InterContinental Hotels Group PLC

LSE:IHG

Earnings Call Transcript 2021-Q3

[Operator]

Hello, everyone, and welcome to the IHG Third Quarter Trading Update. My name is Bethany, and I'll be coordinating your call for you today. [Operator Instructions] I will now hand the call over to your host, Stuart Ford, to begin. Stuart, over to you.

[Stuart Ford, VP & Head of Investor Relations]

Thank you, Bethany. Good morning, everyone, and welcome from me to IHG's Conference Call for the Third Quarter of 2021 Trading Update. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer and Group Head of Strategy. Just to remind listeners on the call that in the 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 from those expressed in or implied by any such forward-looking statements. For any analysts or institutional investors who are listening via our website, may I remind you that in order to ask questions, you will need to dial in using the details on Page 2 of the RNS release. The release, together with the usual supplementary data pack, can be downloaded from the Results and Presentations section of the Investors tab of ihgplc.com. With that, I'll hand over to Paul.

[Paul Russell Edgecliffe-Johnson]

Thanks, Stuart, and good morning, everyone. I'll start, as usual, with a review of our trading performance. You'll see that in this morning's announcement, we are comparing our performance against both 2020 and 2019, but I'll focus my comments on the latter as it is the most meaningful. Starting with comparable RevPAR for the group, which increased to $68, only 21% below 2019. This was a significant sequential improvement from the declines of 36% in the prior quarter and 51% back in quarter 1. Strong domestic leisure demand resulted in rate recovery to almost parity with 2019 and saw occupancy down only 15 percentage points. Absolute occupancy was around 60% in the quarter, a number of markets achieved occupancy and rate back at 2019 levels in the summer. The stronger trading, particularly in the Americas franchise estate, has also led to further improvements to our RevPAR sensitivity, which is now trending closer to $14 million per point of RevPAR. As a reminder, our RevPAR sensitivity is referring to 2021 versus 2019 and is calculated before cost savings. In regards to savings, we remain on track to deliver a sustainable $75 million reduction in fee business costs while still reinvesting for growth. Further to these, we now expect around $25 million of additional temporary cost reductions for this year only, largely driven by vacancy rates for corporate roles and other headcount-related costs. Turning now to our regional performance. In the Americas, RevPAR was 10% lower. Rate exceeded 2019 levels and absolute occupancy recovered to 66%. Standout occupancy performances included 70% across the Holiday Inn Express estate and 80% in our extended Stay brand, which exceeded 2019 levels. In the U.S., RevPAR was only 7% under the 2019 level and was ahead for Holiday Inn Express and our extended Stay brands. Strong demand over the peak summer months resulted in July RevPAR being ahead of 2019 by 2% in nonurban locations, where we have nearly 3,000 hotels or around 90% of the estate. It's worth pausing for a moment to focus a little more on the trends we saw in the U.S. during the quarter across business demand, group activity and leisure demand. Leisure demand stayed strong, with room nights consumed slightly up on 2019. Rates were up by almost 10%. We've seen that essential business travel demand has been resilient throughout COVID. What we're now seeing is increasing amounts of discretionary business travel demand coming through. This resulted in overall business room nights consumed down only 12% in the third quarter, with rate down less than 5%, a marked improvement on the prior 2 quarters. Group demand has similarly seen improvements each quarter and group pricing is holding firm. while room nights consumed were still down nearly 30%, rate was down only 8%. The strong rate environment across each demand segment is encouraging as we continue to see demand build back. Turning now to Americas system size. We opened around 3,000 rooms, leading to gross growth of 3.3% year-on-year. We signed more than 4,000 rooms, taking our Americas pipeline to 97,000. Encouragingly, the pace of development activity picked up through the quarter, with signings accelerating in September. We've also seen a sequential pickup in deal applications through the year, particularly during the third quarter. Moving now to Europe, Middle East, Asia and Africa, where RevPAR was down 43%. Performance within the region continued to vary, reflecting the differing levels of travel restrictions. In the U.K., RevPAR improved to only 22% below 2019. London, which has a higher weighting towards international demand, saw a RevPAR 51% below. This compared to markets outside London achieving 95% of 2019's RevPAR. Continental Europe improved to a 48% deficit and the Middle East to a 39% deficit as restrictions eased. In contrast, Australia saw a deficit of 68%, impacted by the reintroduction of travel restrictions. With the general reopening of travel and increasing demand across the region, the number of temporarily closed hotels was down to just 28 at the end of September compared to more than 200 at the start of the year. We opened over 4,000 rooms, resulting in gross growth of over 5% year-on-year and signed a further 2,200 rooms into our pipeline. Conversions accounted for half of the signings in the period, and we expect development activity to pick up further in the fourth quarter. Turning now to Greater China, where RevPAR fluctuated significantly in the quarter. July RevPAR was down just 6% as the recovery continued and benefited in particular from strong domestic leisure demand. The reintroduction of temporary restrictions meant that the August deficit was 55%. With restrictions then lifting again, September RevPAR swiftly recovered to a 26% deficit. Across Mainland China, Tier 1 cities continue to see a greater level of RevPAR deficit, down 32% given their historical weighting to international inbound travel. RevPAR in Tiers 2 to 4 cities, which are more weighted to domestic and leisure demand, saw a 26% deficit. In July, Tier 4 was over 40% ahead of 2019 RevPAR levels given the strong demand in resort locations, including Sanya. Net system size in the region increased by 10.6% year-on-year with 5,300 rooms added in the quarter. We signed 6,300 rooms into the pipeline. COVID restrictions held back some development activity in the period, and we expect the signings pace to pick up significantly in the fourth quarter. Moving now to the group system size. Our strong openings momentum continued with 5.2% gross growth year-on-year. The one-off quality initiatives we have underway this year mean that as expected, after exits, this netted down to a system size that was flat year-on-year. Further rapid progress has been made on the review, which covers around 200 Holiday Inn and Crowne Plaza hotels. Over 90 hotels have already exited or are confirmed to exit, with more than 40 further hotels committed to improvement plans. Year-to-date, this review accounted for around 2/3 of our removals. By contrast, the rate of removals year-to-date across other brands has been broadly in line with our annual removals rate of around 1.5%, which we've seen for the last 5 years. We remain on track to conclude this review by the end of this year. Our 91 hotel signings took our pipeline to 270,000 rooms. Signings accelerated over the course of the quarter, and this trajectory is expected to carry on through the fourth quarter as owner interest in doing deals with us continues to strengthen. So to conclude, trading continued to significantly improve, driven by strong domestic leisure demand and a strong pricing environment. We are encouraged by the return of more corporate travel and group bookings. We saw over 5% gross openings growth. And outside of the Holiday Inn and Crowne Plaza review, our removals rate for other brands in line with our annualized rate of around 1.5%. Signings pace improved through the quarter, and we expect this to significantly pick up again in the fourth quarter. Looking at a very short term, fluctuated COVID restrictions may well still make trading volatile in certain markets. But looking further ahead, the strength of our brands, platforms and scale underpins our confidence to exceed prior levels of profitability and to deliver industry-leading levels of net system size growth in the coming years. With that, Bethany, could you open the call up for questions, please?

[Operator]

Of course. Our first question on the line comes from Jamie Rollo at Morgan Stanley.

[Jamie David William Rollo, Managing Director]

I've got 3 questions, please. First, Paul, is there anything you can give us so many as sort of early indications on the corporate negotiation season? It may be too early, so otherwise, any sort of color on recent trading? And any sort of expectations on Q4 and whether that corporate recovery can continue and therefore you could see sort of Q4 RevPAR similar or better to Q3, which I think is what consensus is looking for? Secondly, on the signings. In the Americas, there was still half 2019 level. I appreciate in EMEAA and China, there were other aspects dragging it down. But given sort of market was fully open, why is that still quite weak? And how does that sort of frame your thinking about openings going forward? And then just one more on the savings, the $25 million temporary. I mean they've been there now for nearly 2 years. I mean, are we just not going to end up putting in $100 million of permanent savings do you think from next year?

[Paul Russell Edgecliffe-Johnson]

Thanks, Jamie. So in terms of the first question and what we're seeing in the corporate rate renegotiation process, I think our corporate customers are very keen to lock in pricing. The pricing environment has continued to be very strong. And as I referenced, leisure pricing has been, in many markets, well up on 2019. So that's one of the key things that our customers are looking for, is to make sure the prices are not going up too much in 2022. But it's been constructive conversations so far, but nothing particular I can pull out of it. In terms of recent trading, we are continuing to see this continued rebound in corporate demand. And we certainly saw that through the third quarter looking at industry numbers beyond, yes, it is continuing. It's not an immediate bounce back to where we were in 2019, but it is -- it's encouraging to see. And the rates that are being achieved, again, encouraging to see. And it's sequentially quite a significant improvement on what we saw in the first half. In terms of signings, yes, we're pleased with the step-up in signings in the third quarter that we saw in the U.S. It is still below what we saw in 2019, of course. Remember that there is a quite long lead time for a deal to go from when an owner starts to get interested in doing a signing with us to actually getting ink on a page and a legal contract in place. And for quite an extended period of time, our owners have been focused on stabilizing their businesses, looking after their teams, et cetera. And so it'll take a while before that sort of normalizes. What we have seen, though, and is very encouraging, in the big step-up in the preapplication, so the people who are calling us and saying they want to look at a new site with us, signing letters of intent. And also in the lending environment, the regional banks have been calling our owners more to say we are open to business. We want to lend on your project. So again, that's a good sort of early indicator as to step back up in signing double in due course. And on the savings, the $25 million additional, the intent is not that this becomes part of the permanent savings, because they were a growth business and we are wanting to have all the resources or the muscle in place to be able to deliver that level of net system size growth, which we aspire to. It is tough to find people of the caliber that we're looking for. So we have had some positions open this year, but our intent is to fill those. So it's not our intent to run with $100 million. So we hope we'll find the people to take that down to $75 million.

[Jamie David William Rollo, Managing Director]

And just back on the Q4 numbers, I know you didn't formally guide. But any thoughts on market expectations for RevPAR to be down circa 21%, similar to Q3. Does that sound sort of reasonable?

[Paul Russell Edgecliffe-Johnson]

I think it'll partly depend on what we see in China. And I think what we've seen is China can be very volatile. If you look back on what we saw in the third quarter, it went from negative 6 to negative 50 to negative 25 sequentially by month. So quite where it ends up will depend on what restrictions the Chinese government puts in place. And if we see it fully open again, I think it will all very quickly go back to a very strong level of trading there. With restrictions, it'll be tougher. And that's quite a big swing factor. It's very difficult to call with that factor still in mind.

[Jamie David William Rollo, Managing Director]

Sorry, are you saying China needs to be fully open and sort of back to normal for you to be down 21%? Or could it be better than that if China is back to normal?

[Paul Russell Edgecliffe-Johnson]

I'm saying it's a big swing factor in the -- in what will be printed for the group as a whole, and it's impossible to tell where that's going to come out right now. So if it comes out at sort of minus 10, which it could for China, then that will be a positive. If it comes out at minus 50, again, if things are all closed down, then that will be a negative. And it's impossible to call that at the moment.

[Operator]

Our next question comes from Vicki Stern at Barclays.

[Victoria Jane Lee Stern, MD & Equity Analyst]

Just firstly, on the achieving unit growth back to sort of 4.5% plus for next year. If you could just walk us through again the building blocks in terms of that confidence. Obviously, you signaled the lower churn. But perhaps more color on the gross opening side and really why there's that level of confidence in getting back to those 2018, 2019 levels as soon as next year? And within that, is there much expectation for conversion activity, for example? Second question, just sort of following up on Jamie's really. Can we talk about sort of how you see the signings momentum then phasing over the next few quarters? Obviously, there are a lot of unknowns. But assuming things continue to open up given those sort of preindications that you've been getting, I suppose how do we think about how quickly you could get back to pre-COVID levels of signings over the next year or so? And then finally, on pricing, just if you could give more color what you think is driving that strength that we're seeing in price, even on the leisure side? Sort of wouldn't have thought pre-COVID that we'd have seen a recovery as swift in leisure even if the demand was coming back as quickly in terms of price. And given your comments there on the sort of rate indications business, guys wanting to lock in sort of decent rates at this stage, just how sustainable you think that positive pricing dynamic is as we look into next year, perhaps with a more normal business leisure mix?

[Paul Russell Edgecliffe-Johnson]

Thanks, Vicki. So in terms of our level of confidence in getting back to the level of growth that we were seeing before, I think if we look at what we've seen year-on-year in terms of our gross growth, so the 5.2%, and then if you think about normalized level of exits of 1.7%, that would have delivered us 3.7%. And what we're saying is we're seeing -- we're expecting next year to be back to similar to what we saw in 2018. So you're talking about that, something starting with a 4. So yes, you'd have to see a few more openings than we saw this year, but they're not a lot, a few thousands. And then if you think about the step-up that we are seeing, and sequentially we've been seeing, I think it's pretty reasonable when you look at just trading to date. So nothing more than that. You look at the very large pipeline, you look at the number of brands that are very attractive for conversion, so with Vignette, with voco, in particular. There are a lot of owners who would like to move their hotels across into these brands and take benefit of all the revenue delivery that we have. So that's what's driving that. In terms of the signings momentum, I mean, it's a hard one to be precise on, because deals will get signed when the deal is ready and when we're confident on the project. What I think is very encouraging is the number of new inquiries. And remember, our owners want to do more hotels with us. And as long as the debt capital is available, and then they will sign up. It's -- once they have their existing business stabilized, which broadly, in the U.S., they do, so it's a question of when rather than whether we get back to the sorts of levels that we saw before. And in terms of pricing and what's driving that. Well, one of the statistics that, frankly, surprised me slightly was just the level of price that was being achieved in -- from our leisure guests over the summer months and 10% ahead of what we're seeing in 2019. And I think it's the supply and the demand that -- and plus the levels of inflation that we're seeing in the broader economy. It might be ahead of 2019 on a nominal basis. But if you think about it on a real basis with some years of relatively high levels of inflation, it's closer to parity on a real basis. So I think that then, a high level of demand for leisure is then translating through into the pricing that we're seeing in business, the pricing that we're seeing in group. And I think that will be sustained as I think we'll have a very strong leisure summer next year as well. And we will continue to get good pricing off the back of that.

[Operator]

[Operator Instructions] Our next question comes from Bilal Aziz from UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

Three quick ones for me, please. Firstly, and apologies if I missed it, but what were conversions as a percentage of the gross additions into this quarter? And perhaps how do you think that number evolves going into next year, please? And secondly, you spoke about China into Q4. Just a quick comment on the U.S., please. Are you expecting leisure to soften into Thanksgiving and Christmas or even both leisure and business will improve in Q4? And then very finally, just on your sensitivity and what you said is now closer to $14 million to 1% of RevPAR. Can you perhaps flesh out what's the next [ loaf ] of improvement will be driven by, particularly in EMEAA, as that now starts to, I guess, gradually improve and you intend to seize into next year, please.

[Paul Russell Edgecliffe-Johnson]

Thanks, Bilal. So conversions, you didn't miss it. I don't think we talked about it. We don't give that level of granularity on a quarter normally. But conversions were about 25% higher in EMEAA, but in lots of demand for our conversion brands, given the revenue that they deliver and the strong benefits to owners, which is encouraging to see. In terms of leisure, will we see it soften into the Thanksgiving season? I mean I think there is a lot of leisure demand out there, people wanting to travel. And frankly, given how strong the summer season was, there was some people who haven't managed to take all the trips they would like to have done. And so leisure has, across the industry, continued to be very good. I think that the Thanksgiving season, probably for the industry, will be strong, and then it will probably soften a bit in the buildup to Christmas, which is the normal pattern. But I think nothing else that we can particularly say at that point. In terms of the sensitivity, it's -- going into next year, really all does depend on when the remaining owned and leased hotels and big management contracts get back to their normal level of profitability. Remember, it used to be $13 million of sensitivity per point of RevPAR, went up, and now trending close to $14 million. So it'll come back in due course. It's an output rather than input, so -- but we'll keep you in the loop as we trend through 2022.

[Operator]

Our next question comes from James Ainley at Citi.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Three questions, please. Firstly, if I look at the industry data in the U.S. by segment, it looks like Holiday Inn and Crowne Plaza underperformed quite materially. Kind of why do you think that is? I mean, perhaps if you push the data for those hotels you are exiting, we'd have a slightly different picture. So interested in your perspectives on that. Secondly, related to that hotel review of those 200 hotels. It looks like kind of rather more choosing to exit now than the last time you kind of gave us the numbers. Where do you think you might land on that review in terms of the exits and the reinvestors? And then the third question on labor supply more broadly. How do you think your hotels there are faring? Are you still seeing some limits to occupancy or services in hotels? And do you see any sort of signs of labor availability easing?

[Paul Russell Edgecliffe-Johnson]

Thanks, James. So in terms of the Holiday Inn and Crowne Plaza and the comparisons you made in your statement, I think the thing worth remembering is that Holiday Inn, in particular, has historically, given the nature of the brand that we built some time ago, they had a higher level of group business in that and a high level of business travelers normally than a typical [ upper ] Indigo hotel which would have been a small box, sort of old boxes in there. And that's really the differential you're seeing. In terms of Holiday Inn and Crowne Plaza and the exit rate, it's very much in line actually with what I've guided to and what we're expecting to see. So 90 who have now exited or said they're going to exit, 40 who have signed up. So it's a similar proportion, is what I would expect to see by the end of the program. So maybe 120, 130 or so going. And the remainder committing to a significant improvement, which will be great because it will significantly raise the quality of those brands and that will help us grow them over the long term. So a really important initiative there. And in terms of labor supply, there's a lot that we're doing for our owners through our procurement teams and our human resources teams to help find people for the hotels. And that's, of course, one of the benefits of being part of a large system like ours, is that we have those linkages. And we've also been providing owners with labor rostering tools and our plans as to how they make the most of the people that they have. It is still clearly a challenge, and I think it's going to stay a challenge to find everybody that the hotels need, but our own is a very resourceful. They're an army of entrepreneurs out there who are very skilled at running their own businesses and they know their local markets. So I think they're very well placed to do that with our help.

[Operator]

[Operator Instructions] The next question comes from Alex Brignall at Redburn.

[Alex Brignall, Research Analyst]

All in a similar sort of theme of signings and opening rates, please. The first one is just on that lag time between signings and openings. Clearly, you're talking about strong 2022 and 2023. If we look at the financial crisis, the slowdown came after that. Obviously, you've got a strong pipeline. So theorizing or making assumptions about current signings, right? At the current signings that we have now, when would that start to drop through into lower openings, please? The second question is on -- encouraging to hear comments about application. There are some data out from [ CodeStar ] about land acquisitions for hotel usage, which in this year is still 80% below the level in 2019. So I guess somebody who knows -- anyone who knows the data of you guys, what's the sort of order of events for unifying the land comes first, then an application and a signing? Can you just explain how that might sort of work chronologically? And now on conversions, you've given numbers on conversion as a percentage of total. Could you just talk about conversions on an absolute level versus pre pandemic. I think, and I could very well be wrong, that on an absolute level, they're still below the level that we saw pre pandemic. And I guess my question is, why would that be? Would we not -- should we not see conversions on an absolute basis go up versus prepandemic if it's not sort of needing new sort of financing to build? So why they might actually be down if that's driven it?

[Paul Russell Edgecliffe-Johnson]

Thanks, Alex. So in terms of signings to openings in the period that it takes, it does, as you would imagine, as I think as you know, it varies significantly across the brands. So for InterContinental, which might be part of large complex, you could be talking in 60 months. Some are doing more -- some are done more rapidly. But it does take some time. By contrast with an avid, for example, by the time you break ground to when the hotel opens, it could be less than a year, and that's one of the great attractions for owners of the avid brand and similarly with Candlewood, Holiday Inn Express is that they are relatively simple boxes to build. So the key thing is get the hotel signed and sign with good owners and then get the ground broken. And then once the ground is broken, then the hotel will manifest a certain period afterwards. So -- and that's always been the case, and there's no real change there. In terms of the order in which things happen, well, the key for an owner to be able to get debt finance is to have an application approved by us. And obviously, you'll need the debt finance to acquire the land. So the key thing for an owner is getting our franchise signed up. Often, they will have rights over a land or they will -- they'll have land identified, but it doesn't mean that they will necessarily own the land, some do. They may have it as part of a historic arrangement, they may have another hotel on it that they're deconstructing to build a new one. So there's a variety, but you have to get the contract with us normally first. And in terms of conversions, the conversions have stepped up significantly. And in EMEAA, more conversion discussions than we've ever seen before. I mean on an absolute basis, I would actually have to look at the numbers and refresh my mind as to what we used to do back in 2019 on an absolute basis. And we have seen owners having to focus on their operating businesses more and on building their next hotels less. And that will mean that you see fewer hotels getting done. So that'll be the reason if there is some absolute differential. Nothing else behind it.

[Operator]

We have no further questions registered on the line, so I'm going to hand back the call to Stuart for closing remarks.

[Stuart Ford, VP & Head of Investor Relations]

Many thanks, Bethany. No closing remarks from me. Paul, anything to add?

[Paul Russell Edgecliffe-Johnson]

Thanks, everybody, for listening and look forward to catching up with you very soon. Have a great day.

[Stuart Ford, VP & Head of Investor Relations]

Thanks all.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.