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

We will now begin the Q&A session, participants online. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Elie Maalouf to introduce the Q&A session.

Hello. Thank you, and welcome to this Q&A session. I'm Elie Maalouf, Chief Executive Officer of IHG Hotels & Resorts. Hopefully, you've all had a chance to watch the results presentation, which we made available at 7:00 U.K. this time this morning. It featured myself and Michael Glover, our Chief Financial Officer. We also released the latest episode of IHG Checks In On, featuring Heather Bosley, our Chief Commercial and Marketing Officer; and Joey Fleming, our Chief Product and Technology Officer. The episode provides a closer look at how we are leveraging artificial intelligence to get closer to the guests, transform the search and discovery process and further enhance the overall guest experience. Before we open the line to take the first question, I will briefly summarize our strong performance in the first half of 2026. Our global RevPAR grew by 4.1% with growth across all 3 regions and underpinned by the breadth of our geographic footprint, the depth of our brands and the resilience of our operating model. We delivered gross system growth of 6.5% and net system growth of 5%, driven by record development activity with openings and signings both up 8% year-on-year on an organic basis. We expanded our fee margin by 120 basis points and grew EBIT by 10%. Adjusted earnings per share grew 13% and supported by our share buyback. In summary, we made excellent progress in the first half on our strategic priorities, and we are confident in the strength of our enterprise platform and the attractive long-term growth outlook. And with that, let me turn it over to the operator to take the first question.

Your first question comes from the line of Jamie Rollo from Morgan Stanley.

Three questions, please. You've obviously delivered very strong net system growth in China again. But also, we've seen some market, weak market data continuing through Q2 into Q3 on RevPAR. So could you talk a bit about why you think RevPAR slip back in China? And is there any risk that impact owner economics and annual net system growth going forward? Secondly, just a question on the sort of fee algorithm at the group level. Your helpful Slide 47 shows constant currency fee growth for the 3 regions combined at 5.2%, well below the sum of 4% constant currency RevPAR, and 5% available rooms. And there's quite a few items on the slide, you're giving behind that. Could you please talk through those items and when you think that sort of regional fee algo sort of picks back up again? And then finally, just a sort of general industry question. Some of your U.S. peers had been reducing charge outs to help on the economics, somewhere under pressure to share credit card income. Now I know you're an early move a couple of years ago on your reward night reimbursement. Are you considering any future changes to charge out? And would that be system from P&L? Or would that be IHG P&L?

Thank you, Jamie. Let me start with China. So we were very pleased with our performance in China and our growth in China in the first half of the year. We had very strong RevPAR growth in the first quarter of 5.7%, as you noted, 8% in Q2. So for the half, it was 3.1%, which is very pleasing. If you recall, for a number of years, I've been saying that China would bottom out, and it did in the fourth quarter last year, and I think it's just turned up. We said it would not be sort of a vertical V-shape turn up, but it's been gradually turning up. So what happened in the first quarter you had a very strong Chinese New Year that had additional days added to it. And then they also threw in -- the government threw in some new school holidays in the first quarter. So we think the combination of those hold some business, some travel, some leisure forward from Q2. We still printed the positive RevPAR in Q2. We're confident in the long-term potential in China. If you looked at it by tiers, Tier 1 and Tier 4 did very well. Tier 1 is major cities, and then you got Hong Kong and Taiwan, Tier 4 is leisure and resorts, and they did very well. Tier 2 and Tier 3 saw some softness in business transient, but that's not new. It's been going on for quite some time. And I think that Overall, China has been doing better. As you noted, we've had record development activity in China for a number of years now. And every year, we're hitting new records. I think this year will be another record of signings and openings. We have reached 900 hotels. I believe we're going to reach 1,000 open hotels by the end of the year with roughly another $600 on our development, taking share in the marketplace. So why is that happening? Consistent. It's happening because you still have a large economy, $20-plus trillion, growing between 4% and 5%, not as much as it used to grow, but on a bigger base. You have record exports, different products that are exporting, it's EVs, batteries, technology. They are leaders now among the leaders in artificial intelligence. It's a different economy but still growing well. You have a middle class that's still growing. And importantly, while not every sector of the economy is doing very well, like the residential sector is still in a slow but certain turnaround, but it's slow. In the residential sector, travel is strong domestic trips are up, international inbound, now that China is a growing segment. And what you see is the travel among the sectors is still a favorite thing our occupancy continues to actually improve in the first half of the year after being flat during the negative RevPAR years. So we don't see signs of oversupply. We're adding a strong level of new openings, but it's being absorbed in our system, and we actually saw some rate growth too across the full China business. So we're confident that the midterm to long-term China outlook is good. I mean look at the profit performance in China. It's up 25% year-on-year. So for us, China is not just a growing and large market. It's a profitable market and getting more profitable. Now on the fee algorithm, let me turn that over to Michael, and then I'll pick up on the industry question you had.

Jamie, thanks for the question. You might expect we'll have a similar answer to what we've had the past. The vast majority of the fee triangulation difference that you raised is really around the development activity and the record level of openings and the growth in system size that we've seen. Newly opened hotels typically take time to realize stabilized occupancy, room rate, overall hotel revenue. and most agreements have a graduated fee structure that steps up over the first few years of operation. As a result, the full fee revenue contribution from recent opens openings is only partially reflected initially in builds over time as the hotels mature and fee structure step up. We said in the past that, that will begin to narrow with time. And actually, at the group level, you've actually seen about a 40 basis point improvement year-over-year in that fee triangulation. And in some markets like the U.S., you've seen 110 basis points of improvement year-over-year as that has happened. And we do believe that will to continue to improve. There's always some other noise in there. But really, that's what's driving that. And that's a good problem to have because we've been driving the system size growth. We want to continue to drive that growth. As it stabilizes, it will normalize. And I'll pass it back to Elie on owner economics.

Yes. Thank you, Michael. Look, this is our fifth year in a row of increasing net system size growth gradually with a focus on ease with fees with a focus on high-quality estate. And so we're building a sustainable model of higher net system size growth, and you can see it building. We'd rather have that going on and some lag in when those fees come in. But the good news is there are more fees coming -- we're not putting a ceiling on where our system growth would reach. But at some point, in theory, when we reach a cruising altitude and level off that cruising altitude, then the lag will -- the closing of the lag accelerate. But I'd rather continue our growth and have the lag catch up with us as more fees come in. On your industry question, so I'm not going to comment on what others have said and done. I would first say to you, as you would know, Jamie, some things are read across as to other businesses. Some things are not. Let's not assume that everything is a read across. Let's not assume that every situation is different. We have a different distribution in the Americas and some competitors, different system fund arrangements. So we have a slightly different situation. Overall, I'd say not just in the Americas but globally, we have a very competitive owner value proposition and fee structure really designed to drive attractive returns for owners. And look, we are all aware that there have been cost pressures over the last couple of years across all industries, in our industry, too, and they've affected owner economics. And that's why we've been in front. Starting in '24, you mentioned yourself, we lowered the loyalty assessments. We increased the reward night reimbursement rates. We reduced the cost of our Ignite program marketing program, all of which directly improved hotel level economics for owners. They're not theoretical. These improve the P&L at hotels by real basis points by real cash flow. On top of that, we've lowered the cost of our Fin B programs in our mainstream and our premium hotels. We've lower the cost of our new build prototypes or conversion packages now that we have more conversion brands. We broadened the categories offered by our procurement program to lower the cost across hotel construction and operations. And then today, in the SCA, you saw that we are -- we talked about a new commercial services program that we've been piloting in the Americas. I guess it's more on a pilot than 5 are hotels now, and it's expected broaden to the full region very soon. And it's been lowering -- it's going to lower the cost of that commercial services program, 75% of the participating hotels. So we have a holistic approach to dealing on owner cost because book owner success is fundamental to our success. We can only be successful asset-light, if they're successfully asset heavy, we recognize it. We have an owner's association with representatives are elected by the owners with whom we discuss all these matters, get alignment and proceed with it. So I mean our relationship has been productive, constructive with owners, none of these improvements in costs that I mentioned earlier on our P&L. They're all within sort of the general system fund, looking to create value for owners. And look, where we are lowering the cost of these programs, it's not sort of just a straight discount. It's using the scale of our growing system fund, using the efficiencies that we're finding to new processes, technology, now artificial intelligence to create more efficiency from the greater scale. And as every good operator, sharing some of the efficiencies of that scale with your partners. And so I think that I see benefits, but our owners have been benefiting from that scale. And I think we're in a pretty good place on it.

Your next question comes from the line of Jaina Mistry from Barclays.

I've got 3 as well. Just on NUG, I see on your website, you've got consensus of 4.7%. Do you still see upside risk to that number given what's happening in the Middle East? And any risk from the Revo bankruptcy in Germany? And then secondly, also on NUG actually, Elie, you mentioned that the gap between RevPAR and NUG versus what you report on fee revenues or narrow as you hit the right as you hit cruising altitude of NUG. What's the achievable run rate here is mid-single digit the right run rate. So should it start to narrow in 2027? And then very final question, just going back onto your owner relationships and what you were saying before. You mentioned not everything is read across. IHG obviously has the owners association. Just how differently does this position IHG in the market versus your peers?

Jaina, I'll take the first one. I'm sure Elie will come in on the next 2. You're right. Consensus does show NUG at 4.7%. And we wouldn't call any upside to that risk. We would call that opportunity. And so you may remember at the first quarter result, consensus was around 4.5%. And we said there was more opportunity to the upside than there was risk to the downside. And over time, consensus has moved up to 4.7%. And we've delivered 5% in the first half. And so as we look at it, we do feel like there's opportunity to do better than the 4.7% but it's in and about the right place, 1/10 of a point is only about 1,000 rooms on a system size of about a little over 1 million rooms. So we feel confident in where that is. And certainly, we wouldn't be expecting any number below that.

All right. Thank you, Michael. So your question was on when do we reach this cruising altitude and what does it do to the triangulation from there. So I think there are really 2 questions. I think there was actually one other aspect of your question that Michael didn't touch on the Revo bankruptcy. We have very little exposure to Revo. We're aware of when we have a few hotels with them. We have very little exposure to that. And so it's not going to be material fact.

Yes. Sorry, I should have mentioned we have 6 hotels, 820 rooms, and that's it. And so not really much exposure at all. Yes.

So on your second question. So first, we're very pleased that the fundamental health of our business is in great shape. Our signings are growing, our openings are growing, our RevPAR is growing. Our margin is growing, our operating profit, cash conversion, EPS the model is working. Takes a lot of hard work from the teams around the world. And it's a result really of the strategy that we presented to you in 2024 at the beginning, we talked about broadening the reach or brands, broadening our geographic reach, working on our cost working on our conversion, adding great technology and commercial platforms, all to make the model work even better for guests and for owners and for our shareholders, and it's working. And so even in a time where you have some geopolitical conflict in the Middle East. The rest of the business is so diversified now. It can more than offset it and continue to grow, not just in earnings and profit but also in net system size growth. We're not putting a ceiling really on where we go in the system size growth. I think it's further clearly from where we are today, given the strength of our signings openings and the recognition that we're getting from owners the brands that we have either acquired and accelerated or we have launched an accelerated and you look at Garner. 3 years on, 220 hotels open pipeline, a dozen countries more than I would have ever imagined and more coming. And so noted collection. We talked about it just a few months ago, 3 signings, actually the first 2 in the Middle East, despite everything going on there. So there's momentum there. And I don't know when we reach our cruising out there. I'm not eager to reach actable cruising gate because it just means that we've topped off. I just think there's more to go. And then the triangulation from there, well, is already narrowing, by the way, as Michael said, it narrowed 40 basis points year over 5 years. It will continue to narrow. But there will still be some lag as long as year-over-year, we're opening more than we did over the recent time. It does take especially in luxury lifestyle 2, 3 years to get to the full steady state revenues and steady-state fee schedule. So there will continue to be a lag even after you open the hotel, it's good. It just means that there are more fees coming from higher growth in the business. Now on your last question, yes, we're all in the same industry, but we tend to be similar in some ways and different in others. So let me just give you a few ways where we're different than others. And then there are some things that were similar. Yes, we're all exposed to, say, inflation and interest rates. We're all exposed to macro events or that can happen. But then your distribution and the shape of your business matters. So in the Americas, for example, we are 85% of Essentials and Suites. That's Holiday Inn, Hon Express, our extensive state brands, Avito, 85% broadly distributed, not really concentrated in urban areas where you'll have higher union costs higher operating costs, higher taxes and really full-service hotels with higher just operating costs. So yes, we have some of those great properties, but we're 85% Essentials and Suite, which makes us different from others. I'm not saying there's anything wrong with their shape, but we just have a different shape, which over time has served us well. Now we're growing more in luxury and lifestyle, but on a huge base of Essentials and suites. So that's one difference. Another difference is that we're much more indexed to industrial businesses in the heartland, much more industry energy to manufacturing to construction to technology than we are, say, to professional services, which again has other -- nothing wrong with those segments, but we're less indexed to that. We're more to traditional industries and manufacturing construction, which is actually having a pretty good moment now. So that's another difference. I'm not sure who of our peers have owner associations or don't. I wouldn't know. I know we do, and it's a very constructive relationship. I used to sit on the Board of that as our representative. Julian, my successor in America, does that now. And we have a constructive and we don't always agree on everything, but we find constructive outcomes, always in the interest of the health of the system and the health of our franchisees and owners. So we have that dialogue and it works well for us. And there are other things that make each company different from the other. So just because we're in the same geography, doesn't mean that everything affects us in a similar way. Jaina, thank you for your questions, and we're ready for the next one.

Your next question comes from the line of Leo Carrington from Citi.

I have 3. Firstly, on RevPAR, I mean the growth has been primarily rate driven, probably also if you excluded the World Cup effect in the U.S. too. I mean how do you frame the ADR growth in the first half of the year? Is it pricing power? Is it yield management, really interested in how you see it? And secondly, on residences. As noted, I heard in the -- in your presentation, we're expecting the fee growth to be more substantial in '27 and beyond, I think. Can you just give us some color on the pipeline visibility for '27 and how material this ancillary fee can become? And then lastly, on key money, I think it was broadly stable or even down year-over-year. is broadly stable, the outlook despite what I think is a little mix shift towards luxury and lifestyle in the pipeline.

So look, we're pleased with our RevPAR growth of 4.1% in the first half of the year, and it was broadly based. Every region grew RevPAR, every brand RevPAR, every segment grew RevPAR, so it was actually more balanced than in previous times. And so we're actually pleased to see some occupancy growth return. There are a lot of questions in the past from some participants about -- is it only going to be rate growth? Well, yes, we saw a healthy rate growth. We also saw a healthy occupancy growth on pretty high levels. So every region had occupancy growth and every region had rate growth. So I think that in the long term, typically, the majority, not all, but the majority of RevPAR growth comes from ADR anyway, and this distribution that we saw in the first half is probably similar to historic distributions of overall RevPAR growth plus or minus a few basis points. And what's that down to? Look, the World Cup was we're saying it's going to be a 40 basis point factor in the whole year. So it's not the biggest mover, and we never talked about in the beginning of the year as being a big mover, and we're not saying it is now. It was great. I had a lot of fun. I went to match. I watch as many games I could. I think it was a great commercial success. I've met all of our expectations. But it's not the fundamental driver. The fundamental driver are really 2 things: One, strong fundamentals in the markets where we operate, very strong fundamentals in the U.S. recovering industry in China, great attraction to people traveling into Europe. I mean just inbound to Europe is up again, expected to be up 5% from the U.S. this year, high spending and all that, as we said, more than offset the impact in the Middle East. That's one key thing. The second thing to take advantage of the strong fundamentals is a strong enterprise at IHG. Our brands are doing well. We've been really taking care of our brands, stronger cut through marketing, our loyalty program now 160 million people, greater room nights penetration. We said we had 67% room night penetration around the world, 73% in the U.S. We're right there in the leadership -- among the leadership of the industry now in penetration. That drives better RevPAR guys better economics, also at the bottom line for owners yes, in our commercial and technology systems, we think, are as good as they get. It's a global sales force that's driving groups and meetings and events you saw our group's business doing well and meeting and events doing well. And that's really something we're investing a lot in. Our technology platforms, not just our revenue management system that we've put in place now 18 months across the whole estate, but are the new -- we have our new POS system PMS system in 2,000 hotels planning to be in 4,000 hotels. Our marketing programs are becoming a lot more efficient with AI, cheaper to produce, faster turnover, more marketing per dollar, more effectiveness per dollar. Our owner support is stronger. Our procurement service or owners are stronger. Our total value propositions for owners is stronger, which is translating in more signings and more openings, greater share of conversions. We're taking a strong share of conversions, which means owners are preferring our system, our platform to others. And so in a very competitive industry. So it's just not one thing that is driving the healthy RevPAR. It's -- yes, good fundamentals. I mean benefit like everybody else does in the industry. But then within that, we're taking share by having a strong enterprise across multiple fronts. Residences, it's a small part of our business today, but it's a growing part of our businesses. When I was I've -- I think I said -- I don't know if I told you I've been to the Middle East twice already since the beginning of the year. We're already in conversations with owners there for more projects despite the conflict, our residences here at the successes in London are almost, I think, all saw that, but for 1 unit, if any one of you are interested, we can send you to the right people. And so we think that in 2027, some of these projects are already under construction today go into sales mode. And so from there, you anticipate more fees coming in, it will still be early, but it's a multiyear build up to what we think is going to be a material business in our total diversification of our fee streams.

I just would add on to that. We've got 35 hotels or branded residents open and selling around the world in 19 different countries and even more in early stages a double element as Elie talked about. There are some in the Middle East that could cause some delays or slower sales momentum. But we feel like that's going to normalize over time. But we've got projects across Southeast Asia, Europe and the U.S. that are progressing very, very well. We did talk about a full year result that we were somewhere in the $5 million to $10 million range last year. And we've been saying that, that could be multitudes of what it was then. And that is still how we believe and can get and be substantial in 2017 and beyond. I'll move into key money there. Yes, our key money was down slightly in the first half. I don't think there's anything systemic or anything that I would call out specific around that. And we continue to say that we'll be -- our key money and maintenance capital will be in the $200 million to $250 million range. We see no reason to change that right now. We did have the big step up a couple of years ago, certainly, as we moved into luxury and lifestyle. That continues to be case. But we're good at the $200 million to $250 million range as we've laid out.

And I just want to add to sort of combining your last 2 questions. The reason residences has really opened up as a new business line and fee opportunity for us is because of the strength of our luxury and lifestyle business is because of the strength of our ultra luxury in region and in Six Senses. So these things kind of build on each other. It's never really one thing, but part of our strategy to go further and lager and lifestyle was to open up not just our loyalty opportunity and our co-brand opportunity, but to open up residences in addition to in of itself, the great business case of higher fees per key and luxury and lifestyle, but there are incremental lateral benefits that come with in residence is 1 of them. Thank you, Leo. We can go on to the next question.

Your next question comes from the line of Estelle Weingrod from JPM.

Maybe we come back to Estelle if somehow her audio isn't working. We'd love to hear from you.

Your next question comes from the line of Richard Clarke from Bernstein.

I guess, a few follow-ups from what we've been asked so far. So just on the key man point, I guess another theme of Q2 earnings has been a sort of step up in key requirements to grow mid-scale conversion brands. Have you seen any of that trend for Ghana in the U.S. that you're being asked for key money a little bit more regularly? Secondly, very really very strong unit growth. I think the only one of the other -- the major hotel groups, maybe where the pipeline is growing a little bit slower then the unit growth looks like a couple of fairly meaty terminations InterContinental and Crowne Plaza in the first half? Just anything to call out are those sort of Middle East projects that have been perpetually delayed? And then just you called an important development to this new commercial delivery model. Just anything you can give us around what is the scale of that? How much money are you saving for owners? What exactly is that? What are those additional specialized commercial services that owners are buying? And what changes have you actually made on that front?

Thank you, Richard. Just to your first question, no, we are not seeing -- we're not seeing more key money or really key money at all for Garner. I mean in mainstream, if there ever is key money for us, it's where it's say, an urban property that's in a high bare to entry, much higher RevPAR. So it's kind of working like a premium to not full service, but a premium property at that point. But -- but no, I mean Garner is growing very well in the Americas, growing now in another dozen countries. Very pleased with this pace. And we've done it thoughtfully also by maintaining a very high-quality estate, but really key money to speak of there. I think we mentioned in one of the scripts that we actually have signed our first -- we actually opened the first Garners in Japan last year, and now we have another portfolio of which 12 are going to be Garners in Kyoto. That's a really high-value market. I mean it's very exciting to go in with such a distribution into quota. So now on that. And I think we're -- we're about in the right place on key money, continue to grow our system and staying efficient and capital-light and asset light. On the pipeline, look, the biggest reason the pipeline did not grow as much it could have is because of record openings. I mean you had 52% openings in China. And that was -- it was really strong openings. And so I think that's really the main reason. It's -- we're not seeing any out of the ordinary exits in the Middle East whatsoever. And there might be a delay of some of the projects per quarter or 2, not that we've registered that yet. Certainly, we haven't heard of any cancellations. Keep in mind, our pipeline in the Middle East, 90% of it is in Kingdom of Saudi Arabia, Egypt and Turkey. We do have some of it, of course, in UAE very little in the other countries, but 90% in KSA, Egypt and Turkey, which are far less affected it in the front line of where the conflict is today. So we feel pretty good about our pipeline there. Commercial Services. So today, not just America, but globally, but starting in Americas, we have, in addition to the commercial benefits that our owners get as part of their franchise or management agreement. We have premium commercial services program that offers field marketing, digital support, web support additional training group efforts, just a whole menu of things, web design on and on a whole menu of things that hotels sometimes choose to outsource or leave with us, and we're happy to do it. We have use technology, efficiencies, new processes. We spent over a year redesigning this to provide an even deeper and greater package of support at a lower cost, and we rolled this out. in this year to 500 hotels. It's performing very well, saving the hotel is money. We'll come back with some statistics but there's also confidentiality and competitive advantage that we want to maintain. Everybody is working hard to make sure their owner offer is the best out there. We think ours is, but we're going to not give anybody any clues on how to make this better. But it is a material benefit because it's one of the things that we don't just develop this thing in isolation. We work with owners every time we develop something like this. They tell us what they're looking for. We respond. They tell us what a meaningful savings a benefit would be, and we respond and work in collaboration today. So it's material for them. Thank you, Richard. Let's go to next question. Maybe Estelle is back.

Your next question comes from the line of Estelle Weingrod from JPM.