InterContinental Hotels Group PLC

LSE:IHG

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the IHG Q1 Results Call. My name is Breka, and I'll be coordinating your call today. [Operator Instructions]I will now hand over to your host, Heather Wood, Head of Investor Solutions (sic) [ Investor Relations ]. Please go ahead.

[Heather Wood, VP & Head of Investor Relations]

Hi. Good morning, everyone. It's Heather Wood, Head of Investor Relations, IHG. I'm joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer. We'll be talking you through our 2019 first quarter trading update this morning. As previously, we won't be holding a separate call for U.S. investors today. But we will be making the replay of this call available on our website. I therefore need to remind you that in the discussions today, the company may make certain forward-looking statements as defined under U.S. laws. So please refer to this morning's announcement and our SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements.With that, I will now hand the call over to Paul.

[Paul Edgecliffe-Johnson]

Thanks, Heather, and good morning, everyone. I'll begin with some of the key highlights in the quarter, before covering each of our regions in turn. And then I'll open up the call to questions.Looking first at our rooms and our focus on accelerating growth. We delivered strong results with net system size increasing 5.4% in the first quarter. We opened 12,000 rooms or 11,000 excluding the acquisition of Six Senses, a strong performance for what is typically our smallest quarter for openings. These included 3,700 rooms in Greater China as we passed the milestone of 400 hotels opened in the region. At the same time, we remain focused on removing underperforming hotels from our system and exited 6,000 rooms.We've strengthened our portfolio of brands, signing 24,000 rooms or 173 hotels into our pipeline. Excluding the hotels from the acquisition of Six Senses, this is our highest room signings pace for the first quarter in 12 years. Our total pipeline now stands at 279,000 rooms. In Greater China, we continued to see strong traction for our Holiday Inn Express Franchise Plus product with 21 signings in the quarter, taking our total to 164 signings since launch nearly 3 years ago. We also signed a further 6 franchised hotels for Holiday Inn and Crowne Plaza. Looking now to our brands. The Holiday Inn Brand Family continues to be the engine of growth for our business. In the first quarter, we signed 10,000 Holiday Inn Brand Family rooms, 69 hotels into our pipeline. And we are continuing to roll out our next-generation room and public space designs across the estate. Last month, we celebrated the opening of our 100th Open Lobby hotel in Europe. These next-generation designs are driving a meaningful uplift in guest satisfaction, and owners are benefiting from increased food and beverage revenues.In the mainstream segment, avid continues to attract strong interest from owners and is on track to be IHG's next brand of scale. We have now signed more than 180 hotels since launch just over 18 months ago, including 12 in the last quarter. We continue to expect signings pace to average around 20 to 25 avid hotels per quarter over time, albeit there will some fluctuations as they were in this quarter. With planning approval obtained or ground broken on close to 50 hotels, we expect openings to gather momentum throughout the year.Turning now to our luxury portfolio. We further established InterContinental Hotels & Resorts' position as the world's largest luxury hotel brand with additional signings in Thailand and China. Last year, we accelerated the international expansion of Kimpton Hotels & Resorts and opened our first flagship property in the U.K., the Kimpton Fitzroy in London. We have since opened a Kimpton Hotel in Edinburgh, and we'll have additional openings in Glasgow and Manchester later this year. Building on this momentum, we also recently opened the first Kimpton in Asia in Greater China in Taipei. In total, we have a presence secured for the brand in 14 countries around the world. I've talked before about our ambition for Regent Hotels & Resorts. Owner feedback has been overwhelmingly positive. And in the first quarter, we signed Regent Hotels in Chengdu and Bali, taking the brand's presence to 7 major international markets. Finally, in February, we acquired Six Senses. In the last 2 months, we have opened 2 resorts in Bhutan and Cambodia and have a further 8 under construction. With more than 50 deals under active discussion, we expect to accelerate Six Senses' growth to more than 60 hotels over the next decade.I'll now move on to talk about RevPAR and the first quarter trading performance in each of our 3 regions. Group RevPAR increased 0.3%, solid growth on top of strong prior year comparable. Starting with the Americas, where we continue to see record levels of U.S. industry demand. This meant predominantly rate-driven RevPAR increases with the Americas up 0.8%. The U.S. was up 0.6%, a good performance bearing in mind the continued drag from hurricane-related demand in the prior year. This is also good on a relative basis, given we outperformed the segments in which we compete. Elsewhere in the region, RevPAR in Canada was up 1% with good demand across the western provinces. In Latin America and Caribbean, strong growth in Colombia, Brazil and Argentina helped drive RevPAR growth of 10%, while in Mexico, RevPAR was down 2% impacted by a change of government in the region.Moving on now to our Europe, Middle East, Asia and Africa region where RevPAR was down 0.7%. Good growth in a number of major countries in the region was weighed down by declining RevPAR in the Middle East and South Korea. In the U.K., RevPAR was up 2% with over 4% growth in London principally due to strong corporate demand. Elsewhere, the provinces were flat. RevPAR in Continental Europe was up 1%. Germany saw over 2% growth, helped by a favorable trade fair calendar and a football fixture in Munich. France was down 3% impacted by social unrest in Paris.Middle East RevPAR was down 4% due to increased supply and continued political unrest in the region while RevPAR in South Korea fell 30%, largely due to the strong performance from the Winter Olympic and Paralympic Games in quarter 1 last year. The impact of these 2 markets reduced RevPAR growth in our EMEA region by around 1 percentage point.Finally, moving to Greater China, where we continued to significantly outperform the industry. RevPAR across the region was flat due to the lapping of a particularly strong comparable from quarter 1 last year when RevPAR was up 11%. In Mainland China, Tier 1 and Tier 2 cities saw a small increase in RevPAR, with good growth in a number of cities including Beijing and Guangzhou. This was offset by a lower level of conference business in Chengdu. Tier 3 and Tier 4 cities were slightly down, partly due to new supply coming into Sanya. This location reduced RevPAR in these cities by around 4 percentage points. Hong Kong RevPAR was up 1% driven by corporate demand. And RevPAR in Macau was up over 3% helped by strong leisure demand.So to summarize, we continued our trend of improving net system size growth, increasing it by 5.4% year-on-year. RevPAR continued to grow against strong comparatives, and we outperformed in our key global markets. We are making good progress with our new strategic initiatives that underpin our growth ambitions and look forward to launching our new all-suite upper-mid-scale brand in the Americas region later this month. Our comprehensive efficiency program, which is funding the growth investments we are making, is on track to deliver $125 million in annual savings by 2020. Looking ahead, the fundamentals of our business are strong. Despite the continued economic and geopolitical uncertainties in some parts of the world, we remain confident in the outlook for the rest of the year.With that, I will now open up the call for questions. Breka, if you could open the line for questions, please.

[Operator]

[Operator Instructions] First up, we have Jamie Rollo from Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Three questions, but I'll ask them separately. Just first, Paul, how do you feel about sort of consensus for RevPAR up 1% to up 2%? I mean it looks like Q2 might be a bit slower than Q1, given the Easter shifts probably offset the South Korea impact. So just sort of talk a bit about how you feel about Q2 and full year expectations, please.

[Paul Edgecliffe-Johnson]

Sure. So I think what's going to be interesting is how the year plays across half 1 and half 2. So half 1 in the Americas, you're still going to see the impacts of lapping the hurricane comparables, but -- I've been around for a while, but really they die out after quarter 2. So half 2 should be a little easier from that perspective. I think that the Easter impact that we'll see, it is really going to be just in April obviously. And March where normally we would have seen some Easter benefit, that was largely counteracted by the fact there was an additional Sunday in the quarter and also because the timing of Easter meant that some holidays that otherwise might have been taken in March didn't happen. So I'm not sure we really saw much Easter benefit in the first quarter. And we will see a bit of a headwind from it in quarter 2, but hopefully the second half will improve from that.

[Jamie David William Rollo, Managing Director]

So 1% to 2% in the full year, you are happy with that?

[Paul Edgecliffe-Johnson]

Yes. We are not expecting that people will move numbers on the back of what we're talking about today. I think that if you look at the group overall, the second half is easier in China because the comparables get a bit easier there. The comparables get easier in the U.S. And obviously, we have the South Korea impact for the year -- first quarter. So Middle East is going to stay fairly challenging, I think. There is a lot of supply that's coming into the Middle East, has been for a while in the buildup to Dubai Expo 2020. It means a lot of hotels are getting opened up. But that's really the most problematic region for us. Also, I think that second half will get stronger. So as I said, I'm not really expecting people to move their numbers from what they've got at the moment.

[Jamie David William Rollo, Managing Director]

And my second question just on the U.K. regional trading, if you could just sort of break down why you think things have been so tough there in the first quarter. And also the FdR deal on leases, you've obviously got some high exposure there. Could you remind us what the sort of liability is, what the operational gearing is in that business or whether -- could you actually lose money in that U.K. regional lease?

[Paul Edgecliffe-Johnson]

Sure. So overall, the U.K. for quarter 1 was up 2%. London was actually really strong, and the provinces were flattish. And so we're pleased with our London performance. We've got the Kimpton, which came about through the FdR portfolio coming through that. The FDA -- FdR portfolio, we are doing a fair amount of work on to bring that up into the brands that are going to be opened up under, so voco and some Kimptons. The portfolio, we're still very pleased with. It is a little bit more seasonal because of the nature of that business. So you'll see profitability, more than 100% of the profitability in the second half of the year. That will come through as we talk about the first half numbers. But overall, Jamie, yes, still pleased with the transaction. It will give us good representation for the brand and help us sell around the world, and so very happy.

[Jamie David William Rollo, Managing Director]

So it wouldn't make a profit overall this year?

[Paul Edgecliffe-Johnson]

The expectations are that it will make a profit in 2019.

[Jamie David William Rollo, Managing Director]

And then finally just back on the Middle East, could you remind us what the exposure is there? And also if you remember, you've got some pretty lucrative incentive fees on contracts. Could that sort of hurt this year with that RevPAR drop?

[Paul Edgecliffe-Johnson]

A lot of the contracts in the Middle East this year have been renegotiated over the last, I guess, 5 years or so. So we had some contracts in the Middle East that, as you say, were particularly lucrative. A lot of that, that come up for renegotiation have seen the lucrative nature of that somewhat diminish. So there isn't as much EBIT at risk as there would have been some years ago. And look, it's been a tough market in the Middle East for a few years now. And I'm sure it will recover at some point, but it may not be until after the Dubai 2020 Expo's finished and some of that additional supply gets absorbed into the market. But then there is nothing that I'd call out in terms of significant nonlinear fees being at risk there.

[Jamie David William Rollo, Managing Director]

How much of EMEA is Middle East now?

[Paul Edgecliffe-Johnson]

About 5%.

[Jamie David William Rollo, Managing Director]

Of the group?

[Paul Edgecliffe-Johnson]

Of EMEA.

[Jamie David William Rollo, Managing Director]

Of EMEA.

[Operator]

Next up, we have Jarrod Castle from UBS.

[Jarrod Castle, MD, Head of the Travel & Leisure Sector and Co]

Just in terms of the all-suite launch, can you maybe kind of give an update in terms of expression of interest and how that -- how the thinking has developed, I guess, since the full year results? Any changes there? Secondly, just on net system size growth, obviously good start to the year. Could we expect that maybe to even accelerate a little bit as we move through the quarters? And then just lastly, just in terms of some of the more challenging markets, you spoke a little bit about the Middle East. But is there any indication that things might improve as we move through the year in either the Middle East or Australia?

[Paul Edgecliffe-Johnson]

Thanks, Jarrod. So we're pleased with the Middle. We're pleased with the all-suites launch, and -- which we'll be talking about at our Americas conference with our owners later this month. And as we did with avid, we've been designing that in combination with our owners, so the owners' advisory group. Obviously, look, it's too early to talk about owner interest and signings, et cetera. After launching it, we then have to have a formal franchise to state in the document, which then have to go through a regulatory process and to be approved for selling so we can't actually sell any franchises for a little while. That will be right in the back end of this year as it was with avid, so very, very similar sort of timings there. In terms of net system size growth, so we're pleased with the step up that we've seen. And the 5.4% growth is in line with what we're -- the progress that we are looking to get up to industry-leading over time. Obviously, within that 5.4%, there's some benefit from some of the small acquisitions that we've made, so about 20 basis points of benefit from Six Senses and about the same from Regent. So once you take those out and look at it on a more organic basis, you're talking around the 5%, which is what I've been aspiring to for 2019. And then the more important thing is just to keep that sequentially going up. For 2019, upward of 5% will be good and then increasing that again in 2020. And that's more what I'm pushing for rather than saying that we're going to try and achieve everything in 1 year. And in terms of the markets, I think as I said a little earlier, I think that second half might be easier on a comparative basis in the U.S. and in China. I think the Middle East, it's going to stay somewhat challenging. Saudi was particularly challenging in the first quarter, so I guess we'll see how that tracks. That may get a little better through the year, but I think that overall, it's going to continue to be tough because of that new supply that's been coming into the market there.

[Operator]

We now have Vicki Stern from Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

A couple of questions, please, just circling back on margins both full year and then the savings. I think you touched on an element of the savings point when you talked about the FdR deal. But just globally, if you can sort of talk more generally about how we should think about H1 versus H2 and also if you're still happy with the 80 to 120 bps for the full year. And then just going back on the regions, for the outlook, the one market you haven't yet talked about is Continental Europe. Any comments there on your bigger countries like France and Germany as for the outlook, please?

[Paul Edgecliffe-Johnson]

Thanks, Vicki. So in terms of margins, aspiration is very much in line with what I talked about in full year of growing margins at the time by 80 to 120 bps. And because of the FdR deal, which as I said will mean that there is some profit deterioration there in the first half. It comes back in the second. Then it may have a small impact, but obviously, it's not on the fee margin. So let's wait until we've put those numbers out, then you can look at those then, but there's nothing that moves us away from the overall margin expectations. In terms of Continental Europe, it was a bit of a mixed bag in the first quarter. Germany actually was up 2% and France at negative 3%. That was really the social unrest that's been going on in Paris. And we are -- unusually for us because normally we are just quite a broad-based business, we're a little bit more reliant on international inbounds in the French market. I think that has been held back by the social unrest there. So overall, Continental Europe up 1%, held back by France. In terms of the outlook that -- I mean really, I think that Germany will have a decent year. And I can't call what's going to happen in France. It's really very much based on what happens with the social unrest. If that goes away, then I think we would return back to our more normal levels of trading.

[Operator]

We now have Richard Clarke from Bernstein.

[Richard J. Clarke, Research Analyst]

Three questions from me if I may. One is just on upper mid-scale in the U.S. market. You say you're outperforming it, but clearly, that segment for the whole is underperforming the market. Is that having any impact on owners' sort of demand for that part of the chain? Are you seeing any impact there? The second question is a bit of an extension on Jamie's question. Now you disclosed it, we can see incentive fees are more than 30% of your revenue in EMEA and Greater China. So what impact does the RevPAR slowdown have on the incentive fee component across those 2 segments in entirety? And the third question is a little bit off-the-wall. But I stayed in a Holiday Inn Express recently, and you've redone the breakfast there. There's still a lot of plastic at the Holiday Inn Express breakfast. There's Styrofoam cups, plastic cutlery, et cetera. Is there any plans to do away with that and any consumer backlash you're seeing against that continued sort of disposable nature to breakfast?

[Paul Edgecliffe-Johnson]

Thanks, Richard. So I'll take those in turn. In terms of upper mid-scale, this has been where there's been the highest level of investor demand to open up new hotels because the returns there are our strongest because it's limited to other select service hotels. So there has been more supply coming into that market. Obviously, there's been demand as well. In some segments of the market, there's been less supply coming in, and demand's been low. So if you look up at the top end, it is a continuation of what, I guess, we've seen for some quarters, but the RevPAR there has been a little stronger. No change to owner demand there really, yes, and relative owner demand. It is where a lot of the money is flowing into because the returns on capital are very strong. And it's very favorable compared to other commercial real estate opportunities for investment in U.S. markets. So nothing that I've identified that I could call out for you now. In terms of the incentive fees, there's -- in the markets that we're talking about, so in China or in the Middle East, the incentive fees come about more on a linear basis. So in the U.S., you have some where there's depth according to meeting profit thresholds, et cetera. So they might step up or step down, but largely, it's the share of the GOP in the hotel. So although there's a little bit more operational gearing in the hotels there as performance might come down, you might see a slight overleverage from that. It's nothing that's material. In terms of the -- your comment on single-use plastics. So we're taking out straws out of the hotels, which is a good start. There is a lot of focus within the business on this and what we can do. What we want to make sure though -- and you'll appreciate this, knowing us, is that at a number of hotels that we've got, if we say we're going to do something, we know that it can be done operationally across all the hotels. And that's really important. So there's a number of things we're talking to our owners about getting buy-in from them. We did launch our new breakfast product in Holiday Inn Express in the U.S. last year. It's actually been very, very well received. It's a step up in quality, which guests have appreciated. And in terms of what we can do to then make sure that everything is recyclable and we look at single-use plastics, it's very much on the corporate agenda.

[Operator]

The next question is from Jaafar Mestari from Exane BNP Paribas.

[Jaafar Mestari, Analyst]

This will be on RevPAR. The first one is can you quantify the performance of Middle East and South Korea individually. Because for them to be almost 2 points impact on EMEA, they must be quite markedly negative. Also, I think you said Middle East is 5% of the region. How big is South Korea, please? And then on the U.S. RevPAR, you're talking about an outperformance in your key categories. I guess Holiday Inn Express up 0.8% against mid-scale, upper mid-scale. I sort of see what you're saying. But Crowne Plaza Americas down 1.5%, it doesn't look like upscale was that bad in the quarter for the wider market. Are you reading this as an outperformance as well?

[Paul Edgecliffe-Johnson]

Thanks, Jaafar. So in terms of the questions on the RevPAR and what happened in South Korea, South Korea was negative 30% in the quarter. And EMEA was -- so India, Middle East and Africa was negative about 2%. South Korea is a small part of the EMEA market. It's only about 2%, but let's say it was significantly down. And so that has a weighting impact. And then in terms of the U.S and in terms of upscale and Crowne Plaza, I mean it does move around a little bit based on where you are located in the U.S. For example, if you're more located into the Houston market, the Houston market was significantly negative in the first quarter and, for example, not in the San Francisco market where Moscone came back on, then it does have a surprisingly large impact on the performance on the brand. So -- because it is quite a small -- it's a small quarter with lower levels of demand, which that means you'll see a bit of price fluctuations depending on what's happening on the macro factors. So I wouldn't read too much into it.

[Operator]

[Operator Instructions] We have no further questions today. So I'll hand back over to you, Heather.

[Paul Edgecliffe-Johnson]

Thanks, everybody, for dialing in, and thank you, Breka. So any further questions, please, as ever, do follow up with us. And really appreciate you spending the time. Hopefully, we'll see you all soon. Bye for now.

[Operator]

If you have missed any part of this call or you would like to hear it again, a recording will be ready shortly. Thank you for joining today's call. Have a lovely day.