InterContinental Hotels Group PLC

NYSE:IHG

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to IHG Quarter 1 Results Presentation. My name is Nandaja, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Mr. Paul Edgecliffe-Johnson, to begin. Mr. Johnson, please go ahead.

[Paul Edgecliffe-Johnson]

Thanks, Nandaja. So good morning, everybody. Thanks for dialing in. This is Paul Edgecliffe-Johnson, Chief Financial Officer at IHG.I'll begin with some highlights in the period before covering each of our regions in turn, and then I'll open the call to questions.We've had a strong start to 2018, with RevPAR up 3.5% and net rooms growth of 4.3% year-on-year, bringing our total system size to 800,000 rooms.We added 8,000 rooms to our system, up 16% year-on-year, which included a record first quarter in Greater China. At the same time, we remain focused on removing underperforming hotels, exiting 6,000 rooms.Whilst these removals were lower than in the first quarter of 2017, we continue to expect 2018 to be towards the top of our 2% to 3% range for the full year before trending back down again to the low end of the range over the medium term.Looking now to future growth. We signed 20,000 rooms or 146 hotels into our pipeline, up by more than 30% year-on-year, led by our new midscale brand, avid, this was our strongest first quarter signings pace for 11 years. Our total group pipeline now stands at 252,000 rooms. And with our share of the active global industry pipeline at 3x our share of open rooms, we are set up well for future organic growth.As of 2017 full year results, we set out a series of new strategic priorities to drive industry-leading net system size growth over the medium term. These initiatives will be funded by savings realized from our comprehensive efficiency program. I'm pleased to say that this program is well underway, and we are on track to deliver $125 million in annual savings for 2020. These will be reinvested behind our growth initiatives, against which we've made some good progress in the quarter, starting with our brands and our ambition to expand our global luxury footprint.In March, we announced the acquisition of our new upper luxury brand, Regent Hotels & Resorts. Established in 1970, Regent has an enduring reputation with both guests and owners, particularly in China and Asia. Combined with the power of IHG's enterprise and supported by our increased investment in our luxury capability, we see a significant opportunity to accelerate Regent's growth and take a greater share in the $60 billion global luxury hotel market. Our intention is to grow the brand from 6 hotels today to over 40 hotels in key global gateway city and resort locations over the long term.We also announced that following a major refurbishment, the InterContinental Hong Kong will convert back to the Regent brand in 2021. This iconic property was instrumental to the success of InterContinental in Greater China, and we are confident that bringing it back under the Regent flag will provide a catalyst for the brand's growth in the region.Last year, we signed new deals to Kimpton Hotels & Resorts in Mexico, Bali and Greater China. In 2018, we have built on this momentum, with the announcement yesterday of our agreement to rebrand and operate a portfolio of 13 high-quality hotels in the U.K. to our brands. A number of these will be Kimptons, including prime locations in London, Manchester and Edinburgh. This will establish IHG as the leading luxury hotel operator in the U.K., with more than 2,000 rooms in this valuable segment.This portfolio deal will also strengthen our upscale presence in the U.K., allowing us to quickly establish our position for our soon-to-be launched new upscale brand. This brand will capitalize on a significant opportunity IHG has identified to offer consumers an informal but differentiated experience in the upscale segment, whilst offering owners a strong return on investment by converting unbranded hotels. We will share more details on the new brand name and identity later in the year.In the mainstream segment, avid is going from strength to strength and is on track to be IHG's next brand of scale. We've now signed more than 100 hotels since launch in September, equating to a deal every other day, quite a remarkable achievement. This strong demand for avid, just 7 months after the brand was officially launched, has significantly exceeded our expectations and we expect this to continue, although it is likely that the pace will moderate somewhat as we begin to move to a mature -- to a more mature signings run rate.Moving on to another of our strategic initiatives, focused on evolving our owner proposition. Holiday Inn Express Franchise Plus, our tailored franchise offering for the China market, continues to generate strong demand from owners with a further 11 properties signed in the quarter. This was up from 5 last year in what is typically the slowest quarter for signings. There are now 8 Holiday Inn Express Franchise Plus properties open in Greater China and 77 in the pipeline, and we expect this strong momentum will continue to the rest of the year.Looking now to our initiatives to enhance revenue delivery. The rollout of our new Guest Reservation System and cloud-based hotel technology platform IHG Concerto is accelerating, with more than 1,000 hotels now online. We remain on track to complete the rollout by early 2019.As we progress with our new medium-term growth initiatives, we remain focused on delivering fee margin growth. Our comprehensive efficiency program is progressing well. And we continue to expect that the associated exceptional cash costs will be around $200 million. With $31 million incurred in 2017, the majority of the remaining balance is expected this year. These costs will be charged to the P&L and system fund, broadly in line with the savings delivered.I'll now move on to talk about trading in each of our 3 regions. Across the group, RevPAR was up 3.5%, with growth in both rate, up 1.9%, and occupancy, up 1 percentage point. The earlier timing of the Easter weekend, which this year was split evenly between March and April, was a slight drag on RevPAR growth, particularly in the Americas and Europe.Looking first at the Americas, where RevPAR was up 2.9% with the U.S. up 2.2%. The significant damage caused by Hurricane Harvey continues to result in strong RevPAR growth from recovery and displacement demands in the affected areas, although this benefit is now starting to diminish.Our best estimate is that, excluding this hurricane-related demand, adverse Easter impact and other smaller market-specific factors, underlying U.S. RevPAR growth for the quarter was approximately 2.5%, showing continued momentum from quarter 4 and reflecting broad demand growth across the top 25 markets in the U.S. This upward trajectory is reflected in the fundamentals for the U.S. lodging industry, which are improving. With record demand in 83 of the last 85 months, accelerating U.S. GDP growth, improving corporate profitability and the highest U.S. consumer confidence and employment levels in 17 years, we remain positive in our outlook for the year ahead.Elsewhere in the region, RevPAR in Canada was up 7%, benefiting from a strong convention calendar. In Latin America and the Caribbean, reduced industry supply due to hurricane activity in 2017 helped drive RevPAR growth of 16%. While in Mexico, RevPAR was flat, impacted by the strengthening of the Mexican peso against the U.S. dollar.Moving on now to our other regions. Last year, we announced that from the 1st of January 2018, we would merge our Europe and Asia, Middle East and Africa regions. The newly combined region spans 72 countries, allowing us to leverage our scale, share best practice and upweight investment in those markets with the highest growth potential.On the 17th of April, we issued new financial statements and KPI data for 2016 and 2017, reflecting this new regional structure as well as the impact of IFRS 15 and other presentational changes in our reporting. These new comparatives are available on IHG's investor website.In the first quarter, RevPAR for our new Europe, Middle East, Asia and Africa region was up 2.9%.In Continental Europe, RevPAR was up 6% as we continued to see a recovery in markets previously impacted by terror attacks. Both France and Belgium were up high single digits, whilst Turkey was up double digits. In Germany, RevPAR was down 2% due to an unfavorable trade fair calendar, which is expected to improve in the second quarter.In the U.K., RevPAR was down 1% due to strong comparables, a reduction in U.S. inbound travel as sterling strengthened against the dollar and the shift in the timing of Easter. In London, which benefited most from the weak sterling in the first half of 2017, RevPAR was down 3%, while the provinces were up 1%.Elsewhere in the region. Middle East RevPAR was down 6% due to high supply growth, while Australia and Japan were up low-to-mid single digits.Finally, moving to Greater China, where RevPAR was up 11% in the quarter, significantly ahead of the wider market. Typically, we see elevated levels of demand in the weeks building up to the Chinese New Year, which fell 2 weeks later in 2018. As more of this build-up period occurred in quarter 1 rather than in December, this was a boost to RevPAR growth in the region.In mainland China, RevPAR was up 10%, with double-digit growth in Tier 1 and Tier 2 cities due to high corporate and group demand in these markets. In Hong Kong, RevPAR growth accelerated to 15% due to the strengthening of the renminbi against the Hong Kong dollar, which helped to drive a significant increase in inbound travel from mainland China. In Macau, RevPAR was up 25%, reflecting the ongoing improvement in market conditions.Before I wrap up, I want to just take the opportunity to reflect briefly on the strength of our position in Greater China. This has been another exceptional quarter for the region, with market-leading RevPAR and accelerating rooms growth and the first and the highest first quarter openings and signings on record.We were the first international brand to enter China more than 30 years ago, and the market has been a strategic focus for us since it's established as a standalone region with our head office in Shanghai in 2011. Since then, we have opened 62,000 rooms, increased the region's system size by 60% and driven fee revenue up 70%. With a pipeline of 75,000 rooms, representing a 22% share of the active pipeline in Greater China and significant demand for our franchising products, this strong growth is set to continue in the coming years.Having consistently invested ahead of the curve in our operational and development teams with now 6 offices across the country, we have the capabilities to deliver this growth. As well as now experiencing scale benefits with 9% revenue growth generating 16% operating profit growth in 2017, this operational platform has allowed us to take a unique approach to franchising in Greater China. Rather than pursuing a mark to franchise route, we have made the strategic decision to retain full control of the franchise development process, keeping 100% of the fees generated from these properties. This is a significant point of competitive differentiation for IHG.We now have 77 franchise properties in our pipeline and expect this figure to continue to grow strongly. As these hotels open up over the coming years and the China market continues to mature, our strategy will sustain the growth trajectory of our fee business revenues as well as ensuring a consistent, high-quality product for our guests.So to summarize. We've had a strong start to 2018. Our year-on-year net rooms growth continues to accelerate as we focus on driving medium-term industry-leading net rooms growth. And we've delivered strong RevPAR growth across the group with improving underlying performance in the U.S. and double-digit growth in Greater China. We're making good progress with our new strategic initiatives that underpin our growth ambition, particularly in expanding our luxury footprint, and our comprehensive efficiency program is on track.Finally, we marked a major milestone in the rollout of our new Guest Reservation System and IHG Concerto with more than 1,000 properties now online. Looking ahead, the fundamentals for our industry are strong. We have the right strategy, and we remain confident in our outlook for the year.With that, Nandaja, please, let's open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Just 2 questions, please. On the FdR deal, first of all, you've taken on a pretty significant lease liability, which is sort of quite a departure from your model. I guess, there are some strategic benefits from either getting scale for Kimpton and the new brand. But could you explain a bit more how the financials work, particularly the trading profit share? I'm still struggling to get to a mid-single-digit EBIT number. And do you have any more deals in the works? You've done quite a lot, as you say, with Regent as well. And then the other question is just on the sort of full year guidance for removals, high end of 3%, the [half out] additions. You've obviously got the benefit of the FdR deal, the Regent deal. So I assume we're still talking something north of 4% for the full year, but probably not as high as 5%. Is that fair, net?

[Paul Edgecliffe-Johnson]

Thanks, Jamie. So yes, we're really pleased with the FdR deal. Obviously, very competitive. They were really pleased that we won that. And when we look at how we structure the deal, we have to look at which owner we're working with and dealing with a REIT like FdR, this is the deal that we could structure with them that gives the right commercial outcome for them and for us. We do deals like this sometimes. Our InterContinental in -- our InterContinentals in Berlin and Düsseldorf, for example, are on similar structures. So it looks like a lease, but really commercially it's effectively a management contract with guarantees. So we have a certain level of annual and total caps on our lease liability. And the income comes through from effectively a franchise fee that we get on it. So happy to run through that in more depth, but don't want to just hold the call on that. In terms of more deals, yes, we would look at more such opportunities. And as we said at the prelims, we do want to build out our luxury capability because it's something that we're very strong at, with the InterContinental brand that we think that we could add more to. Really pleased with the Regent deal, a very small amount of CapEx, but a really high-quality, high prestige brand there. And if something similar to that, a small CapEx but with an opportunity for us effectively organically to grow after buying an intellectual property shell came up, then we'd certainly look at more opportunities like that. Albeit with organic growth in the mainstream, like we've seen with avid, that does give us a lot of opportunities as well. So we always keep a balance between the 2. In terms of growth in the full year, yes, removals will be towards the top end of the range. And that's really because, 10 years ago, we opened up a lot of hotels in 2008 and a lot of those were on the old 10-year franchise contracts that are now coming up for renewal. It'll then step down a bit, but we are still expecting to continue to accelerate our net system size growth, so look, I wouldn't disagree with the parameters that you put out there.

[Operator]

Our next question comes from Monique Pollard from Citigroup.

[Monique Pollard, Vice President]

Just 2 questions from me, please. Firstly, could you comment on how the trials are going either with the rollout of the Guest Reservation System and whether you're seeing any meaningful or significant improvements in RevPAR and room management as a result? And then, secondly, I was hoping you could comment on whether you're planning to follow suit with Marriott and Hilton in the U.S. of reducing commissions paid to third parties that book group meetings? I think Marriott had said they're planning to reduce commissions from about 10% to 7%. And I don't know if you were planning to do the same because it's going to impact your profitability, but can make it more attractive from an owner perspective.

[Paul Edgecliffe-Johnson]

Sure. Thanks, Monique. So yes, well, look, we're really pleased with the rollout of GRS. It's been a long time in the coming and it's nice that we've now got it out in over 1,000 hotels and we got every one of our brands. Now we have hotels that are underway. And a lot of work obviously by the start of 2019. We'll hopefully transition that across. In terms of enhancements to RevPAR, I mean, some of the things that will drive the RevPAR increase are the version 1.1 additions that will come through. It is a much better Windows-based intuitive interface. So some of the capabilities that already exist in the old Holidex system but were just actually quite hard to find for people who are not used to a Windows environment rather than sort of green screen flashing cursor environment of technology from 10, 15 years ago couldn't necessarily identify that. So we are seeing some benefits from that. We're seeing some of the hotels saying, we really like all the new functionality you brought in. And when we're reminding them there isn't any new functionality, it's actually just investigating what was there, there's sort of a bit of a silence at the other end of the line. In terms of commissions, look, we are looking at it, as you would expect. We are a smaller groups and meetings business than Marriott and Hilton. We don't have these huge boxes that they do. It's a slightly different business mix. We're more leisure and transient than they are, but we'll continue to monitor developments in that area. So nothing to say on it today.

[Operator]

Our next question comes from Tim Ramskill from Crédit Suisse.

[Tim Ramskill, Research Analyst]

Two questions from me, please. The first is just around the point you make around the supposed anniversary-ing of the 10-year contracts. Can you just spend a little bit of time explaining to us the dynamics there? I mean, presuming a good proportion of those renew so --and that it's hard to see the assets that are relatively youngish would be sort of materially underperforming. So why does it definitely lead to an uptick in exits? I just want to understand the dynamics there. And then my second question is, if we look at how the pipeline historically has flowed through into new openings, you used to talk -- I'm going back quite some time now but pre-crisis about rooms being in the pipeline for approximately 3 years. More recently, that has been kind of about 5 years. I just wondered if you could give us some sense as to how you see that sort of flow through, particularly with avid, which I'm presuming can kind of come out of the ground a bit more quickly perhaps.

[Paul Edgecliffe-Johnson]

Yes. Thanks, Tim. So look, when you've got a lot of renewals coming up in a year, then there's always a question as to what did the owner do and what do we want to do? So we're thinking about some of these hotels will choose not to continue with the owner, whether it's we don't like the location anymore, we don't like the physical quality. We don't like the way that the owner has invested in this property or the owner may have a different objective for the next 20 years because he'll be signing up now to a 20-year contract, which we've moved to. So a 20-year contract is definitely getting more advantageous for us longer term because it means that it's easier for us to get the owners to put in capital at various stage gates along the way and to manage it, the life cycle of the asset better. So I think that's one of the reasons we will see the level of removal step down over time. So look, our best guess is as we look out is that we will be towards the top end of that 2 to 3. In terms of pipeline to opening, it's really once -- a hotel gets construction underway, so once you break ground, then you will move through relatively rapidly. It is appropriately challenging for hotels to get financing. That's one of the things that has helped supply growth remain at a relatively modest rate and will -- has led to a more -- continue to lead to an elongated cycle. So yes, it does vary 3 years to 5 years by region and by brand. And yes, you're absolutely right, the new avid, which is a simpler, more modular and turnkey solution in terms of the build, will be quicker. But it's beginning to InterContinental over in China, will still probably take 5 years. So there's a mix there. No huge differential from what we've talked about historically.

[Tim Ramskill, Research Analyst]

Okay. And then just my quick follow-up. As you mentioned, if the alternative for owners is a new 20-year contract, how does that compare to the sort of competitive options that will be available to those owners? Is 20 years untypical? Maybe...

[Paul Edgecliffe-Johnson]

No. It's exactly what Hilton and Marriott do, 20-year contracts. So we were there via...

[Tim Ramskill, Research Analyst]

Choices and Wyndhams?

[Paul Edgecliffe-Johnson]

It's a variety. Honestly, you go to some brands, you can have a contact at will because it's a weak brand and that's how you get people in. So you can terminate at will. That's not how we do business. So if you've got a strong brand proposition, which we do, then you can have a 20-year contract turned to you. We haven't seen any diminishing in our signings, as you've seen, as a result of bringing that in, which we did a few years ago.

[Operator]

Our next question comes from Angus Tweedie from Bank of America Merrill Lynch.

[Angus Vere Tweedie, Vice President]

Two questions on the pipeline again. If you could just chat a bit more about avid. Clearly, you're seeing strong signings there. Could you give us any sort of feeling for how you see that might progress over the rest of 2018? And then secondly, you're obviously referencing the slightly straighter financing requirements. We're probably seeing within the U.S. pipeline that a greater proportion of hotels in either construction or final planning as a proportion of the pipeline, is that a reflection of that? And are we getting a better quality pipeline, do you feel, going forward?

[Paul Edgecliffe-Johnson]

Thanks, Angus. So in terms of the signings growth through 2018, it's going to stay high. I mean, this is a product that owners really want. And so we're going to continue to see a high level of signings. Well, I think we're probably seeing just in that initial period. We couldn't sign the deals until we had a franchise disclosure document, which is a legal document. Until we're ready to go, there's a bit of a sort of pent-up demand until we have that. So yes, I wouldn't necessarily read through it exactly sort of a deal every other day as being the run rate would continue. But I certainly expected to see continued high levels of signings for avid. And in terms of the financing environment, yes, the finance -- and I've talked about this for a few years. The financing environment is appropriately strict in terms of the covenant that's required from the borrower and in terms of the loan-to-cost rather than loan-to-value that's going to be applied to the project. And it should mean that only hotels that are going to be successful and with good owners get financed and with good brands, and that definitely helped us and will continue to help us. I think this year is probably, with the projections, is going to be the high watermark in terms of development activity in the U.S. That's what a lot of commentators are saying. So I think that, looking forward, we'll probably see a continued environment of low 2s to thereabouts of supply growth, which, given the demand environment, as I say, leads to a more elongated cycle.

[Operator]

The next question is from Richard Clarke from AB Bernstein.

[Richard J. Clarke, Research Analyst]

Three questions, if I may, very quick ones. Just as a beginning, I was just following off of Angus' question. 100 avids was the number of avids that get the discount on the first couple of years of fees. So just wondering whether we're at some kind of watershed there and Angus saying we're not. But is there any sense that maybe you need to prove the concept now to get the people paying the full fees on that? Second one on the franchise growth in China. You made reference to that. The only franchise hotels turning in the pipeline are the Holiday Inn Expresses. You've released Holiday Inn and Crowne Plaza to franchise as well. No hotels in the front end of the pipeline and probably just too early, but if you can talk about that kind of full franchise rather than Franchise Plus model, how's that expected to develop going forward? And then lastly, on luxury, maybe a sort of 3A and 3B here. But I see you're describing Kimpton as luxury now. Is that on a basis of any change there? And then how do you see the sort of ranking of Kimpton, InterContinental and Regent? We've kind -- it looks like Regent is actually cheaper than InterContinental in quite a lot of the Chinese cities, but is that just the distribution rather than the quality?

[Paul Edgecliffe-Johnson]

Yes. Thanks, Richard. So look, in terms of the avids, the demand and the letters of intent that we have and the number of conversations we have remains very strong. People are signing up for really long contracts in that building, a prescriptive building. An avid looks -- every avid looks the same. You have exactly the same interior package, et cetera, et cetera. You don't make your investment decision based on the fact that you're going to get a couple of years of small discounted fees. It just doesn't count into it. So I don't expect to see that, that's slowing anything down there. In terms of the franchise in China, so yes, as you say, the Franchise Plus Holiday Inn Express model, working through really well. In terms of what I think we'll see with Holiday Inn and Crowne Plaza where we sample franchise, I think what we'll see is hotels that will start out probably as managed and then that move over time to being franchised. So whether it comes up on a renewal or you are a few years into the contract, the owners say, actually, we would like to have go at managing these ourselves. And we'll help them with that and transition off to a franchise environment. So that will be my guess as to what we'll see there because the capabilities that we bring to help someone set up quite a sophisticated and complex new business in China is really advantageous to the owners, and really, the economics in terms of the fees are not that different. So if you want to run it yourself, that's fine, we'll help you. We'll help you with that, but I suspect a lot of them will actually come into the system initially as managed. And in terms of the descriptor, it's not the most sophisticated industry in terms of exactly what you use. It's often the STR descriptors you upscale, upper upscale, et cetera, and luxury, which comes down to price points and Kimpton is coming in, in the luxury price point. So it's being talked about as that. It is clearly a boutique brand, a boutique luxury. Regent, of course, is upper luxury. So if you're looking and seeing differentials by market, that already just be down to micro locations and it might be a hotel but still ramping up in China. We do, of course, have some fabulous locations for InterContinental in China. But in terms of brand positioning, you've certainly got Regent ahead of InterContinental, but InterContinental is still a very solid luxury offering and then Kimpton in a more boutique space.

[Richard J. Clarke, Research Analyst]

Maybe just one quick follow-up. You talked at the beginning of the year of maybe 1 to 2 acquisitions in luxury. In fact, is there still potentially that second one in the offering?

[Paul Edgecliffe-Johnson]

There are a few things out there that -- yes, we'll see whether any of them come off. We are really pleased to have done Regent, and there's an awful lot that we can do then organically through that. It will be the same requirements really. If there's something that has really strong brand proposition that we can grow out organically from a shell, from a base position, then that's attractive because the returns on investment are good. As I said before, what I don't like is buying something where the growth has got to be x growth and you're paying a price that really means I can't get a strong return on capital. But when you look at building a brand, I can either invest and invest and invest for some years, as we will with avid and then we'll start to make really strong returns once we've got hundreds of units open and paying us fees, or -- and you can do that in the mainstream, or in the luxury segment, it's really hard to do that. You're better off buying the hard work that someone has done maybe over 10 years to get you to an initial brand positioning, and then take that on, plug it into our systems and see it flourish and grow.

[Operator]

Our next question comes from Sophie Aldrich from Aberdeen Standard Investment.

[Sophie Aldrich]

I just wondered, I had a question regarding your deal strategy. I've seen some discussion about deals in the luxury space, but are we likely to see further deals outside of the luxury space? And more generally, will M&A be a similar size to Regent or potentially something larger?

[Paul Edgecliffe-Johnson]

Thanks, Sophie. So over the years, we've looked at all the opportunities that come up in this industry, as you would expect. And we've been pretty consistent that what we want to find in any deal that we look at is long-term growth, a very high-quality brand and something that we can make a return that's greater than our cost of capital. As we look at the various opportunities, there have been very few that meet that criteria. We bought Kimpton because we see that having very strong brand proposition, #1 positioning in the U.S. and an opportunity to grow it to a very meaningful business around the world, which we're now demonstrating out. And it will be a global brand of scale. Regent was a very small capital outlay and something that we'll then grow out from a handful of hotels too, over time, best estimate is 40-plus. And then that will make very strong returns for us. And with the new brands that we've got, so with avid, with Kimpton, with Regent and then with the new upscale brand that we've talked about we're launching, which is more focused into conversion opportunities, there's a lot of levers to growth there. If something else came up similarly sized to a Regent, something like that, then we'll certainly look at it and evaluate it and see if there's a positioning that we can get to a significant enough scale position to make meaningful fees from. And if it is, then we'll consider it very carefully. Probably not many more of them, if I'm honest, maybe we'd add another one on in the short term next few years if the right thing comes up. But we've only really made in the last 15 years since we became an independent company, a few years before we bought Kimpton and then Regent earlier this year, so it's pretty unusual for us.

[Operator]

The next question comes from Tim Barrett.

[Timothy William Barrett, Leisure Analyst]

It looks like there's a bit of divergence between change scales in the U.S. I wondered if there's anything to call out on why midscale is outperforming Kimpton and InterContinental. And secondly, coming back to your points on China. It was obviously one of the best quarters in a long time. How sustainable do you think that's going to be through the rest of the year?

[Paul Edgecliffe-Johnson]

Thanks, Tim. So I think we may have missed just the first few words of your question, but I think that there's a little delay on the line. I think your question was around what's happening in the various chain scales and midscale versus other. Part of this, I think, is down to geographical distribution, say, the D.C. market in particular was pretty tough, so with these very strong comparables that came through there. Partly, it is also where you are in terms of occupancy and rates, so how much opportunity is there to continue to grow. So it's the demand and the supply that's coming through. And certainly, for us, I mean, we got a -- with InterContinental, we've got higher distribution into InterContinental -- into Washington, D.C. We've got a renovation going at the InterContinental, the Willard there, which has had some impact on us. Holiday Inn Express actually has been performing really well. It outperformed Hampton in the first quarter, which is one of the things that we do look at. And it's been doing that for -- since the middle of last year. So a good absolute as well as a good relative performance there. In terms of China, how sustainable is it? Well, when we started to see the stronger levels of performance in the latter half of last year, I thought it was probably linked to the additional economic stimulus coming into the industry after the Chinese National Congress. But it seems to be more than that. And I think you have got the benefit of Hong Kong and Macau reversing, which were -- which were tough, so it had some tough trading periods. But then looking at whether it's Tier 1, Tier 2 or 3 and 4, the balance between supply and demand remains very, very favorable. In the Tier 1 cities, supply is negligible now, and demand is strong. So I mean, you've got a Tier 1 supply growth of only 1.6% in the first quarter. Your supply is a little bit higher in Tier 2 at 3%, but demand growth is double that. And then in the Tier 3 and Tier 4, you're looking closer to sort of 4% supply. The demand growth again well outpacing that, which is allowing us, together with our strong commercial engines that we've got out there, which is taking a lot of [ nice ] business to really deliver very pleasing performance.

[Operator]

[Operator Instructions]

[Paul Edgecliffe-Johnson]

I think that, that is all the questions that we've had this morning. If anybody does have anything more that we can help you with, please do, as ever, get in touch and really appreciate you dialing in. We appreciate the interest and your time, and have a great bank holiday weekend, everybody. So bye for now.

[Operator]

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