InterContinental Hotels Group PLC

LSE:IHG

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the InterContinental Hotels Group first quarter trading update to the 31st of March 2020. My name is Becky, and I'll be coordinating your call today. [Operator Instructions]I will now hand over to your host, Stuart Ford, to begin. Stuart, please go ahead.

[Stuart Ford, VP & Head of Investor Relations]

Good morning, everyone, and welcome to IHG's 2020 First Quarter Trading Update Conference Call. And apologies to anyone receiving a delay of getting on the line. There was congestion on the phone lines. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Keith Barr, our Chief Executive Officer; and Paul Edgecliffe-Johnson, our Chief Financial Officer.I need to remind listeners on the call that in the discussion today, the company may make certain forward-looking statements as defined under U.S. law. Please refer to this morning's announcements and the company's SEC filings for factors that could lead actual results to differ materially from those expected in or implied by any such forward-looking statements.Finally, as we will be holding our Annual General Meeting later this morning, Paul and Keith will have to dial off at around 10 a.m. May I therefore ask that you prioritize any questions you may have so that we can get around to everyone during our Q&A session.I will now hand the call over to Keith.

[Keith Barr, CEO & Director]

Thanks, Stuart, and good morning, everyone. The impact of COVID-19 on the global economy continues to deepen. And as communities, businesses and governments respond to this crisis, our travel and hospitality industry has been faced with the biggest challenge we've ever seen. As a company, we continue to act quickly and thoughtfully to ensure that we're providing as much support as possible to all our stakeholders, whilst protecting the long-term health of our business. I'm so proud of the manner of our response and thankful to our colleagues and owners around the world. They have really stepped up and selflessly responded at the frontline, working tirelessly to give our guests and hotel teams the support their need during these very difficult circumstances.Since the outset in Wuhan, our people have shown what true hospitality means at IHG, such as making meals for crews, building temporary hospitals there and reopening hotels with just 1 day's notice for support workers flown in. And that sentiment continues today from providing accommodations to thousands of health care and support workers globally to donating beds to local hospitals in Madrid, sheltering the homeless in the U.K. and Australia and reopening our hotel kitchen to prepare and distribute meals to the elderly, food bank organizations or colleagues from our own industry who find themselves out of work. Our purpose of true hospitality for everyone sits at the heart of our business, and we are focused on making thoughtful choices at the right time in the right way. I'll talk more about our broad response in a moment, including the importance of our close working relationship with owners and the mutual efforts we are making to keep hotels open.But first, let me hand over to Paul to take you through our first quarter financial performance.

[Paul Russell Edgecliffe-Johnson]

Thanks, Keith, and good morning, everyone. I'll start first with RevPAR. You will have seen that this time around, we have provided monthly RevPAR data in our release, and I will focus my remarks on the month of March as well as what we have seen subsequently in April.Our global RevPAR declined 25% in the first quarter and 55% in March. By late March, demand for hotels has fallen to the lowest levels ever seen as governments around the world began to impose social-distancing measures and travel restrictions. These restrictions remain in place in most of our key markets, and we estimate that April RevPAR decline will be around 80%.Turning now to our regional performance. Across the first quarter, RevPAR fell 19% in the Americas and just under 20% in the U.S. In March, U.S. RevPAR fell 49%, outperforming the overall industry and our weighted segments. This has been driven by a number of factors. First, our weighting in the upper mid-scale segment, which accounts for around 65% of our hotels. This segment has proved to be more resilient, as it was through previous downturns. Through the financial crisis in 2008 and '09, upper mid-scale RevPAR fell around 15% compared to luxury and upper upscale, which fell between 18% and 25%. We are seeing a similar trends in March when upper mid-scale RevPAR outperformed both of these segments combined by around 16 percentage points. We also have the strongest brand in this segment, with Holiday Inn Express outperforming the upper mid-scale by nearly 3 percentage points in March.Combined with our weighting to the more resilient segments, around 85% of our rooms are in nonurban markets, which also tend to hold up better in tough economic conditions. RevPAR in our nonurban markets declined 45% in March against an over 60% decline for hotels in urban markets. In addition, our hotels are less reliant on international inbound travel, with around 95% of our demand typically being domestically driven. And finally, we are less exposed to large group meetings and events, which tends to be the first to fall away and the last to recover in a recessionary environment.Informed by the trends we are seeing now, our experience of previous downturns and the insights we are getting from China, our expectation is that during these times of weaker demand and as the industry starts to recover, we should be relatively well placed. Domestic demand is likely to recover first as international travel remains restricted. Transient business is likely to drive the recovery as lingering social distancing measures limit group business. And suburban markets will be driven by the domestic economy, which will recover before urban.The fact that our hotels are well placed to capture available demand can be seen in the low percentage of our hotels that are closed, just 10%. We're working closely with our franchisees and owners to support them in keeping their hotels open by relaxing brand standards, pausing renovation work and offering fee reliefs and increased payment flexibility. We've also been strong advocates for our owners through lobbying for greater support in government funding schemes, and we're working hard to drive business into their hotels through securing government contract business.Finishing up on the Americas with our most recent trading. We expect April RevPAR to have fallen by around 80%, with occupancy levels at our open comparable hotels showing some signs of improvement through the month and currently in the mid-20s.Moving on now to our Europe, Middle East, Asia and Africa region. RevPAR for the first quarter fell 26%, with declines in each of our markets reflecting the spread of COVID-19, which impacted the region from the second half of February. In the U.K., RevPAR was down 22%, including a 55% decline in March. RevPAR in Continental Europe was down 28% this quarter, with March down over 70%. Within this, Germany was down just over 70%, following the cancellation of major trade fairs. Elsewhere in the Middle East, RevPAR fell 60% in March largely due to the partial lockdown in a number of countries. In Australia, restrictions on both domestic and international flights led to a RevPAR decline of 50% in March. And in Japan, RevPAR fell 70% driven by reduced tourist and corporate demand from China.As of the end of April, we had around 560 hotels closed or approximately 50% across the EMEAA region, largely reflecting the timing of government-mandated closures. Occupancy levels are running in the low 20s for comparable open hotels. We expect RevPAR in April to decline around 90% in EMEAA.Finally, moving to Greater China. RevPAR across the region was down 65% in the quarter. This reflects the COVID-19 outbreak, which impacted the region from late January, with RevPAR down 89% in February, before a modest improvement to an 81% decline in March. This trend of improvement has continued into April, where we expect RevPAR to be down around 75%. As restrictions have been lifted, we've seen hotels reopen. And at the end of April, only 10 hotels were closed compared to nearly 180 at the peak in February.Occupancy levels in comparable open hotels are also starting to rebuild, currently being in the mid-20% range compared to the trough of around 5% in February with demand being led by domestic corporate and transient travel. As we look to the recovery in China, we are again well placed to capture demand. Our focus on building an in China, for China business will benefit us with around 90% of demand into our hotels being domestic.Moving now to net system size. During the quarter, we opened 6,000 rooms, the majority of which opened in the first 2 months of the year, although there were still 1,100 rooms that opened in the month of March. We removed 8,000 rooms, 2,000 of which relate to a previously announced portfolio of hotels in Germany, for which we have received significant liquidated damages. The combination of additions and removals took our net system size to 882,000 rooms, up 4.6% since this time last year.We signed 14,000 rooms in the quarter, of which 4,000 rooms were signed in March, taking our total pipeline to 288,000 rooms. This included 12 avid hotels and 5 Atwell Suites in the U.S., 2 further hotels to Six Senses in EMEAA and 22 franchise signings in Greater China.Since the quarter end, development activity is continuing, albeit at a slower pace. In the U.S., 10 hotels broke ground in April. And in Greater China, construction crews are back on-site, and work has resumed on around 95% of hotels looking to open this year. We also continue to sign strategically important landmark hotels, including the InterContinental Hotel in Rome and the Regent Shanghai.As we scenario plan for the balance of the year, like the rest of the industry, we have limited visibility. Given the level of cancellation activity we have seen for the second quarter and just applying common sense, it's clear that conditions will continue to remain challenging over the coming months. This much is also evident in the weekly RevPAR data published by industry organizations and their analysis of what the rest of 2020 could look like in terms of industry RevPAR.To prepare for this, we have taken rapid and decisive actions to reduce costs, preserve cash and bolster liquidity. We've implemented temporary scaled payroll reductions across the entire organization, along with cuts to travel and other discretionary spend, and remain on track to reduce our fee business cost by up to $150 million, as previously guided on the 20th of March.We've made similar reductions to discretionary costs across the System Funds, including reductions to marketing spend, in order to help mitigate the impact of lower assessment fees from hotels, whilst ensuring the best return for our owners on our remaining activities. We have also taken action in our owned leased and managed leased hotels. We will implement further cost reductions as necessary in each and every part of our business to manage the group appropriately through the evolving trading environment.We are taking steps to protect our cash flow, which includes reducing our gross capital expenditure by around $100 million from last year's levels and ensuring that we are proactively managing our working capital. We are already seeing the benefit of this in reduced cash outflows. We received good levels of payments from owners through April, who appreciated our owner offer with managing their cash flow. All in all, it meant the business was net cash flow positive in April, albeit we recognize that owners are entering a more challenging cash flow environment, so a deterioration is possible in the coming months.In addition, as noted in our March update, we have also withdrawn the Board's recommendation to pay the final dividend that we announced in our results in February, and we will defer consideration of further dividends until visibility has improved.As you know, we have always run the business on a conservative basis. We are well capitalized, with the majority of our debt being in bonds, which have a staggered maturity profile, with the first maturity of GBP 400 million due in late 2022 and no others for 5 years. In recent days, we have extended our $1.275 billion syndicated revolving credit facility by 18 months out to September 2023. And as announced 10 days ago, we have agreed with our lending syndicate the waiver of our existing covenants for the next 3 tests. This means that our standard net debt to EBITDA and interest cover covenants will not be tested until 31st December 2021. Instead, there is a $400 million minimum liquidity covenant tested every 6 months. We also issued GBP 600 million or around $750 million of commercial paper from the Bank of England's Covid Corporate Financing Facility.As of the end of April, $850 million of our revolving credit facility is undrawn, and we have $1.2 billion of cash on deposits. This takes our total available liquidity to around $2 billion, which we estimate, in a theoretical zero-occupancy environment, would provide at least 18 months of headroom. This takes into account the cost base across the fee business, our owned leased and managed leased hotels and the System Fund. This assessment is also before any further cost and cash actions.It is worth noting at this point that our previously stated sensitivity of a 1% movement in RevPAR results in approximately a $13 million movement in EBIT still holds. However, we expect the sensitivity to be around $1 million higher through 2020 due to taking into account the hotel closures in our owned leased and managed leased estate. This sensitivity is before the cost savings which we had announced. We are also expecting a reduction in our technology fee income, where we have offered temporary discounts to owners as part of our response to COVID-19, as well as in other revenues such as trading fees, which are impacted by hotel closures and social distancing measures. In total, our best current expectation is that this will reduce income by $20 million to $30 million in 2020.To summarize, the cost reduction, cash flow and liquidity measures that we are taking will enable us to meet the immediate challenges facing the business. Combined with our weighting to more resilient domestic Mainstream travel demand, this positions us well to emerge stronger and deliver on our long-term growth ambitions.With that, I will hand the call back to Keith.

[Keith Barr, CEO & Director]

Thanks, Paul. So we can see quite clearly the impact this crisis is having on our trading. We can't control that. But we can do everything in our power to help mitigate the effect it has on our business and our owners' businesses and also shift some of our focus onto the broader role we play in relief efforts around the world.I want to spend a few moments just talking through how we are doing that in 3 different ways. Firstly, caring for our communities. We're working with governments around the world to help provide hotel accommodation to those who need it the most, including thousands of frontline workers leading the relief efforts as well as some of the most vulnerable in society such as the homeless. We currently have around 290 hotels across our business that have been repurposed, including InterContinental Sydney, where the team reopened within 24 hours' notice to accommodate travelers sent directly to them after returning to the country.We've also continued to work with our humanitarian aid partners to fund disaster relief efforts that is helping food banks and charities in more than 70 countries get vital supply to those most in need during this crisis. Our own colleagues continue to inspire us, too, volunteering their time, cooking and delivering meals and donating vital supplies to hospitals. The InterContinental Bali, for instance, have been sewing masks made from linen for the local community, while support for CARE International is helping provide PPE equipment in developing markets. We've also seen our IHG Rewards Club loyalty members generously donate millions of loyalty points in recent weeks to support our True Hospitality for Good community partners, such as the International Federation of Red Cross and Red Crescent Societies.The second area is how we support our guests, hotel colleagues and owners. For our guests, health and safety are paramount, and we want them to feel confident in booking an IHG hotel, knowing that we are consistently delivering a safe, healthy and clean stay. Our IHG Way of Clean program is already a key part of how we operate, and we're extending this to become a global brand standard. We continue to follow the advice from the World Health Organization and the Center for Disease Control and Prevention to ensure that we have the most up-to-date safety and security procedures in place for our guests and colleagues.We understand that not everyone wants to travel right now, so we have waived cancellation fees and created Book Now, Pay Later options for the rest of 2020. We're also protecting the loyalty points and status for IHG Rewards Club members by extending membership status and deferring the expiration date of points.For our owners, it's important to recognize many of them run small businesses and so they are currently facing real challenges, either temporarily closing their doors or running at the lowest level of occupancy they've ever seen. We are standing beside them to help get through this, hosting webinars on how to flex operations to stay open and reduce costs or how to secure government financial support that may be available to them. Furthermore, we're giving our owners an opportunity to pause all renovation work and offering fee relief options, passing through all cost reductions we are achieving on their behalf and providing increased payment flexibility so they can reduce their cash pressures and manage through this time.If they are in the unfortunate position of having to furlough hotel staff, or worse still, let people go, we're also supporting these people with dedicated website for temporary vacancies with hiring companies like Amazon and Walmart. Alongside this, whether at the White House or at Number 10, we are working on behalf of all of our owners with the highest levels of governments in key markets globally to secure invaluable stimulus packages for the hospitality industry that will further protect our owners and jobs.And third area is that we have to manage sensitively through what is a very challenging time at the corporate level. Outside of Greater China, we are effectively operating the entire business remotely today, having swiftly put in place all necessary organizational processes, changes and strengthening our IT systems. It's vital, though, that we recognize the pressure of remote working and stay focused on ensuring our colleagues feel properly supported during this time and able to adjust to such a unique environment both professionally and personally.We are encouraging our colleagues to take part in leadership Q&As and have invested in a range of digital resources designed to offer personal development and help create as much of a work-life balance as is possible. All of our time and resources are being focused on responding to this crisis in the here and now and ensuring that we proactively plan for what a recovery will look like market by market and, to some degree, hotel by hotel.If we look across our portfolio of almost 5,900 hotels right now, it is no doubt a tough picture. Around 1,000 hotels are closed, and occupancy levels at open properties are low. But it's important to underline the strength of our business model and why it positions us well to withstand this pressure. Firstly, we are an asset-light business, with most of our revenues tied to hotel revenues, not profits. Secondly, we're skewed towards transient demand as opposed to large group bookings, which are more impacted by social distancing measures and reduced travel budgets. Thirdly, our broad geographical distribution is weighted towards domestic demand, mostly in nonurban markets, both of which are expected to lead the recovery in our industry if international travel restrictions persist. And the fourth point is that we have a market-leading position within the upper mid-scale segment, which has historically outperformed during downturns.As Paul spoke about earlier, we are still seeing hotel openings and signings in this challenging environment. In April, we signed the Regent Shanghai Pudong, which will become the first opening for the brand since the acquisition. In the same month, the InterContinental Hong Kong also started its biggest renovation in 30 years as we prepare to reopen it under the Regent brand in 2022.So in summary, our top priorities remain the health and safety of our stakeholders, ensuring we stay true to our purpose, culture and values and to protect the long-term future of our business. We anticipate continued disruption in travel for the months ahead, and forward visibility remains very limited. We are focused on taking the necessary actions to reduce costs, preserve cash and further strengthen our liquidity position. Our strategy remains intact. We will continue to build on the relative resilience of our business model.With that, Paul and I are happy to take your questions. Before I hand back to the operator, I know there are a lot of calls on the line, so if we could ask you to prioritize your questions so we can get through as many callers as possible in the time that we have. Operator, if you could please open the line to questions.

[Operator]

We have our first question registered from Richard Clarke.

[Richard J. Clarke, Research Analyst]

If you could indulge me with 3 questions, please. For the first one, I just want to unpick your comment on the fact you're cash flow positive in April. And it looks like, in your liquidity statement, you would be eating through over $100 million of cash at 0 occupancy, but you can't be making $100 million of revenue at the moment. Is there anything funny in April that gets you to cash flow positive?Second question, just wondering the scope of that technology fee discount. How much is that? How much we should read into your willingness to sort of support owners over the longer term with further fee reductions, deferrals, et cetera?And then lastly, just an update on Concerto. It looks like some of the tech will now be more demanded in terms of sort of choosing a room and mobile phone door entry. Any update on how quickly you can roll that out as we come out of the crisis?

[Keith Barr, CEO & Director]

Sure. Thanks, Richard. And I would ask everyone's indulgence a bit because Paul and I are not together, and so I will try to emcee the questions and answer some and then pass to Paul as well, too. And hopefully, that will go well. So I'll let Paul take the cash flow and the tech fee conversation. I'll talk to you a bit about technology.We fundamentally believe that technology will be more important going forward than it even was today, Richard. And we'll continue to make the investments for it. We have completed some of the initial testing, the alpha and beta, for Concerto. The rollout schedule is going to be contingent upon our ability to get people to travel and restrictions.And so it's difficult for us to map out exactly what the deployment schedule will look like on a global basis due to the nature of markets varying from country to country and the availability to get people to travel because we do have to touch every single hotel again and with training. And so we also think about our training delivery method on that, too. But it is a top priority for us to deploy Concerto and continue to invest in other technologies to create competitive advantage, which I think is one of the advantages that we have at IHG as being one of the leading players.So Paul, do you want to take cash flow and the technology fee?

[Paul Russell Edgecliffe-Johnson]

Thanks, Keith. So in terms of the April cash flow, look, we were pleased to be cash flow positive in the month. Obviously, when you think about cash flow, it is a bit lumpy. Your cash burn includes CapEx, includes interest, includes taxes, et cetera. So it's not just going to be the same month by month. Obviously, also the cash inflows in April don't relate to trading in April. So they relate to earlier months, to March and February, when obviously business was stronger. We've done a lot on working capital, which has also helped in April. It continues to be a major focus of ours to maximize our cash flows. So we will continue to work on that.In terms of the tech discount and your comment as to whether there's anything to read into it, well, we are working with our owners to achieve the best outcome for them. That's our philosophy. And the tech fee doesn't vary really with RevPAR, and most of our fees obviously do. So we have reduced that for a temporary period by a small amount to share in the pain that they're seeing. But it is a temporary reduction. It was well received by the owners, and it shows the spirit in which we're approaching this crisis.

[Operator]

Our next question comes from Vicki Stern from Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

Yes, just firstly, just coming back on the owners. Can you just give a few comments about how you perceive the health of your owner community in general, perhaps any geographic differences to touch on as well? And do you think over and above what you've already announced that there might be any need to take any additional measures? And sort of what measures could there be?And the second one is just around the additional cost savings you said that you are looking at. What sorts of areas might those include? And just a reminder actually on the $150 million, if that includes taking any advantage of the furlough schemes.And finally, just any sense you can provide on what you think the breakeven occupancy level typically might be for one of your hotels just to give a sense as to when things might reopen that are the closed currently?

[Keith Barr, CEO & Director]

Great. Thanks, Vicki. I'll pick up the owners' health and a bit on breakeven and then let Paul talk about the cost savings and the $150 million.So I think the health of our owners is generally good. If you think about the vast majority of our portfolio is in Mainstream, they are small businesses. And we've been able to lobby governments in different markets for support for colleagues and also support for their businesses. So the CARES Act, in particular, has provided a great bridge for the small businesses in the U.S. to be able to get that loan, have those loans turned to grants that they utilize those proceeds to keep people employed, too. And so clearly, they're under incredible pressure.But breakeven, we estimate, for the Mainstream segment, is around 30% occupancy, and we're running sort of around the mid-20s right now, too. And so with government support, with the cost reductions that we're getting through and working with them, we think the general health of our owners is good. Clearly, there will be some owners that will run into significant issues during this, that is inevitable. And we will continue to work with them and partner with them overall.So I think that's the philosophy we've taken in there, is to be a good partner. And I think that's been paying dividends. The conversations that we've all been having with the owners association and the big owning groups has been they're in a pretty good place for the next few months. And they expect, as restrictions ease up over time, that occupancies move up to some degree and gets them back into a more comfortable -- more comfortable, I wouldn't say it's a comfortable position, but a more comfortable position than they are today.Then when you go to Asia, you think we're dealing with a lot of -- in China, there's a lot of state-owned enterprises, big property development companies, which are well capitalized and supported. We deal with a lot of sovereign wealth and high-net-worth individuals, who are quite well capitalized, too. So in general, I'd say the owner health is under pressure but is in a reasonably good place, but we will expect to see some challenges along the way.Paul, do you want to talk about the cost savings and the $150 million?

[Paul Russell Edgecliffe-Johnson]

Yes, absolutely. So we spoke, I guess, a while ago now about the $150 million that we will be taking out of the cost base on the P&L this year. As you know, probably about 2/3 of our normal cost base is people costs. So we have made reductions to salaries across the organization, scaled, obviously, s at the most senior level, higher level, are significantly higher than the more junior levels of the organization. We've also taken out our bonus.We have reduced our investments behind some of our new brand activity that -- you'll remember, we created the capacity for -- through our major cost reduction effort a few years ago and have put that behind building out the avid brand, Atwell brand, Regent brand, voco brand, et cetera. In the current environment, we have pulled back on that. We look at travel and discretionary costs. So in total, that has given us a significant reduction to our A&G expense. Equally in our System Funds, we've reduced significantly our marketing spend, et cetera, and with similar reductions to employee costs. We have not taken advantage of the U.K. furlough scheme, no.In relation to your comment -- to your question about the breakeven level for hotels and when they might want to reopen, for a lot of our Mainstream brand, it's somewhere in the high 20 to 30. For a hotel like a Candlewood, you can run on a skeleton staff of 2. And actually, if you look at a Candlewood, then they've maintained quite a high level of occupancy. They're well used. Holiday Inn Express is -- again, you can run with a low staff level. So it does work to keep them open, and most of them are open.If you look in the U.S., 90% of our hotels across the region are reopened. And we are in a net reopening environment. But we're seeing more hotels open up, and there's more that are talking to us about reopening. There's a protocol they have to go through to reopen. But we are seeing those steadily come back.In China, we had 180 closed at the trough, and now we're back to only 10, which are a few big urban hotels. But it's a good trend. We want the hotels to stay open to be -- continue to be part of the infrastructure of cities, to be part of the community. And the owners want their hotels open as soon as they can.

[Operator]

Our next question comes from Jamie Rollo from Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Three again, please. On the fees, back to the fee question, I think you said $20 million to $30 million on the prepared comments. Is that just on the technology? Or is that on some of the other discounts? So could you talk a bit about all the discounts being offered? And is that just a Q2 impact? Or should we expect that for the rest of the year? And does that change that $14 million RevPAR sensitivity?Secondly, on the System Fund, are you expecting that to break even this year? And could you talk a bit about the sort of fixed-variable cost split?And then finally, what's your expectation on sort of unit growth over the next few years, particularly on conversions from independent hotels?

[Keith Barr, CEO & Director]

Thanks, Jamie. Paul, do you want to pick up on fees and System Fund? And I'll talk a bit about growth.

[Paul Russell Edgecliffe-Johnson]

Absolutely.

[Keith Barr, CEO & Director]

Why don't you start off on the fees and I'll end on growth?

[Paul Russell Edgecliffe-Johnson]

Okay. Great. Will do. So in terms of the fees in the prepared remarks, we're trying to give you the best guidance that we can obviously in an uncertain environment. My best expectation right now is that the fees from technology costs, from training and a few other miscellaneous fees across 2020 will reduce by probably $20 million to $30 million. Depending on just how long we keep the discounts in place for, so it's not just the second quarter, that's across the period of the year across all those fees and -- but look, we'll give you some more updates through the year if we see that changing to a material extent.In terms of the System Funds, we will get it as close to breakeven from a cash perspective as we can this year. My guess is it will probably be cash flow negative, maybe somewhere between $50 million and $100 million across the year. There are some costs there that we would not want to cut as we need to continue to drive business to our hotels to the extent that we can in a lower demand environment.And in terms of your question about fixed versus variable cost, well, we've always talked about the majority of our costs in a normal environment are, of course, people. So 2/3 of our costs are there. We've brought that down somewhat already, as I've spoken about, to now probably 50-50 people costs, non-people costs, but we continue to look at all costs in the business.And Keith, I'll pass it back to you to talk about growth.

[Keith Barr, CEO & Director]

Thanks, Paul. Jamie, I think if you think about in the environment that we're in now, there -- clearly, there are headwinds and tailwinds to growth. And so what are the headwinds today and in the short term? Clearly, we have building sites being closed down and construction being stopped, social distancing. So that's going to slow the development pipeline and construction pipeline for this year without question. The nature and the extent to which will really depend upon how countries open up and how businesses open up, too.So clearly, we're not going to be growing at the same levels we had previously planned to. But we are still signing hotels. We signed 104 hotels in the first quarter. We opened up 44 hotels. We're still signing hotels into April and having ground-breaks in April, too. So the growth is still going to occur and the pipeline will still materialize but over a different period of time.The other headwind clearly will be the availability of capital. We saw after the financial crisis -- while this isn't a liquidity issue today, the lending in the sector will be constrained for a period of time. It will come back and it will come back to the biggest and best companies like it did after the financial crisis, and that's where IHG is well positioned. So those are some of the headwinds that we are definitely facing.So what are the tailwinds, though? I think it's going to be a -- this, I think, will increase the movement of hotel supply into the biggest, best branded hotel companies. Customers are going to want to stay in branded hotel companies. I think this is going to put headwinds onto home sharing as well. I think this means that the power and strength of the enterprise is going to deliver superior returns, lower cost of distribution. So I think the trend that we saw happen over the last decade will continue to accelerate.And the other opportunity it presents will be conversions. I think you'll see weaker brands and/or independents convert over into the big branded players. And with the opportunity we have with voco and with Kimpton and Hotel Indigo, great conversion plays. And candidly, I mean, the deal that we did in Shanghai is -- for the Regent, is a conversion of a luxury -- leading luxury hotel brand, and they want to come be part of IHG. So I think that will be something to help us. But it's really hard to have any visibility on what growth is going to look like in the next 12 months until we have more sense for how countries reopen and how construction reopens.

[Jamie David William Rollo, Managing Director]

Just on that fee relief comment, Paul, does that include the discounts you're giving to owners who are paying early, that 10% discount? What sort of additional dollar impact are we talking about, particularly if that carries on through the rest of the year?

[Paul Russell Edgecliffe-Johnson]

So it's just for the second quarter, which is what we've done to date, it's actually had a pretty small impact. But we will continue to monitor what we need to do with the owners. As you know, we're in partnership with them. And it's the right thing to do. We will consider continuing with that discount through a longer period. So there's nothing more I can say on that right now. But thanks, Jamie. But it's not included in the $13 million. So if we did decide longer term, then that would increase.

[Operator]

Our next question comes from Jaafar Mestari from Exane BNP Paribas.

[Jaafar Mestari, Analyst]

Two questions, please. Firstly, going back to the liquidity and cash burn math. So when you estimate that $2 billion of liquidity leaves you at least 18 months of headroom, what's the monthly cash burn? How does it work? Is it just $2 billion divided by 18? Or do you assume any one-off outflows, working capital in the first weeks? You've just talked about the System Fund. Do you assume a base level of liquidity that you would not use? So for example, is the monthly cash burn $2 billion minus your $400 million liquidity covenants, then divided by 18? That's the first question, please.And then secondly, on the System Funds. I'm just curious if you have some track record that you could share because the reporting was obviously not the same in '09. How agile have you been in the last recession in terms of removing costs? You obviously mentioned you don't want to remove everything, but could you reduce the cost of System Funds almost one-for-one in line with RevPAR, outside of those $50 million to $100 million that you want to keep there?

[Keith Barr, CEO & Director]

Thanks, Jaafar. Paul, do you want to talk through those 2 points?

[Paul Russell Edgecliffe-Johnson]

Thanks, Keith. So in terms of the liquidity and the cash burn, I mean broadly, yes, I mean, it is -- you take the $2 billion, and that will give us 18 months. There's a small element of non-occupancy-linked income cash that we get from our credit card relationship, but it's not a significant number. And that comes in irrespective of the occupancy in the hotels. It doesn't think about any base level of liquidity that would be required. It's simply saying this is how much we have. And if we were getting nothing other than a small level of credit card income, then that's how long that would last for.In terms of the System Fund, well, I wouldn't actually relate back to what happened in '08, '09 as a real read-across because I mean, back then, yes, of course, we did reduce, but you're looking at a different environment now. But what I can say is that we've acted very quickly, and we have managed to scale back the expenditure in the System Funds very significantly. There's some things that we do want to continue to sustain because it's the right thing to do and will drive business.Certainly, if we were looking into a tough environment in 2021, for example, I wouldn't expect that the System Fund would be cash consumptive. I think probably, in 2020, it's going to be the right thing to keep it a little bit cash consumptive just so that we can keep some of that investment spending there.

[Jaafar Mestari, Analyst]

Can I just follow up -- sorry. Is it okay to follow-up just very quickly on that cash...

[Paul Russell Edgecliffe-Johnson]

Okay. Sure. Go ahead.

[Jaafar Mestari, Analyst]

On the fee business, apologies for that, but are you saying that it's basically $110 million of cash burn per month? Or if I look at it differently, are you saying it's about $1.3 billion on an annual basis? This looks extremely high, if I take just fee revenue, $2 billion, fee EBIT, $800 million. So it looks like if you did nothing, the sort of cost base is $1.2 billion. Could you just help me understand that math? And is it really $110 million per month?

[Paul Russell Edgecliffe-Johnson]

So if you looked at the business and assume that we're getting no income at all, and obviously the business has System Fund expenditure, you've got owned and leased dormant costs, so the cost of running our owned and leased hotels with 0 income coming in, then you've got your interest charges, your tax charges in prior years, et cetera, et cetera, so that's on the basis of how we're looking at it. In a normal environment, so in today's normal, so if you're looking at the level of business that we're currently seeing, clearly, it's very significantly longer than the 18 months, maybe even up to -- or approaching double that. But if you look at a zero-occupancy environment, then our best estimate is 18 months.

[Operator]

Our next question comes from Molly Pollard (sic) [ Monique Pollard ] from Citi.

[Monique Pollard, Director]

Let me just -- just 3 questions from me, if I can. The first one, just coming back to the cash burn. When I'm looking for 1Q, I'm getting from the numbers you've given a cash burn of $230-ish million in the first quarter. Just wanted to check if that's correct, and within that, what the level of working capital movement was.And then in terms, secondly, of fee payments, could you comment on what you've seen in April in terms of deferrals? And I guess, as you say, that April payment's really more related to February and March. So maybe better to get an understanding from you in terms of the proportion of fees that you think might be deferred through May and June.And then finally, just on room opening, so you flagged to the 1,100 rooms opened in March. I guess at this point in time, is that our best estimate in terms of run rate for the rest at least of the first half of 2020?

[Keith Barr, CEO & Director]

Thanks, Monique. Why don't I take room openings, Paul, and then you talk about cash burn and the fee payment issue?

[Paul Russell Edgecliffe-Johnson]

Right.

[Keith Barr, CEO & Director]

So I think in terms of room openings, you can't take any month as a run rate because effectively, if you look at historical performance, we tend to accelerate as the year goes on. And so I wouldn't take March as an indicative number to extrapolate out for the remainder of the year. Again, we're seeing construction activity begin robustly in Greater China, where we have a significant pipeline. We are seeing other markets that begin to return.And so again, as markets open up, we expect construction to start up again and then seeing us continue to accelerate growth in the latter portion of the year. But it is really difficult to give any really forward visibility until we have more sense for, again, construction being opened up around the world and progress that. So clearly, we're not going to be growing at the same pace in this year as we would have otherwise grown on a normal basis, and the pipeline will be shifting into future years. But again, we are quite confident, again, that we'll continue to sign and open hotels.Paul, you want to talk about cash burn and the fee payments?

[Paul Russell Edgecliffe-Johnson]

Sure. Thanks, Monique. So year-to-date, our cash is broadly neutral to the end of 2019. So if you take out the movements around the RCF and the CCFF, so no real cash burn year-to-date.And in terms of fee payments and what have we seen around deferrals, well, we saw a lot of owners in April who did pay their fees bang on time sort of mid-month to take advantage of the discount that we offered for the on-time payment, and they very much appreciated what we're doing to help them. Some, of course, have spoken to us about deferrals. And we will often have that. So that's a continuation of what we've seen historically.And it is early in this environment. So we'll come back if things change at the half year, and we'll talk about that. We're in business together with owners for 20 years on a contract. So if they are having trouble with their fees, then we will consider deferrals as necessary. So we have to keep it under review. Thanks, Monique.

[Monique Pollard, Director]

Great. Can I actually just ask one quick follow-up? What does that imply then if you think about those deferrals that you could see, et cetera? What should we be expecting for the working capital movement for the first half?

[Paul Russell Edgecliffe-Johnson]

Well, it's very hard to speculate in this environment. As I say, our owners do want to remain current on their fees. And the vast majority of them to date are doing so. There's some that are -- a significant minority that are talking to us about payment plans, et cetera. So I don't expect any significant impact in working capital from that. Remember on -- there's other things that we can do around managing our working capital. It goes the other way around, supplier payments, et cetera. So -- but we'll come back through the year and continue to update on it. Clearly, it's a matter of focus.

[Operator]

Our next question comes from Alex Brignall from Redburn.

[Alex Brignall, Research Analyst]

I have 3 if that's possible. The first one is on the comment you made about passing cost savings on to owners. I don't know if you can just expand on that or whether that's captured within the previous commentary that you had been making on how that affects your own financials.The second is on leisure and business. I guess the difference in this crisis versus previous ones is that there's a mainly a consensual view that business travel will potentially be permanently impaired. I guess if you could just talk about what that means for construction in the future, how that kind of trend downwards and then back upwards and how that affects -- and what your owners are saying on that would be great.And then the third one is on distribution. The OTAs have talked a lot about taking a lot of share in downturns because people start looking around more. Also when hotels are less full, they obviously will take anyone to sell a room. So it's more difficult to negotiate with them when you're empty than when you're completely full as you have been for many years. So how do you expect that, that might progress?

[Keith Barr, CEO & Director]

Thank you very much. Paul, why don't you pick up the cost savings fees? And I'll pick up business, leisure and distribution.

[Paul Russell Edgecliffe-Johnson]

Absolutely. So in terms of the cost savings, we're doing all we can to reduce the costs for owners. So whether that's around reducing the cost that we require of them in the hotel around some brand standards, whether it's allowing them to delay some renovations or there's programs that we run for them on an out-sales basis, things like revenue management for hire, which, at the moment, they're not needing. So we've been managing to reduce the cost down for them on that.On the System Funds expenditure, as we reduce that down, we've also reduced down their costs on that. So we're doing, as I say, everything we can on these, either pass-through costs or system-funded costs, to reduce their costs. And we think that's just the right thing to do. And Keith, back to you.

[Keith Barr, CEO & Director]

Thanks, Paul. I said this earlier, I said my crystal ball is a bit cloudy in terms of what does the future really mean for travel because I know, I think we all agree, it's going to change. It's changed after 9/11, it changed a bit after the financial crisis. I don't fundamentally believe this is the end of business travel. I think whether you're using Zoom or Teams, that's going to replace a lot of conference calls now because people are enjoying using that technology. I know that we struggled to get people to use Teams. Now we have 800 people using it in the first few weeks we were working from home.So I think there will be some impact on travel, but I don't think it's going to fundamentally change the industry going forward because conferences, groups, meetings and events will come back over time. Business travel will return and will be there. And leisure travel will continue to grow as it has. And so I'm not one of these naysayers who say that the business travel is done. I just fundamentally don't believe that. And I think that our owners really believe that travel will continue to grow as economies grow around the world.And for instance, these investments, it's a long game. People are investing for 20, 30, 40, 50 years in hotels and seeing the returns delivered over that period of time, too. So most of our owners are seeing through this disruption and recognizing that it's a -- long term, it's a great asset class to be involved in, and will continue to invest in it.But travel will change and evolve. The way that we interact with customers and hotels will evolve. And we're trying to stay on top of that and by implementing new policies and procedures and understanding how our hotels might be designed differently in the future. And it will force us to innovate and become -- how do we continually deliver better returns for our owners, too. So I think that's the way great businesses perform. And they're challenged by this. It's how do they innovate, how do they get through this and to continue to deliver a great business result.In terms of distribution, I think that the industry is in a much different place today than it was in the financial crisis, than it was in 9/11 in terms of its relationship with distribution and its control of this distribution channels. And so the agreements we have today are much more complex and give us much more control on what we choose to do and how we segment hotels. And so -- and owners are going to be very, very cost-conscious about the cost of distribution, too.And so we will continue to work with our owners, but I wouldn't expect to see a radical change in the distribution relationship between the OTAs and the hotel companies going forward with them gaining massive amounts of share because I think people are going to want to book with hotels, want to book hotel companies. And the big branded players will continue to work on that, too.

[Operator]

We have one question left from Tim Barrett from Numis.

[Timothy William Barrett, Leisure Analyst]

Two quick things, if you've got time. One is the thing with owner economics again. Lots of investors are still interested in that, particularly around leverage and how leveraged your owners are. Clearly, your comment, I guess, about breakeven related to operating rather than below the line.And then China, a quick question on the recovery there. The high 20s occupancy, is that a little bit below industry? And has it been straight line? Anything you can generalize on there?

[Keith Barr, CEO & Director]

Paul, why don't you talk about owner economics, and I'll end on China?

[Paul Russell Edgecliffe-Johnson]

Okay. So owner economics. Yes, most of our hotels, certainly in the U.S., are financed through regional banks. And if you think about the period coming out of the financial crisis, the leverage that was available there was on pretty strict credit terms, so much lower loan-to-value ratios than existed in the buildup to the financial crisis. It's been pretty sensibly managed, which is one of the things that I've talked about many times as being a helpful constraint on supply over the years and ensured that finance has only gone to the strongest brands like ourselves.So around the world, it may be a little different in some places. In China, there's less of a reliance on bank finance. But our owners are a pretty conservative bunch overall. And although they will clearly be looking at their economics in a period where they've seen such a level of reduction, we're hopeful that they've got strong relationships with their banks and their banks will be supportive.

[Keith Barr, CEO & Director]

In regards to China and the recovery, it kind of varies by segment and by geography. And so again, with 5% at the trough, now in the mid-20s. And if you're seeing the Tier 1 cities where we have more big-box hotels, which have more groups and meetings and conferences, those hotels are running lower occupancies. And you're seeing in Tier 3, Tier 4 and some of the more in the Holiday Inn Express, where there's less reliance upon big conferences, meetings and events, are running higher occupancies.And so we would expect, again, China to follow the similar pattern. It will be a domestic recovery. It will recover sort of Mainstream first and then gradually move up. And it's slowly moving in the right direction, but it's a very slow movement. The only -- the bright spots obviously again, I mentioned this, I talked to the team and they saw a definite uptick over the Labor Day holiday. And our Six Senses hotel in China was almost sold out. And the same thing happened in Vietnam as well with Six Senses hotels there.So we will see that uptick of leisure and it's a gradual movement, but it really is dependent upon how countries control the virus and the movement of people. And so in places like Australia and New Zealand, you'd expect to begin to see a recovery coming because, again, the virus has been very well contained. China, it's been very well contained, and businesses are reopening and so forth, too.So that's -- the trajectory of recovery will be dependent upon how the virus is being managed in that geography and then what restrictions that the governments are putting on to businesses overall. But again, we're quite confident that we have well positioned this company to get through this to support our owners and to support our customers. And we'll come out of the back end of this being stronger than we entered into this.So thanks, everyone. Really appreciate you joining us today. A bit more of a more detailed set of results than we normally do at Q1, but situation dictated that. We need to head off to our AGM. So I hope you all are healthy and your loved ones safe. And I look forward to catching up with you in the future. Thank you, operator. That's the call.

[Operator]

Thank you for joining the call, ladies and gentlemen.

[Keith Barr, CEO & Director]

Stuart, do you need to wrap up anything?

[Stuart Ford, VP & Head of Investor Relations]

No more. Carry on. I've got no more.

[Keith Barr, CEO & Director]

Great.

[Stuart Ford, VP & Head of Investor Relations]

Many thanks. Great. Thanks, everyone.

[Keith Barr, CEO & Director]

Thanks, everyone.

[Operator]

Thank you, ladies and gentlemen. You may now disconnect.