evaluate the potential for future returns, doing so next in early 2024. What's important to note here is that our highly cash-generative model should enable regular annual returns of surplus capital, such as through annual share buyback programs, having returned -- already returned $500 million of surplus capital in 2022 and $750 million in 2023, we expect to have significant ongoing capacity to return further surplus capital to shareholders, both in the ordinary course and as we look to move leverage into our target range over time. We would expect consensus to routinely model the return of surplus capital in future years, aligned to our capital allocation approach. The 2023 share buyback program of $750 million, combined with the ordinary dividends, will have returned $1 billion to shareholders in 2023, equivalent to 10% of our market cap at the start of the year and equivalent to more than 8% of our current market cap. Now back to you, Elie.

Well, thank you, Michael. And so to summarize the third quarter, strong trading has driven continued improvement in our group-wide RevPAR performance with China demonstrating an excellent rebound in trading. And both the Americas and EMEAA regions showing no signs of weakening. Net system size growth was 4.7% year-on-year, and we expect close to 4% for the year. And with good development progress across our categories, we're pleased that we continue to see luxury and lifestyle becoming an increasing proportion of our business as well as strong growth in conversions across the brand portfolio. As we said in this morning's announcement, we expect to close out 2023 with a very strong financial performance. I'm excited about the future for IHG and the attractive long-term demand drivers in our markets. As such, we are confident in the strengths of our business model, scale, and strategy to capture sustainable profitable growth. In February, we will talk more about the evolution of our strategic priorities, but the core components of creating value for our shareholders will remain unchanged. First, growing our fees through the combination of both RevPAR and net system size growth. Next, this in turn contributes to driving further margin expansion. And then with our typically strong cash conversion, this allows IHG to both reinvest in the business and to consistently return surplus capital to shareholders, which further enhances earnings growth. And with that, I'll now pass it back to the operator and open up the call for questions.

[Operator Instructions] Our first question comes from the line of Richard Clarke with Bernstein.

Three questions, if I may. Maybe just starting off with net unit growth. You're talking about further challenges. Is there any sort of sign of a light at the end of the tunnel there, you're beginning to see construction start accelerating? When do you think you can get back to sort of north of 5% net unit growth at this stage? And then second question, obviously, in the news this week, we've heard about the Choice bid for Wyndham, it may or may not happen. I don't expect you to comment particularly on that deal, but would you see kind of consolidation in the industry is broadly good for IHG? When Marriott bought Starwood, you talked about some opportunities for IHG to grab some of the peripheral hotels. So would you be seeing that as a positive boost overall for IHG? And maybe just lastly, again, topical you made the comments about Israel hotels and that 2 of the hotels being closed, just the wider region. Are you seeing any particular weakness in demand into any of the neighboring countries to Israel and the wider Middle East?

Okay. I think I'll take these questions, Michael, just jump in wherever, Richard. So look, we're not seeing anything different negative in the development market. The growth of our signings, 27% year-on-year for the quarter, 16% year-to-date over last year is a positive indicator of the confidence of owners, not just in our brands and in our system delivery, but also in the wider development market. They see strong RevPAR, strong rate, occupancy basically back to 2019, strong consumer confidence. Therefore they are encouraged to build more hotels. And the supply environment has been low, which is a precursor to supply growth. So we do see this accelerating going forward. We don't know how many more interest rate increases are out there, but I think we all agree we're getting closer and closer to the end of those. If you heard the Chairman of the Federal Reserve yesterday, I think he feels like we're getting closer. And they we're feeling like we're getting closer to flattening of inflation. So all of those are positive indicators. And I think our owners and investors feel that confidence. And that's reflective in the growth of our signings and the acceleration of our growth. So yes, we definitely see the light at the end of the tunnel, and we're getting closer and closer to that light every time. Meanwhile, I don't think we're waiting for the end of the tunnel. We are growing both in signings and in system size growth. We are growing our conversions in the meantime, which leads me to your second question. Obviously, we won't comment on any speculation around M&A. But we have a very sound strategy globally across our brand portfolio across our enterprise delivery in our markets. We're very confident that it's the right strategy to deliver shareholder value. We launched the Garner hotels at the half year with an intent of converting independent hotels, first in the Americas and then beyond and also those of, let's say, lesser delivery systems. That is still the case. Let me just leave it at that for the second question. And on your third question, look, it's very distressing, tragic to see what's happening in Gaza and Israel. We hope for an immediate cease of the hostilities. Our first priority is the safety of our colleagues and our guests in the area of conflict. Clearly, our 5 hotels in Israel have been impacted in terms of booking and cancellations as anything travel-related has. It's too early to reflect and too early to assess a wider impact. Clearly, at a system level, we're not seeing anything at this point. But look, it's a fast-moving situation, and we're watching it very closely, as is anybody in the travel industry.

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

Just firstly, coming back on the unit growth. I know you obviously talked there in your prepared remarks about a good visibility on openings coming through in Q4. But just could you elaborate on your confidence in reaching that sort of 4% net unit growth for the year? Because obviously it does leave quite a lot to be done in Q4. And then with that, I think consensus is right now modeling about 4% for next year also. So just at this stage, does that seem reasonable to you as well. And related, are you expecting to sign any other deals similar to Iberostar? Is there anything you're working on there right now? Second one is on China. RevPAR data has obviously come through much better than you expected back at H1. I think you suggested back then something more like a minus 5% versus 19% in the back half. So where for you has the biggest surprise come from? And where does that leave you in terms of expectations now for the back half? And then just finally, on the credit card opportunity. Elie, I know you've been talking quite a bit recently on that and the renegotiation that will come through, I think, in 2025. So just a few words on just how big the opportunity could be there for IHG in terms of uplift.

Okay. A lot in there, but I'll try to unpack it. I'll start with Q4 net unit growth and then turn it over to Michael or Stuart on next year and then move back in. So look, we have very good visibility and confidence in the openings for Q4 to get to close to 4%. Look, the fourth quarter is typically always our largest quarter for openings and also signings. And the amount -- the proportional amount that we will be opening in the fourth quarter is in the range of what we have opened over multiple years. So that's where our confidence comes from. I'll just skip over the next one. Regarding partnerships, look, we're always working on things. The Iberostar partnership is giving us the platform to work on similar opportunities. We obviously won't comment on anything that is -- may or may not be under discussion, but it's a long-term strategy that we have. And look, we've been in partnerships for well over a decade, starting with the LVS partnership in Las Vegas, then we expanded to Macau and now with Iberostar, so there's more opportunity there over time. Michael, I will turn it over to you on China. On 2024, look, we're not giving guidance, as you know. But we're comfortable with consensus where it's at right now for 2024 on net unit growth. On the credit card, it is clearly an opportunity for us, and we're working towards that. There's a lot that we're doing beyond just the renegotiation or rebid of our credit card agreement. It's really strengthening our loyalty plan, which continues to perform very well and to attract more guests and more customers and more spend. The new cards we've already launched continue the strong trajectory that we announced, the fact that it accelerates trajectory, we announced at the half year of new customers and new spend. And that's just really building the momentum, along with the expansion and growth of our luxury and lifestyle portfolio. The more luxury and lifestyle portfolio we have, which we just discussed, the acceleration of it here in the third quarter, the more attractive we are for higher spending credit card customers. So it is really a total system approach, a total company approach to put us in the right position in 2025 for more monetization of our customer and our credit card opportunity. So yes, it is a big opportunity for us. Michael, why don't I turn it over to you on the China question, where the strength came from.

Sure. So if you look at what happened over the summer period, July was the strongest month over the summer period, and you started to see it come back in August and September. And that's a lot and that's because of the really strong leisure activity we're seeing in the region. And again, we saw really strong leisure activity over the mid-autumn festival holiday in early October. We would expect to see that come back to normal levels. We still don't have the airlift back in China. It's now 45% of 2019. That has moved up from -- by 10% at the half. So it's starting to come back, but not all the way back there. I think that will still affect our Tier 1 cities as they benefit mostly from that international travel and airlift coming back. So I think that's what I'd say on China. And then from a net unit growth for next year, obviously, we don't give out guidance of what we're going to do next year. But what I would say is that there are some great indications with signings being up 16% year-over-year and up 27% in the quarter, that there is still a lot of confidence in our brands. The conversion activity being almost 40% of our openings and signings is also very helpful as those tend to have a shorter burn to get into this. So we feel good about our brands, the launch of Garner, as Elie mentioned, is going well. So I think we believe in what -- in our brands and what we've got going. And hopefully, next year will be a good year.

And just back on China, I think Michael and I spent a week, a full week there a couple of weeks ago and came back very encouraged. Yes, the macro that you read at a very high level is different. But really, the travel industry, there's a lot of energy, a lot of dynamism. 1.8 billion trips were taken during the mid-autumn festival between air, rail, and car. I think -- we believe that China is a tailwind for us, unlike a lot of the commentary.

The next question comes from the line of Jamie Rollo with Morgan Stanley.

Three questions, please. First of all, just back on the Iberostar, could you remind us how many of the hotels still have to join the system and the timing of that and when it's going to hit your reported net unit growth? Secondly, what percent of your hotel guests in Europe come from North America generally, if you got it for this year, even better? And then finally, just on the buyback, that $750 million was due to be completed by the end of the year. You stepped up the pace quite a lot recently. It's now mostly done. I'm just wondering why that was accelerated if the next cash return is not going to be starting until sort of mid to late February?

All right. I'll let Michael take the first question on Iberostar and we'll dig up the answer for you on guests from North America. I guess, I don't count the guest anymore. I've now got residents here in London. So I don't count anymore. And Michael will take the buyback question too.

Yes. So Jamie, on Iberostar, we have 27 of the 70 hotels remaining to be brought into the system. I think we said all along, those would be the lower -- those would take a little longer as those tend to be third-party owners. So I think we would look to see that come in over the next 12 to 18 months as we work with those owners to get the deal in. And then from a buyback perspective, what I would say on that is we actually use an enhanced agency model. And so we go out and agree with a broker to deliver and do the buybacks. We don't control the timing of that. They guarantee as a pricing discount to VWAP. And so they have been making the decisions on when to buyback. And so they -- within whatever algorithm they use, they've determined that was the best period to do that to accelerate.

And Jamie, just in terms of U.S. travelers into the EMEA region, it averages around 10% across the whole of the EMEA region. There are some locations that are higher and others that are lower. So locations like Ireland, for example, is a higher proportion, but it blends to around 10%. That's data that's based on our loyalty customers. Obviously, we're able to analyze that with greater precision and that's around half of stay occasion. So it's not something that you can collect with precision from every single guest stay, but it's pretty well informed data.

And Michael, there's 27 remaining third-party owned Iberostar that's similar in size to the other sort of 40, or do they?

Yes, that's right.

Those 27 are all in the EMEA region. That's the only difference with those 27.

The next question comes from the line of Jaina Mistry with Jefferies.

It's Jaina Mistry. I've got 3, if I may. My first question is around kind of the macro environment. And I'm really interested to hear your thoughts on the health of the U.S. consumer. Obviously, the RevPAR data that you've reported to the Americas is really strong. Have you seen any changes to spending behavior since student loan repayments came back in this month? And then my second question is around growth. So macro sites, I thought it was really interesting to see Marriott's new growth algorithm. Are you thinking about growth in a similar way for IHG? Or is there any reason why IHG's growth trajectory would be different to Marriott over the next 1 or 2 years? And then my last question is around [ NUG ]. I mean, you stated that you're happy with consensus, it seems like consensus is on 4% NUG for next year. To what extent is you being happy with 4% and contingent on China coming back, the openings in China coming back to a more normal level next year?

Okay. I'll take the macro question and turn over the algorithm question to Michael and Stuart and also the 2024 NUG question to Michael. So on the macro, look, before I even talk about the consumer itself, on the one hand -- we've been living now even post-pandemic in 2 years where there always seems to be something very significant to worry about. We've been waiting for a recession for 2 years now, that hasn't happened. We've been waiting for the consumer to slow down or for travel to slow down, and that hasn't happened. We've been waiting for broader impacts from the conflict in Ukraine that hasn't happened. We've been waiting for energy prices to create more disruption, which hasn't happened. So I'm not happy about those things, but the adverse or severe adverse consequence that everybody predicted, just haven't happened and our travel industry and our company and our performance is powered through it. So we're not ignorant of what we still see and the new challenges that appear. But we're staying on our strategy and confident that executing it will deliver value in the long term and even in the mid-term, and we're powering through it. The U.S. consumer has been surprising most predictions, including the Federal Reserve predictions, which is almost looking for the U.S. consumer to soften and yet they don't. And unemployment doesn't go up and that is -- that's really the underpinning of the strength of the consumer. If people have jobs, they have pay -- if they have pay, they're happy and they spend. And that's also the situation in China. Employment is good. People have income and they're traveling. So I think before -- to look at the leading indicator of consumer confidence, you have to look at employment, wage gains have been good, employment has been good, job growth has been good, always -- mostly surprising to the upside. And so that's why the health of the U.S. consumer at the moment is good, and we're not seeing any cracks in their desire to travel and not in the business side of it either, which that and groups and meetings have been recovering. Over to you on the -- before I turn it over, sort of on the growth, on our total shareholder value, our algorithm, we've been very clear what it's like. The RevPAR growth, the net unit growth required to deliver the high -- mid-to-high teens revenue growth and the margin, which then allows us to drive margin growth in the 100, 150 basis points, which then drives EBIT in the 10% to 12%. And then with surplus capital that we returned to form share buyback, we end up in the 13% to 15% EPS growth though. I think that algorithm is holistic and best in class.

Yes. I wouldn't add anything else to that other than we just can't comment on what Marriott is doing in their view. And if you look at our asset-light model and our strong cash conversion, that allows us to deliver that algorithm, as Elie just laid out. And so I don't know that there's much more to say there. On the NUG versus consensus, I think we've gone through that a couple of times, and Elie has mentioned that we were happy with kind of where consensus was. And as I mentioned earlier, I think given our brand portfolio and the impact of conversions and the launch of some of our new brands like Garner, we really feel confident in our teams and what they can deliver and continue to grow our system growth.

And I mean, your question was how much of it is relying on China? Look, it's an all-region play. We expect and we're seeing momentum in all regions, not just in one region.

Do you need China to start to recover next year or openings to start to recover next year?