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

Last session for today. I'm Muneeba Kayani, I head up Europe Transport and Hotels Research at Bank of America. I'm based in London. And we are delighted to be hosting this session with Michael Glover, who is CFO at InterContinental Hotels. Michael, thanks for joining me in New York today.

Well, certainly. Glad to be here. Glad to be the last spot. I know I'm keeping you between the end of the day, so we've only got a couple of hours of content to go through. So hopefully, it'll be -- you'll be okay.

Great. Well, so it's the end of the summer here. And Michael, as a lodging CFO, what did you do this summer?

I had a good summer. I was in the U.K., and my family was with me. And we went actually down to South Africa for a trip to see Cape Town, and we spent a couple of days there. Went up to the wine country, did a wine tour. They have a wine tram through there, so got to a bunch of wineries and try different wines. And then flew over to Kruger National Park and did the Safari for a few days. One of the great things that we got to do is we actually are converting the Table Bay Hotel into an InterContinental. So that was exciting to be able to see that before it actually becomes an InterContinental and think of all the good things we could do with it. It's a great location. So if you're ever in South Africa, look up our InterContinental Table Bay Hotel.

Sounds great. So moving back to the U.S., which is your largest market. And in the second quarter, you saw your U.S. RevPAR improve to 2.5%. So really, we've had a lot of discussions today around what's happening in the U.S. domestic market on the leisure side. Are you seeing any signs of a slowdown, trading down? Anything you'd call out between kind of the higher and lower income consumer trends here?

Yes. I mean there's been a lot of noise around that from the half year. And I mean, you have been here all day, I'm sure you've heard some of our competitors talk about what they're seeing. They've also lowered their guidance. We didn't have guidance out at the half year. Our consensus was about 2.9%. It's about 2.6% now. We said we were comfortable with where that was. We're still comfortable with where that was. If you look at it, we were in the U.S., we were negative in the first quarter, positive in the second quarter, all 3 months were positive in the second quarter. And actually, we said on our call at the half year that July was positive as well. We've seen good growth in August as well. I think you might see September come off a little bit because you've got a bit of a weekend calendar shift there. We had 10 weekends in August. And last year, you had 8. In September, you've only got 8; last year, you had 10. You've also got some holidays moving around. But then I think you see it begin to pick back up in the fourth quarter. So that's kind of what we're seeing. The consumer, if you then step back, there's some -- obviously some movements around. But you look at the employment numbers. Actually, if you break that down and get into it a bit more, actually, unemployment was really driven by new entrants into the market. Actually, the actual number of jobs still went up. So when people have jobs, they travel. Supply growth in the industry is still sub-1%. That supports RevPAR growth. So there's -- GDP is still growing. I mean, I think we're still all waiting on a recession that never seems to come. But yes, I mean, all that supported for RevPAR growth. So we're comfortable with where we sit and certainly happy with the kind of positive RevPAR we've seen in the U.S. so far.

Okay. And then maybe if you could talk on China. So it's tracking. If you look at market data, negative in 3Q, you'd flag that the comps in China get tough in 3Q and then ease in the fourth quarter. So can you tell us a little bit more about what you're seeing in China? And what's needed for the domestic travel recovery?

Yes. I think there's a lot of noise around China. I spent 3 years there as the CFO in China. And having been in the market, I feel like I understand the market pretty well. If you actually look at our first half RevPAR growth, if you look at occupancy, occupancy was only down 1 point in the first half. So that doesn't feel like a market that's really dropping off. And at the same time, what you had going on there is you had a lot of outbound travel. And you may remember in 2023, the outbound -- ability to travel outbound in China was very limited. And so in 2024, the government has increased visas, they've allowed for visa-free travel into certain countries. And so we've seen a significant shift in outbound travel out of China. And what that's done is when we look at our Southeast Asia region, we've actually seen RevPAR growth in the first half of over 16 -- over 15%. Certain markets like Vietnam, we're over 30%. Thailand was over 25%. That's because of that Chinese outbound travel was coming out of China, and last year, it was in China. And so what we also see is really at that top end and -- is that it's coming out of those Tier 4 locations, and that was really the high-end suites that we had, the high-end rated business. That has kind of come out and gone overseas. So occupancy basically flat. RevPAR is down mainly because of that rate, because of those folks coming out and the higher-rated business coming out. So that's what we kind of saw in the first half. And then as we move into the third quarter, we definitely have stronger comps coming. If you go back to last year and look at '23 versus 2019, in the first quarter, we were minus 9% to 2019. In the second quarter, we were slightly down minus 1. In the third quarter, we were 9 points ahead of 2019 and then kind of came back to minus 1 to flat in the fourth quarter. So our comps certainly in the third quarter are tougher. So I think you'll see that, but then they get easier as you go forward. But I think still, if you look at what's going on in China, you have to take a long-term view on China. First of all, the middle class is continuing to grow in China. And I think most economic forecasts show that they will have 200 million people added to the middle class by 2033. And what we do know is that as wealth rises, people want to travel. So as that growth happens, people want to travel. And so that's going to help us long term in China. We also know that the government is very supportive of travel and tourism in China. It's one of their key pillars of their economic success. They've done a lot of work to reduce visa fees and create new visas. So all of that has really -- will be really helpful in the long term. So we're still very bullish around China in the long term. Yes, we'll have a few ups and downs, but really strong growth. And actually, if you look at the developers in China, our signings were up 38% year-over-year, and our openings were up 50% year-over-year. So still a lot of confidence in the development community around what's going to happen in China longer term.

Well, I was in Vietnam this summer, and I certainly saw the Chinese tourists there, so I can relate to that. And you started talking on development, so that's a good segue into that topic and as we kind of look into a period where consensus expectation around Fed rate cuts, inflation getting -- easing. So you were just -- we were just talking about the fact that you were speaking with the hotel owner over the last week or so. So what are you hearing in terms of new building environment from the hotel owners?

Yes. Well, I mean, if you look at our -- where consensus sits with system growth for the year, it's at 4.2%. We're very comfortable with where that sits. I was telling Muneeba that the last weekend, we were -- we had a bunch of owners in for an event. I probably talked with 50 owners around the U.S. And two years ago, I was hearing things like it's too tough to get financing, banking is not -- we're just not able to get anything from the regional banks or the local banks. That really has kind of dissipated. I didn't really hear any owner raising that, which is that's good momentum, a good kind of place to be. Then I think the second thing was most owners said the cost of financing is getting better. And so as we know, the Fed has given an indication that they will lower rates. A lot of that is starting to get priced in. They're seeing that cost of financing coming in. So certainly, I think in talking with owners, there's a bit of sense of optimism that things are moving in the right way and that there will be the opportunity to continue to grow and build hotels. And actually, if you look at our signings, if you take out the NOVUM deal, which is a little bit of an anomaly, our new build signings were up 65% at the half. And that's up last year, they were -- sorry, not up, we did 65% of our signings were new build signings. And in the last year, around 65% were new build signings as well. So that just shows the confidence that I think owners have in building hotels and generating that return. So I think we're headed in the right direction there. And hopefully, we get back to a place that owners are building more regularly.

And you mentioned NOVUM. So convergent environment has been strong. You signed NOVUM deal in Germany earlier this year. So kind of how are you thinking about conversions in the medium term?

Yes. Well, the NOVUM deal was a fantastic opportunity for us. 119 hotels in total. We wanted to get into Germany. Germany is a really hard market to crack because you have to drive leases and we're asset -- you have to really grow with leases and we're asset light. So this gave us a partner and an opportunity to do a franchise conversion. These are all full fee deals, full franchise deals. The owner is going to retain all the leases, and now we drive 119 hotels into that market. That's really exciting because now we get access to that German consumer, and Germany is one of the largest outbound traveling consumer groups there are. And so that really helps us build brand awareness in Germany. So there's the benefit to us of certainly having those hotels there, building that brand awareness. But also for the owner, it gives access to our platform, our system, our owners. The owner there gave an example that -- he's a German, company based in Germany and grew up in Germany, but could never access, for example, Lufthansa and get in there another German company. But accessing our platform, he was immediately able to get those German room nights into this system, and that was a benefit for the owners. So when we think about conversions and what's happening is there's a bit of a symbiotic relationship. We obviously want the fees and the system-sized growth that come in. But the owners are seeing a lot of value coming into our platform, and that's what we're driving for our owners. And so that's why you see deals like NOVUM, you see a deal like we did with Iberostar, where they've come into our platform and really gotten value from the room nights that we drive. Now we don't have a target on conversion activity or new build. We'll take everything. So -- but we have built new brands to be able to take care of and address conversion opportunities. We just launched Garner last year. We've got voco, Vignette. So we've got this now portfolio that allows us to take advantage of quick conversions and bring those into the system while also still growing through new builds.

So you mentioned Iberostar and NOVUM, like full fee economics there. How do you think about other partnerships where you wouldn't have potentially full fee, but it wouldn't be growing a system size. What are your thoughts there?

Well, the first thing is we love keys with fees. That is what we like to grow with. And so every deal we do, if we're really going to achieve that algorithm, we've got to have fees with those keys. And so that's what we try to do, and that's what we look at. There may be instances where we do a partnership where there's some ancillary benefit maybe to the loyalty program or something like that. But we really -- for us to deliver on that medium to long-term growth algorithm that we laid out at the full year, you've got to drive that fee revenue. And we don't want to -- we could lead the industry in system size tomorrow, but we'd have to give away a lot of fees, and we don't want to do that. So we think the right thing to do is to be true to our growth algorithm, drive the fee income and deliver that down in terms of profit and then share buybacks.

And when we think about kind of your medium-term outlook and system growth, so I think our pipeline is around 30% of system size at 1H results. Consensus has about a 4% growth in numbers this year and I think going forward as well. So how should we be thinking about that? Could there be upside on that number?

There could, yes. I think we're certainly very comfortable with where we sit this year at 4.2%. That's where consensus is. We feel comfortable with achieving that. If you look at what we have kind of coming into next year, you still have roughly half of the NOVUM hotels that will come in. That's roughly 8,000 rooms. So that kind of underpins that target. As you know, there's a lot of moving parts, especially as you move into luxury and lifestyle, which now is a bigger part of our pipeline. It's 14% of our system size, but 21% of our pipeline. Those tend to move a lot in the openings because they're big build hotels, expensive build hotels. So it can move a lot, but we certainly would be targeting and continuing to grow that system size number.

Okay. Can you talk a little bit on the credit card side? And you -- with your 1H results, we're talking about kind of the growth you're seeing on new accounts and spend. So can you talk a bit about the initiatives that have driven this growth? And then how should we be thinking about your credit card agreement?

Yes. So this is going to be my marketing pitch. I do have credit card applications ready for all of you as soon as you're ready to -- after this pitch to get your own IHG One Rewards credit card. We relaunched the credit card in 2022 with our partner, Chase. And really, we did a number of things. We improved the kind of benefits that you get from the card. We created a business product card as well. So you'll see richer enrollment awards, richer payouts. That, coupled with the relaunch of the loyalty program and what we did with the royalty program and making that more valuable to the consumer has driven incremental increases of 60% in new account activations, a 30% increase in spend, 25% new card members. So really strong growth in that card. And then coupled with that, the loyalty program is driving significant value for our owners. Our contribution from the loyalty program has gone from 50% to 60%, reaching 70% in the U.S., which puts us very competitive against all of our main competitors here in the U.S. So we're very proud of where that's going. We think the negotiation that we're going through now, I can't say too much about that because we are in the middle of negotiations with our partner. And -- but it's going well, and we feel like we have a great opportunity to continue to grow that and deliver even more value for our shareholders.

Okay. So you laid out your kind of growth algorithm earlier this year and the 12% to 15% EPS growth. What gives you confidence on that? And can you talk about the growth algorithm?

Yes. So if you have -- if you haven't heard, basically, what we did at the full year was lay out a growth algorithm where if you look at our business, we expect to grow fee revenue in high single digits, kind of in that 7% to 9% range through a combination of system size growth and RevPAR growth. That, coupled with a fee margin growth of 100 to 150 basis points a year will drive about EBIT growth of around 10%. Then if you look at our then cash conversion, we generally convert over 100% of free cash -- adjusted free cash flow -- adjusted earnings into adjusted free cash flow. That, coupled with our very disciplined capital allocation policy of investing in the business, growing ordinary dividends -- sustainably growing ordinary dividends and then returning cash -- surplus cash back to shareholders should drive an earnings per share growth over the medium to long term of 12% to 15%. And if you think about where we are in terms of our net debt EBITDA, we want to maintain an investment grade credit rating. We sit at 2.4x now, our target range is 2.5 to 3. So we sit outside of that range. We expect at the end of the year, we'll be at the bottom end of that range. So that gives you confidence in the capacity to continue returning cash to shareholders. And we feel very confident that we can deliver that earnings per share growth of 12% to 15%. In the half, we delivered margin growth of 180 basis points, 170 of that was through operating leverage, another 30 basis points was due -- the loyalty points program where we're now taking the sale of loyalty points into our P&L. That was about $12 million of ancillary revenue and profit that came in. We expect that to be $25 million in the half year. We expect another $25 million on top of that, so $50 million next year. So you see that coming through, and you can see that algorithm really driving value for our shareholders over the medium to long term.

So you talked about the fee margin expansion. Like what are the drivers of that fee margin expansion going forward?

Yes. So I mean, if you think about where we sit with fee margin, if you look at -- first of all, look at our China region, we've got 750 hotels there. RevPAR is about half of the U.S. As you think about that RevPAR over time, closing the gap to the U.S., that all comes in as direct profit and margin accretion for IHG. There's no cost associated with doing that. So -- and then if you go into your Middle East and Africa, we have another opportunity within there to continue to drive margin. In fact, in the half, we drove 550 basis points of margin improvement within EMEAA. And then even in the Americas, even though we're at roughly low 80% margin, we feel like we have opportunity to continue to grow that margin within the U.S. And really, what we're trying to do is really add units without adding cost. And if you look at our kind of cost growth in the first half, we were roughly 1% cost growth in the first half. So we know that we can continue to do that. So this is all -- the 100 to 150 basis points is mainly through operating leverage. And then we have additional opportunity to grow that even further to some of our ancillary opportunities like we just did with the loyalty points. So that was 30 basis points of the 180. So we were in the 150 range at 130, then added another 30 on to hit the 180. So we know that can continue, and we're very confident over the long term that we can deliver that 100 to 150 basis points of margin improvement.

On the ancillaries then, do you see kind of any other -- what other opportunities? Or how should we be thinking about that? You announced this year on the loyalty points contribution and that is $25 million this year and like you said, $50 million next year. So how should we be thinking about that ancillary?

Well, exactly that. I mean, those are -- that's a big one. Obviously, adding $50 million of direct profit is a good thing. And that continues to grow. It's not going to just stay at $50 million. We expect that to continue to grow. We have to use the deferred revenue method of accounting. So it takes a little bit of time for that to build because basically, people have to buy the points and then use the points before you can recognize the profit. So it takes a little bit of time for that to grow, but we expect that to continue to grow. And then, of course, we have the credit card, which we talked about today, that's another great opportunity for us to continue to drive that ancillary revenue. And then there's other things that we can do as well. For example, branded residence fees, some of our competitors have quite a bit of fee income that comes from our branded residence. As we've now moved into luxury and lifestyle with Six Senses and Regent, InterContinental and even some Kimptons, we're seeing great demand for branded residences associated with those. So we would expect that to be quite a big contributor in the future. We haven't quantified that number yet as we're just building up that business. But we think that could be a significant contributor in the future as well.

So you're talking about brands, you added Garner conversion brand last summer. Do you see opportunities to continue to create brands, buy brands? And also on geographies, anything specific where you see opportunities at this point?

Yes. Well, 19 brands is not necessarily an endpoint for us. That's where we sit today. We're always looking at an intersection of where owners want to build product and where guests want to stay. And if we have a gap there, then we'll look to determine how do we fill that gap. Now generally, when it comes to lower-end brands, we will tend to build like we've done with Garner, avid, Atwell and it even Express back when it was -- when we launched Express. Those tend to be easier to launch. They're less capital intensive. We have lots of partners around the world that will build those hotels. Then as you go up the chain scale, it gets a little harder to build those yourself because the capital intensity is quite significant, and we're committed to remaining asset light. So if you look at what we've done, we bought Six Senses, we bought Regent, we bought Kimpton. So we would really look probably more as a buy in that upper end. It doesn't mean we wouldn't build something there, but likely, it makes sense to buy. In terms of M&A, you've heard our value, our growth algorithm and how we drive. Obviously, we look at everything that comes out, everything comes across our desk. We do have a high bar because we can deliver significant return for our shareholders just by executing against our algorithm and growing. But we want to be opportunistic as well and make sure we're doing the right things for our shareholders. So if something does come out that's value-add, then we absolutely will look at that and potentially bring it in. And that goes back to our capital allocation kind of policies. We invest in the business first. That includes looking at M&A type activity. And if the right thing is there, then we will invest, then we sustainably grow our ordinary dividend and return excess cash to shareholders. So that's how we think about it in terms of brands. We've had a good success launching brands and excited about what our new brands can do. And certainly, we'll be looking to see how the market changes because it does change. And there's lots of opportunities for us to get in the future.

And anything on geographies that you...

Yes. So obviously, China and the U.S. are two of our primary opportunities. We see great opportunity to grow in India as that country continues to develop and grow. As you see the infrastructure continue to develop, the legal system being -- strengthening and the growth of the middle class, obviously, a great opportunity to do that. Here in the Americas, Mexico has been a strong growth area for us and opportunity. We've got, in the Middle East, KSA with what they're doing to move their economy has been a great growth engine for us. We're still focused on growing there. The government there is really focused on building up tourism and travel. We've already -- are very heavily involved in the religious travel into KSA. So we have even more opportunities to grow there as they continue to move their economy. So there's lots of places around the world. And I think that goes back to fundamentally just kind of the long structural growth drivers of this industry. If you believe that middle class is growing across the world, then -- and you believe that travel is something they're going to want to do as they gain wealth, then this is an industry that will continue to grow, and they'll create lots of opportunity as a company and in an industry for us to continue to grow long-term.

If you could go back actually to the demand side of things, and we talked on the leisure trends, corporate, if you could touch on that, business transient, group travel. What are the trends you're seeing at this point?

Well, in the first half, I think everybody thought leisure travel. Actually, I'm in the U.S., so I can say leisure travel again, is that it was going to fall off a cliff. But to be honest, across the entire group of the half, our leisure travel was up 4% year-over-year. So really strong business was up, 1% and groups were up 7% in the first half. And actually then, if you look at our groups on the books, as we said right now, at the half, it was up 21% year-over-year. And so that was up from 13% in the first part of the year. So for -- I know there's been a lot of noise around groups and the election and things like that. But we have a very different portfolio than some of our competitors and the types of groups we get are very different. We don't have the big box urban center location that has huge meeting space. We have a few, but we don't have that to the same concentration. And so our groups and meetings tend to be smaller. They tend to be part leisure and part business. So we're still seeing strong demand for groups come in. So we expect that to continue on. And we haven't really seen anything kind of dropping off there, to be honest.

And on the business transient side, like what are the trends you're seeing? And how are your corporate rate negotiations?

Yes. We're just in the middle of corporate rate negotiations now. It's kind of starting now, so not much I can say on that yet. Of course, last year, we had really strong growth in that. So hopefully, we'll continue to see growth. I think you were denied at our InterContinental Barclay here because your rate was too low as a corporate negotiated rate. That's actually a good thing because what that tells you and what -- and I think a misnomer out there is that you've always got to raise rates to drive RevPAR and drive ADR, but you don't. And in that case, we yielded you out because we had higher rated business coming in. So we didn't take that rate and you couldn't stay at the Barclays. So that's actually a great example of how you can actually drive that rate, how we think about our revenue management practices and policies. And we've got a new tool that's coming out that's called [ Revisions ] in 1,700 hotels. Now it's going to be in over 4,000 by the year-end. It uses artificial intelligence to help owners drive that rate decision to determine which business today, and you're an example of that. And so we'll definitely work and try to negotiate rates. But again, behind that, we're also making sure we're bringing in the right business at the right price.

Yes, I was certainly priced out. Can you talk a little bit around the key money? You've raised the guidance on that. What's driving that? How should we be thinking about key money?

Yes, sure. There's a couple of things in there. Obviously, this year will be a bit of an anomaly and next year as well as the NOVUM hotels come in. It's not often you sign 119 hotels all at one go. And so you're going to see a bit of anomaly with that. But in general, we've said that our key money guidance will move from about $150 million to $150 million to $200 million. That's mainly driven by our move into luxury and lifestyle. Our luxury hotels require a bit more key money. Those are a bit more expensive to build. And so to make that happen, we have to put a little bit more key money out. And it tends to be a little chunky in how it comes in, because it's -- the build time for those hotels are a bit different than what you get for a normal Holiday Inn Express or avid or something of that nature. So mainly driven through luxury and lifestyle and the growth in that. And as I said, it's now 21% of our pipeline. We typically pay that key money when those hotels open. And so we would see that as that pipeline continues to come in, that the key money would come up a bit. We haven't really seen a requirement to do more key money per deal or more deals getting key money than normally would. It's mainly driven by that move to luxury more so.

Okay. Great. Well, thank you, Michael, for joining us. We are basically at the end of our session at this point. So I think there are drinks at 4:00, so I think we'll end it here. Thank you.

Yes. Thank you.