InterContinental Hotels Group PLC

LSE:IHG

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the IHG third quarter trading update call. My name is Ruby, and I will be your moderator for today's call. [Operator Instructions] I will now hand over to your host, Stuart Ford, Head of Investor Relations to begin. Stuart, please go ahead.

[Stuart Ford, VP & Head of Investor Relations]

Thanks, Ruby, and good morning, everyone, and welcome to IHG's 2020 Third Quarter Trading Update Conference Call. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer. As in previous quarters, we won't be holding a separate call for U.S. investors, but we will be making the replay of this call available on our website. And therefore, I need to remind you that in discussions today, the company may make certain forward-looking statements as defined under U.S. law. Please refer to this morning's announcement and the company's SEC filings for factors that could lead actual results to differ materially from those expressed in, or implied by, any such forward-looking statements. With that, I will now hand over to Paul.

[Paul Russell Edgecliffe-Johnson]

Well, thanks, Stuart, and good morning, everyone. I'll begin with a review of our trading performance before providing you with an update on our cost actions, liquidity and financing. Starting with our comparable RevPAR, which, as a reminder, includes the adverse impact from hotels that have temporarily closed. Global RevPAR fell by 53%, a sequential improvement from the 75% decline we reported in quarter 2. July and August continued the pattern of monthly improvement seen since the April low. The RevPAR decline in September was broadly the same as August as the benefit of the summer leisure demand dissipated and a number of markets saw the impact of the reintroduction of social distancing measures and travel restrictions. Occupancy was down 30 percentage points, but rate was held at around 80% of last year's level. Absolute occupancy levels of our hotels improved to 44%, up from 25% in the prior quarter. Our net system size grew 2.9% year-on-year with 11,000 rooms opened. As we continue to focus on the long-term health and quality of our estate, we removed 5,000 rooms. Development activity continued, with 43 ground breaks and 82 signing, 27% of which were conversion versus 20% last year. Turning now to our regional performance. RevPAR fell 50% in the Americas. In the U.S., RevPAR fell by 47% [indiscernible] September, improving to a 44% decline. There was sequential improvement in each month, although the pace slowed. We have continued to outperform the overall industry, driven by our weighting and market-leading position in the mainstream segment by our distribution predominantly in nonurban drive-to locations, and by our skew towards transient business and leisure demand as opposed to group business. We continued to see a divergence in performance between our franchise and managed estate. Our franchise hotels, which are largely in the mainstream segment and in nonurban locations, saw RevPAR fall 43%. This contrasts with our managed estate, which is weighted towards luxury and upper upscale hotels in urban markets, where demand is weaker and a higher proportion of hotels still remain closed. RevPAR at managed hotels fell 71%. Occupancy across the region improved to 46% in the third quarter and reached nearly 70% on the Saturday of Labor Day weekend. We opened 6,000 rooms, over 80% of which were for our mainstream brands, taking our net rooms growth to 1.7%. We signed a further 2,500 rooms, taking our Americas pipeline of 109,000 rooms or over 1,000 hotels. This included 9 hotels signed across our Holiday Inn brand family. Momentum continues to build for voco since the brand launched in the region earlier this year, with the third conversion signed in recent months and multiple other deals under discussion. Good progress continues with our other new brands. Avid is now open in Mexico and had the first ground break in Canada, and there were 2 further signings for Atwell Suites. Moving now to our Europe, Middle East, Asia and Africa, where RevPAR was down 70%. There was some good progress made in July and August, but the reintroduction in travel restrictions led to RevPAR weakening back to a 70% decline in September. In the U.K., RevPAR was down 68%. London saw RevPAR continue to be down by over 80%, while the rest of the U.K. was down 58% as a result of some better leisure demand in the summer months. Germany saw RevPAR down [ 67% ] as the region continued to be impacted by trade fair cancellations and travel restrictions. As a reminder, the U.K. and Continental Europe business represent less than 15% of our global estate. The Middle East saw a decline of 65%, while lower levels of both international and domestic travel across Southeast Asia and Australasia led to RevPAR decline in Japan and Australia of 70% and 66%, respectively. Performance in the managed estate continues to be challenging as it was in our own [indiscernible] to manage these properties where 6 hotels or 1/3 of this portfolio remained closed. In total, at the end of September, 105 hotels, or 9% of the regions of the state, remain temporarily closed. We opened 2,700 rooms, including 2 voco properties in Intercontinental and a Six Senses Hotel and removed 1,400 rooms. We signed a further 3,000 rooms into our pipeline, including a Six Senses property in AMAALA, Saudi Arabia. Conversions increased to represent 1/3 of the signings in the period.Turning to Greater China. While the change of improvement each month since February continued, with RevPAR down 23% in the third quarter overall. The decline was 36% in July, 20% in August and just 11% in September. Across Mainland China, Tier 1 cities continue to see a greater level of RevPAR decline, around 32%, given they're waiting for international inbound travel. By contrast, RevPAR in Tiers 2 to 4, which are more weighted to domestic and leisure demands, declined 12%. Over 20% of our China hotels achieved positive RevPAR growth through the third quarter, which included the resort destinations benefiting from vacation demands and family travel over the summer months. This includes locations such as Shanghai Wonderland, and in particular, beach resorts, such as Sanya, where occupancy was up versus last year and average daily rate up even more so. Net system size in the region increased by 8.1% year-on-year with 2,200 room added, including the opening of the first voco property in the region. We signed over 8,000 rooms in the quarter, which was an increase on the level of signing in 2019. This included 24 franchise hotels across the Holiday Inn, Express Holiday Inn and Crowne Plaza brand and 13 management contracts. Moving now to a brief update on our cost actions, liquidity and financing. We remain on track to achieve our target of $150 million of fee business cost savings this year. And as previously described, we have plans in place, which will result around $75 million of savings being sustainable into next year and beyond. As also mentioned previously, we expect our gross CapEx to be around $100 million lower than last year, with reductions across all of our main [indiscernible] Turning now to cash flow. Improved occupancy levels for our owners has meant we are now collecting around 90% of our Americas billings within 90 days of being due, which is up from around 80% when our last update due in August. Our continued focus on working capital, disciplined cost control and cash preservation, resulted in positive free cash flow in the third quarter. This led to our total available liquidity position increasing to $2.1 billion, having been broadly unchanged at $2 billion between April and July. Taking into account the bonds that we've issued and repaid in October, on a pro forma basis, our total available liquidity increased further to $2.9 billion. The bond issuance we undertook was very well received and has enabled us to optimize our bond maturity profile. We issued a EUR 500 million bond and a GBP 400 million bond maturing in 2024 and 2028, respectively, at a blended debt cost of 3.0%. This lowers the overall blended cost of our bond to 3.13%. At the same time, we undertook a tender offer, which was also very successful, resulting in us being able to repay early GBP 227 million of our GBP 400 million November 2022 bonds. This means we now have only GBP 173 million left to be repaid in November 2022 and then a staggered bond maturity profile each year from October 2024 onwards. So [indiscernible]. First and foremost, I just want to recognize, once again, the efforts of our colleagues across the whole company. They're working so hard to support one another, our guests, owners and our communities on so many different levels. In particular, the dedication and commitment being shown to ensure every single IHG hotel offers a clean and safe stay is so incredibly important right now and is clearly key to building confidence in travel. In terms of our third quarter performance, it is clear that our waiting to domestic demand and mentoring distribution saw us continue our industry outperformance across key markets. We've seen monthly improvements in group RevPAR since the trough in April, though uncertainty remains regarding the potential for further improvements in the short term. While it will take time for our industry to fully recover, we remain confident that IHG will emerge strongly. And we're focused on leveraging our brand, scale and market positioning and delivering on the relative resilience of our fee-based model. With that, Ruby, I think we can open up the call for questions.

[Operator]

[Operator Instructions] Our first question is from Vicki Stern of Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

I've got 3 questions, please. Just firstly, on RevPAR. You talked about the regional performance. Could you flesh out a little bit what trends you're seeing within the headline RevPAR coming from business versus leisure? And to what extent, at this stage, do you think it's fair to assume Q4 trends somewhat resemble Q3 to the extent that you can predict anything right now? And around pricing, just the price drops that you're seeing still mostly about that mix shift leisure? Or are you actually seeing now any price discounting coming through in the market? And any sense on where that's headed? And then just finally, on the drop through, if you can sort of flesh out whether the $15 million guidance for a 1% change in RevPAR is still relevant in light of some softer U.K. performance, given you've obviously got higher operating leverage in that market? And both whether that's relevant for this year and then into next year as well?

[Paul Russell Edgecliffe-Johnson]

Thanks, Vicki. So in terms of the mix of business between business and leisure. So we've actually seen that stay pretty constant through the year in terms of the balance between the 2. It does, in the summer months, get a little bit more weighted towards leisure and then tends to revert back to our normal mix in the fourth quarter, and we did see that, as you would expect, but nothing really significant to pull out there. In terms of the Q4 versus Q3, I think the commentary that we've made is that uncertainty remains regarding the potential of further improvement in the short term. A few sort of aspects to that, that I'd pull out. I guess if we look at the sequential improvement, there has been improvement by month, really since the April low. And if you look across each of the markets, then that's been the case really until September, where we saw some quite significant improvements, and then we saw some declines as well. So I'll just go through those. If we think about China, well, China has been progressing very nicely, and we saw August 20% negative after July being 36% negative and June 49%, and then September coming in at minus 11%. I would point out, though, that although it's difficult to be precise in our analytics, when we look at September 2019 for the China industry as a whole, in that month, there was the 70th anniversary of the founding of the PRC. And that did depress hotel business in the month. So it's a very weak comparable. I think if you look through that, then I think that the underlying performance in China for September is probably [indiscernible] to August's performance. And then as you look out into the fourth quarter, I'm not sure I see a stimulus for continued significant improvement from that. If we look at the EMEA business, which improved through some months and in August, it was a negative 66%, September went to negative 70%, and I think it's getting quite tough in EMEA with the restrictions that we're obviously all seeing. In the Americas, the August performance was negative 48.6%, in September negative for 46.4% and the U.S. performance within that, a little stronger again. In September, of course, you do have Labor Day, and that's where the stimulus for demand. So again, we may see some further strengthening and -- as we go through the fourth quarter in the U.S., but I don't think it's going to be at the same level we saw it strengthen in the period from April through to September. So [indiscernible] are not necessarily [indiscernible] deterioration, I think the pace of any further increase for the next few months is likely to be a little bit more muted. In terms of the second question around the mix versus price falls on the ADR. Well, we're actually about to lead -- to get ADR at 80% of last year. And if most of the change that you're seeing there [indiscernible], I think that it's pretty evident to hoteliers, but just dropping price not necessarily stimulates demand. So I think that the revenue management discipline has been pretty good. In terms of the sensitivity to a 1% fall in RevPAR, then -- pretty much what we talked about before with the normal RevPAR sensitivity and then the additions because of the discount that we offered to owners earlier in the year, which have now done their full term and were very well received, and then the additional sensitivity because of the operating leverage in the owned and leased hotels, is very similar to what we saw before. We might see a slight notch up in the owned and leased in the fourth quarter, depending on how the U.K. trades. We have a portfolio of leased hotels in the U.K. But I don't think you're going to see anything material, perhaps a few million dollars, not per point to RevPAR, but a few million dollars of additional loss there in aggregate. I hope that [indiscernible].

[Operator]

Our next question is from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

First question was just on the outlook for unit growth. I mean, the old target, I guess, a 5% to 6% gone. But I mean, in the new world, just if you could maybe update us on that because the signings were down quite sharply in Q3. You've got the SVC loss in Q4, appreciate minimal revenue impact there. But maybe sort of looking forward, where do you see the sort of boundaries of net unit growth in the new world, please? Secondly, I think you're still expecting a little bit of cash burn for the full year, which will sit in Q4. I'm just wondering what causes that? Is that system fund? Is that working capital? It seems a little bit conservative? And then finally, just a minor one, but just on credit card fee, I know those go to your owners, but not to IHG, but could you maybe quantify that? And is that something you could push more to help the owners out?

[Paul Russell Edgecliffe-Johnson]

Thanks, Jamie. So in terms of unit growth, we're pleased with the continued signings that we're seeing. That stepped up a little in the third quarter and with the ground breaks in the opening. So we have -- a lot of our hotels are already under construction, and that does underpin the growth that we're going to see over the next few years. So obviously, it's a very large pipeline. And those that are under construction, they will get open. Those that are financed, then owners are pushing ahead. The unknown is the availability of bank financing for [indiscernible] signed contracts or we're on the verge of signing contracts, and I'm not able to get bank financing, then that may have some sort of an implication. It's very hard to assess that right now, frankly. What we know is that our brands are preferred, and lenders like to lend to the strongest brands or the brands with the strongest cash and cash returns. Certainly, what we're seeing is continued strong outperformance from our brands in the mainstream, which does tend then to garner the greatest proportion of the lenders that are available in the market. And what we've said historically is that our aim is to have market-leading net system size growth. And yes, back in the days of 2018, 2019 that was around the 5% to 6% level. If it does diminish somewhat in the coming years, then we'll be targeting that performance. And then if it goes back up again, because it [ definitely ] will in due course, and we'll be targeting that performance. But it's not an absolute. It's more a relative measure that we want to be evaluated against and that we evaluate ourselves against. In terms of SVC, yes, I think SVC will go out in the fourth quarter, which will have a onetime impact. So -- but we'll manage through that. And as you say, very low profit impact. In terms of cash burn, so we're pleased with the cash performance year-to-date. I've put a lot of focus on that. And in the third quarter, we did generate a little more than $100 million of free cash flow. The full year, as a whole, I think what we'll end up with is the operating business ending up broadly [indiscernible] neutral. And the system fund are starting to [indiscernible] inject about $100 million into the existing funds, which we'll get back over time. So that's only temporary, effectively loan from our [indiscernible] funds. But that would take the business overall to around $100 million cash flow negative. Some of that went out in the first quarter. Some of that will go out in the fourth quarter. Fourth quarter always is a little bit more key money go out pay some taxes, interest charges, et cetera. So those sorts of factors, all combining, will take us to that year-end end point. And in terms of the credit coffee, we have a very successful credit cards program in place and something we'll continue to monitor and assess what the right approach is there.

[Jamie David William Rollo, Managing Director]

Could you please quantify the credit card revenues and quantify the percent of the pipeline that's both under construction and funded?

[Paul Russell Edgecliffe-Johnson]

Yes. I mean, in terms of the credit card fees, we -- it's a complicated area, I guess, I'd say, in that we have a very large program. We don't take, at the moment, any income from the credit card onto our P&L, which is a different approach to helping them [indiscernible], et cetera. So in terms of revenues, for us, there aren't any. And in terms of the pipeline under construction, there's 40% under construction, which really hasn't changed since we last talked about that.

[Jamie David William Rollo, Managing Director]

I appreciate the company doesn't pay the credit card revenues, but just to quantify the revenues to the system fund, that will be helpful, if you're able to?

[Paul Russell Edgecliffe-Johnson]

Okay. So system fund, we're probably talking around $100 million.

[Operator]

We have a question from Jarrod Castle of UBS.

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

Three as well. Can you give a little bit more color for some of the exits? Is this just normal course of business? Or are there any things which are specific to the crisis? I guess you've got pretty much most of your estates open. I think you said 3% at the moment is not open. Is that by choice by the owners? Or is it due to government restrictions, if you could give any color on that? And then there's been some comments from OTAs and the likes in terms of distribution and downsizing, et cetera. Can you just give any color in terms of how your distribution channels are working? And where the customer is getting to you from?

[Paul Russell Edgecliffe-Johnson]

Yes, thanks for the questions. So in terms of the exit, there's actually nothing as we interrogate the numbers. That's unusual compared to prior years. And we took out 4,600 rooms in the third quarter, which compares to 4,000 in the third quarter of 2019. The September year-to-date run rate is around 2%, which is in line with what we've done for recent years, but that, obviously, excludes SVC [indiscernible] out in the fourth quarter, which will not set up. So that's a rather unusual situation, and we have no other portfolios that are anywhere near that size. And the next biggest owner has, let's say, about 10 hotels. So there's nothing else that we would expect that could have that sort of an implication on us. In terms of the estate, yes, as you say, it's 97% open. And where hotels are closed, they tend to be the big urban hotels, urban possibly unionized hotels, where, at the moment, the level of demand doesn't make -- sensible for the owner to open it. And we remain in close communication with all of our owners as to how we help them run their business most effectively, and that would include looking at the business that's available in the market to help them understand that it makes sense for them to open or not. There are some where there are still restrictions in various markets, although restriction is on the inbound business. So in parts of EMEA and maybe there are some hotels, which are more reliant on international inbounds will say it doesn't make sense to open a hotel right now, but that's very much in the minority. And then in terms of OTAs. Well we saw OTA contribution fall earlier in the year. And then -- but it's climbed back towards a normal level. We have seen a lot of people who will book direct with the hotel. The booking window is very short at the moment. You're seeing the vast majority of bookings coming in within 2 days of the stay. And so you'll have more walk-in than we would normally, if it was on a road trip or whether business or leisure, just coming into the hotel, expecting that they will be able to find a room. In busier times, people would always want to prebook. We you tend to see more OTA business that's coming to on the leisure side and the business side, and so I'm sure that will continue. But nothing that really changes on the underlying trends there.

[Operator]

Our next question is from Monique Pollard of Citi.

[Monique Pollard, Director]

Three questions from me as well, if I can. The first one was just specifically on the working capital benefit. Obviously, you saw, like you said, over $100 million cash inflow in the third quarter. Just wondering specifically how much working capital benefit you saw given you went from 80% to 90% of America's owners paying within 90 days? And what we should expect, basically, for the working capital for the full year? The second question was just on signings, in particular, in the Americas. Because if I look at the pace of that -- the pipeline signings in the third quarter, it's the lowest level we've seen in quite a few years. So just trying to understand what we should expect on the pace of America signings from here over the next few quarters? And then finally, a question just on Greater China performance. Obviously, if you, say, September had a bit of a benefit from a weaker comp, but when I think about October, there probably was some benefit from the Golden Week. So just wondering if you can give us any update on the trading you saw there, particularly given you mentioned in your comments that the resort locations have seen a boost to RevPAR because of vacations over the summer.

[Paul Russell Edgecliffe-Johnson]

Thanks, Monique. Yes, absolutely. So in terms of working capital, we saw a working capital outflow in the first half of the year. We have been managing the working capital very carefully. And as you'll remember, earlier in the year, we put in some discounts for owners. And we were -- we tried to help them as much as possible with their cash flows. And I think that the approach that we've taken have resonated with them. They've appreciated that we've treated them as well as we possibly can. And that, I think, is why we are being paid the vast majority of the fees pretty much on time. So this is, as you say, it stepped up from us receiving 80% of fees that we build within 90 days to now 90%, which we're pleased with. And so if you think of first -- think the third quarter, the amount that we build to our [indiscernible] we paid -- that we were paid by our owners was basically in line. So we're pleased with the working capital. We'll probably be still an outflow for the year, but it's under tight control. In terms of signings in the Americas, I think that a lot of the owners, who would normally perhaps have signed a deal with us so far this year, have been working on their existing hotels and optimizing the cash flow there. And they have to pay a little bit more attention on to their existing business. And others who are just waiting to see what the lending environment is going to be, with a lot of interest. So our hotel owners, and remember that community want to build hotels, but obviously, building a hotel does require financing, and they want to understand whether they're going to be able to get that financing. So I think once there's greater clarity on that, then we'll see more of the signings coming through. In terms of Greater China, yes, as you say, a strong performance. And if you look at the sequence of improvement that we've seen, I mean, it's been really strong, and our China business is outperforming. September, as we said, we had the weak comp. October, you have Golden Week, which is a big stimulus for demand. I think if you look at the September business and ship out the weak comp, although it's hard to be precise, but as I said, my guess is the underlying there is closer to the August performance. And as we look forward over the next few months, my guess is it's probably somewhere in line with that August performance. So -- which sort of resonates back to the point I made earlier as to I think there's uncertainty as to how much short term further improvement there is from what we -- the exit rate, I guess, you could say for the third quarter results.

[Operator]

Our next question is from Jaafar Mestari from Exame.

[Jaafar Mestari, Analyst]

Three quick questions for me, please. So firstly, just on the regions you've talked in detail about what the September underlying trends could be for China and Americas. EMEA, on the other hand, has deteriorated in September. Is there anything to call out there? Or is this the underlying? Second question, just on the cost savings. So the $75 million that are becoming more permanent, how should we look at it? Is this going to improve on? Or is this simply going to back the existing EBIT sensitivity? And lastly, just on cash burn, you've given some overall guidance. Could you maybe just breakdown, what you call the operating business between, I guess, operations themselves, are they generating cash? And then separately, have you quantified things like cash tax payments, interest payments that fall into Q4? Then I'm going to take you back in cash burn territory in Q4, please.

[Paul Russell Edgecliffe-Johnson]

So you're absolutely correct in pointing out that for September, the RevPAR was at negative 69.9% compared with the 66.3% that we saw in July. And that July performance was quite a significant step up from the -- that August performance versus the July performance, which was negative 74.7%. And I think you'd appreciate there was a lot of leisure demand in August. So everyone wants to get away, right? I think [indiscernible]. So that did stimulate the demand. I think [indiscernible] -- coming back on more than normal run rate in September. I think that as the explanation of that rather than anything else that I can call out, EMEA is a collection of quite a few markets. So it's always harder to get them to be precise [indiscernible] In terms of the cost savings, well, I guess there's a few things to point out. One is that a few years ago, we did go through quite a group reorganization. So we took a lot of cost out of the business then. And we [indiscernible] for us. We moved to our market model and so it took a lot more resources in the business. We're close to market and that's really helped our teams be very responsive for our owners. And we also put some investment behind our new brand initiatives and ensuring that we have that market-leading net systems as growth that we've talked about. And having got the organization fit for the future, I think has always helped -- it's continuing to help. So it's helped before and it's helping now. The sale of the $150 million savings we made this year, we will peak $75 million of that next year. We're trying to get the balance between the cost savings and continue to invest in the business. So the investment that we've put behind the new brands will continue in 2021, they are a big part of our future growth. So we're not stripping the business back to the bone, but we have been obviously -- that cost would be depleted. In terms of the cash, then yes, in the fourth quarter, we will have interest savings, we will have some tax payments, we'll have some other payments. The operating business, I guess, is -- and I referred to that, I think that as opposed to our system funds. So the system funds will conclude something in the order of $100 million of the [indiscernible]. We'll get back in due course, this is [indiscernible]. And that's really the result of -- by the time the pandemic hit there were quite a lot of commitments made in the system fund world. You have to agree to response. The U.S. open, for example, which we're a sponsor of, yes, buy media, et cetera., et cetera, it was impossible to pull back the cash deployment fast enough in 2020. 2021, as I've mentioned before, I expect the system fund to be broadly cash flow neutral. So strong control there.

[Operator]

Our next question is from Leo Carrington of Crédit Suisse.

[Leo Carrington, Research Analyst]

Just very quickly, a follow-up on that -- on the cash flow question. It looks -- I guess, reading between the lines, it looks like you spoke even on a cash basis in July and then generated cash in August and September. Can you break out whether that was primarily due to the stronger RevPAR, 7 percentage points stronger RevPAR in August, September or more of the kind of operational improvements, working capital that you've mentioned already?

[Paul Russell Edgecliffe-Johnson]

The combination, actually, yes, as you said, strong trading, which did help a little bit. And we got a small tax refund in the quarter that came through. And then it's partly the timing of payments of interest on our bonds. So -- and tight working capital control. So -- plus our owners have continued to pay out, as I've talked about. So a number of factors all contributed to the strong cash flow performance that we saw in the quarter.

[Leo Carrington, Research Analyst]

Okay. And then just last question for me. A follow-up question on the closures in your system. Do you have a sense of owners health and ability to hold out until demand returns? And whether this is sort of -- whether it differs significantly by region, do you think? And to what extent does that continuity of specific owners, matter to you in this kind of worst-case foreclosure situation? Do you have a kind of preferability to be the franchise brand for a new owner?

[Paul Russell Edgecliffe-Johnson]

Thanks, Leo. So I guess the first thing on that is that we are in partnership with our owners. And so it's hugely important to us [indiscernible] , and many of them we've been in partnership with for decades. So we do everything we can to bring business into their hotels. That's the most important thing that we can do right now. We can help them think about their manning models and how to reduce costs. We can help them with any information they might need for refinancing, et cetera. But the greatest benefit we can do is deploy our systems and our outperformance to drive the greatest possible level of revenues to their hotels. That said, as you note, if -- but very unfortunately, an owner does run into financial difficulty, then our contract will normally continue. The lender will want to keep the franchise contract honored while they find a new owner for the hotel. We're not seeing an elevated level of exits from the system. It's in line with what we've seen. And you always see some hotels that are in the system, and generally, it is that -- we've asked the hotel to leave for quality reasons. They've come to the end of their contract, and they just don't have the hotel that is right to move forward, not when we work with the owner on a new hotel. So we do everything that we can with the owners to help reduce their cost. And also many of these owners are SMEs, and we've been working with governments all around the world to get as much support as we can. And in the U.S. and in the last PPP program, a very large proportion of our owners in the U.S., were able to take advantage of that. And if there's a new stimulus package agreed, then our owns will be able to take advantage of that. So we ever -- we lobby on their behalf to get as much support for an industry that is critical for the world's economy and provides a huge employment. And I think governments recognize the importance that there is and the number of jobs [indiscernible]. And they are listening to the lobbying. And still a way to go in some cases, but some positive responses so far.

[Operator]

Our next question is from Tim Barrett of Numis.

[Timothy William Barrett, Leisure Analyst]

I have 2 areas, just more color please, other people have [indiscernible] one is just a very big picture question. I think if I understood you right, that you currently [indiscernible] in the U.S., next couple of quarters. And just looking at how flat occupancy is through the weekly sort of traveling data, I just wondered what was backing that up? And whether you think it will be transient demand on the business or leisure side? And then second question, looking at the pipeline, about 5,000 rooms are still exiting quarterly, which seems remarkably consistent. Does that tell us that the pipeline is still fresh? Or is there a period where you review it and look to take out some of the rooms that might not open in fullness of time?

[Paul Russell Edgecliffe-Johnson]

Thanks, Tim. Yes. So I think the sentiment that I'm trying to convey is that there is uncertainty. I think if you look at the exit rate from the third quarter, I -- there is a possibility that we do continue to see the same sequential improvement. And the U.S. has improved month by month and September was pretty strong. September, of course, had that Memorial Day business. And in the U.S., people are continuing to travel. So yes, we're seeing good levels of transient leisure. We're seeing good levels of business transit. What you're not seeing is group business coming back. That's a small part of our business. But many of the other guests are still there and are still traveling because it's just an element of uncertainty. So I can't be certain as to exactly how the fourth quarter is going to look. I have to guess now as there probably would be a small sequential improvement to [indiscernible] to what we saw at the end of that third quarter. In terms of the pipeline, we do, as you note, always trying a bit fresh, and we take some hotel concepts out when we decide that it's just not going to get built and then that frees up that location for us to sign with another owner. So it's not to our advantage to keep hotels in that are not actually going to get built. It's -- we're in 6 or 7 months into this new situation. If owners turn around and say, of course, that they're going to focus on the existing business or they can't get the financing, then we'll take appropriate actions. But it's certainly not [indiscernible] for now, but it's certainly something we would keep under review in the future.

[Operator]

Our next question is from Alex Brignall of Redburn.

[Alex Brignall, Research Analyst]

I've got a couple. So on signings, you've given some good commentary on how your own signings are progressing. In the FDR data, there's been a very material increase in deferrals and cancellations of hotel projects in August and September. I appreciate that's market data, but it seems like a sort of sitting on their hands for a while. Some people are getting out of projects. Could you just talk about, obviously, what you're seeing in on the most recent months, but also whether you're seeing that amongst competitors or kind of some of the other participants? And then secondly, it sounds like, for 2021, you're guiding to sort of materially lower profitability than what consensus currently expect somewhat sort of low [ 400 ] or something around that level, which kind of implies 12-or-so percent revenue of RevPAR less than [indiscernible] is broadly consistent with sort of flattening in the RevPAR trajectory. Could you just help to explain what might get us to that level kind of from a starting point of [ 200 ] in 2020?

[Paul Russell Edgecliffe-Johnson]

Thanks, Alex. So in terms of the STR data, I think what you'll see is owners wants to have the most preferred brand. The most preferred brands are in the mid scale, certainly are ours. So Holiday Inn Express is the #1 brand in that segment, obviously, Holiday Inn Express is the largest brand in the world -- largest hotel brand in the world. So -- and it's performing very strongly. And some of our other brands, Candlewood Suites is one of the best-performing brands in the industry. And this year with actually very low levels of RevPAR. So a number of our brands are already performing very strongly and owners are very anxious to build new versions of those when they can. But it does, as I referenced before, comes down to [indiscernible] to get financing. Lenders do want to lend to those higher quality brands. So we're doing better than the industry there. I think you will see a bit of a shakeout. So the weaker brands will struggle. This is what we saw in each of the prior downturns. The strongest brands came through this, increasing their market share. I have very little doubt that, that will be the same this time around. I think you'll also see more conversions coming through. So more of our growth will come through than, historically, in the case from hotels converting from weaker brands into our brands when the quality is good enough. In terms of outlook, I think I really only guided to fourth quarter and said that there's an element of uncertainty. I think that as we look forward, we said the full industry recovery will take time, but we feel confident from the steps we've taken to protect and support our owners. So I think it's very much dependent on the macro. It's not possible for me to precisely guide you on the fourth quarter. So I certainly can't do that for 2021. And I think there's a very wide range of expectations out there. It will depend on -- as a therapeutic, it will depend on the availability of a vaccine. And it will depend on when people just decide to start traveling again, irrespective. So we continue to monitor all of those. But I -- if my comments have been taken by you as an indication of 2021's EBIT growth, and -- they weren't intended to be.

[Operator]

Our next question is from Richard Clarke of AB Bernstein.

[Richard J. Clarke, Research Analyst]

Three questions, if I may. Just the first one, I know you made a few comments about the system fund, but just wanted to just dig into, are you getting closer to breakeven on the system fund? And are you still happy to keep the losses you're making from the system fund outside of the underlying earnings? Are -- you're still describing those as a as a timing difference. Second question, when I look in your pipeline, the 3 vocos you've got in the U.S. and the Six Senses you've got in China are all very small. They're about 50 rooms normally, you've kind of described your minimum room size is around 75. So is there some sort of widening of the opportunity you're looking at there? Does that affect the contribution margin you get from those hotels? And maybe you can put anything on that? And then third question, apologies if it's a bit boring, but just tax. Obviously, we've got the U.S. election coming up next week. Biden want's to put the U.S. corporation tax rate up. Anything you could do to offset that if that does happen? And it's been put to me that there could be some advantage of you restructuring to not have other countries being consolidated into the U.S. given the fact that he wants to put up foreign earnings income, anything you would look at in terms of restructuring the Americas portfolio to maybe consolidate non-U.S. income into the U.K.?

[Paul Russell Edgecliffe-Johnson]

Thanks, Richard. So in terms of system funds, the balance there is always making sure that we're investing to make our owner's hotels absolutely as successful as they can to drive revenue for them versus also being mindful of the cash cost. So at a time when the owners are -- they're being very focused on us driving revenues for them. We want to do the right thing. So we have allowed that to run to a cash deficit for 2020. So for 2021, our expectation is that we'll bring that back and manage that too neutral. And then over time, cash that we've deployed there will come back. But realistically, we wouldn't be trying to do that until the industry was sort of back in full swing, so that we can continue to support our owners as well as possible. In terms of pipeline and the very good and Six Senses, the size of the hotel, it really comes down to revenue what you don't want is a very small hotel with a low room rate because then the cost of support it and the revenue outlook just don't justify it. Six Senses, the average room rates can be very, very high, and these are very high luxury, very sort after properties, and we have room rates above $1,000. So a 30-room Six Senses can work. Certainly a 60-room Six Senses can welcome generate very good fees. The vocos [indiscernible] states and the Americas have been in fantastic locations. And actually, the first-class assets with high ADRs and they'll generate the fees for us. And where that is the case, then, yes, we can have them with a smaller key count than would normally be the case. No real difference to what the average voco would be, though. I just happened to have managed to secure some real marquee utilization to begin with. In terms of tax, always a complex area. The tax reform brought in a few years ago did reduce the corporate tax rates. Quite complicated because there's some reductions in -- to the headline rate, but also some restrictions is what you can take in terms of interest deductions, et cetera, [indiscernible]. And so we have to wait and see what might happen in the election, whether there is a new administration or what their fiscal policy is and how that manifests. I think it's probably early -- too early to talk about any sort of restructuring that might occur. But it's one that certainly we keep under review.

[Operator]

We do have one question remaining [Operator Instructions] Our question is from Ivor Jones of Peel Hunt.

[Ivor Griffith Rees Jones, Analyst]

I was thinking about the improved state of the balance sheet since the half. Could you talk about the factors that will feed into the Board's discussion about paying a final dividend? And along with the CCFF in the U.K., what else is there a sort of government support or quasi government support through COVID that you might choose to repay? And then the second thing was, should we expect more material impairments at the year-end? And would they -- more importantly, would they be enough such that depreciation charges would -- or amortization charges would fall in 2021 to optically improve the reported level of profit or will they be trivial in total?

[Paul Russell Edgecliffe-Johnson]

Thanks, Ivor. So in terms of the balance sheet, yes, I guess, you could say the balance sheet's improved given the cash generation. I think by the end of the year, we will go back to the nonsystem funds side of the business being about cash neutral a system fund having some about $120 million. And I think that the Board would consider the net debt-to-EBITDA of the business, we continue the cash generation, et cetera. These would be the factors that, as always, are taken into account when considering such matters as the dividend. In terms of government support, we have not taken advantage of the furlough payments in our operating business. Some of our owners have rightly been able to access to that in the U.K., but we didn't take that money in the U.K. We did access the CCFS as we've previously talked about, and that will run through until next March, and then we'll have to make a decision as to whether we want to do that again. And in terms of the [indiscernible] impairments, we look very closely at all our assets at the half year. And we did have pretty good visibility on trading, et cetera. So we marked them down appropriately. We wouldn't necessarily expect any further impairments at the full year. never say never. But I think we were pretty conservative at the half year in terms of the markdowns we took then.

[Operator]

We have no further questions. So I will hand back to your host.

[Paul Russell Edgecliffe-Johnson]

Very good. Well, thank you, everybody. Thank you for listening. Thank you for your continued support. And very good to talk to everybody. And for those of you that don't speak to in the meantime full year results will be in February. So we look forward to talking with you all then. Thanks, and everybody, have a great day. Bye for now.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.