InterContinental Hotels Group PLC

NYSE:IHG

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the IHG Q3 Results Call.My name is Megan, and I will be coordinating your call today. [Operator Instructions]I will now hand over to your host, Catherine Dolton, to begin. Catherine, please go ahead.

[Catherine Dolton, Head of Investor Relations]

Good morning, everyone, and thank you for joining us today for our third quarter trading update.This is Catherine Dolton, Head of Investor Relations at IHG. I'm joined this morning by Paul Edgecliffe-Johnson, Chief Financial Officer.We no longer hold a separate call for U.S. investors, but we do make the replay of this conference call available on our website.So before I hand over to Paul, I need to remind you 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 to actual results to differ materially from those expressed in or implied by any such forward-looking statements.I will now turn the call over to Paul.

[Paul Edgecliffe-Johnson]

Thanks, Catherine. And good morning, everyone. 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 delivered a good third quarter performance. Global RevPAR was up 1%, with U.S. performance impacted by high levels of prior year demand from the 2017 hurricanes. We drove net rooms growth of 5.1%, and we saw our best performance for signings and openings in a decade. We have continued to make good progress against the strategic priorities we set out in February, which will drive industry-leading net system size growth over the medium term. As a reminder, these initiatives are being funded by the savings realized from our comprehensive efficiency program, which remains on track to deliver $125 million of savings per annum by 2020.This progress and ongoing good performance have given the board the confidence to announce a special dividend of $500 million to be paid in the first quarter of 2019, complete with share consolidation, subject to shareholder approval.Looking now in more detail and turning first to system size.We added 19,000 rooms to our system, up 70% year-on-year, with a record third quarter performance in both our Greater China and Europe, Middle East, Asia and Africa regions. This was aided by the inclusion of rooms associated with the Regent brand acquisition and the U.K. Principal deal, both of which closed in the third quarter. Excluding these, our net rooms growth was still 4.6%, continuing the acceleration we have driven in recent quarters. At the same time, we remained focused on removing underperforming hotels, exiting 3,000 rooms. We continue to expect to be towards the top end of our 2% to 3% removals guidance for the full year.Looking at our future growth. We signed 27,000 rooms into our pipeline, up by almost 40% year-on-year. Our total group pipeline now stands at 267,000 rooms. And with our share of the active global industry pipeline at 3x our share of open rooms, we remain well set up for future organic growth.I would now like to take some time to update you on the progress we have made against our strategic initiatives to drive industry-leading rooms growth.Turning first to our Luxury portfolio; and the completion in July of our 51% acquisition of the upper luxury brand Regent Hotels & Resorts, added 6 properties to our system. Since then, we have moved at pace. And just this week, we announced a relaunch of the brand, including new brand hallmarks and design philosophy, a brand-specific service ethos and a striking new visual identity. This will allow us to continue to grow Regent and help position it as a real leader within luxury hospitality. Alongside this, we've signed our first new hotel, the Regent Kuala Lumpur. This will be situated next to the Tun Razak Exchange project, which is set to become the next financial district of KL and an extension of the city's Golden Triangle.With numerous sites under discussion; and the refurbishment of the InterContinental Hong Kong, which when it reopens in 2021 will be rebranded as a Regent hotel, we are well on track to accelerate the brand's growth in the $60 billion luxury hotels block. In the U.K., the rebranding of the portfolio of 9 hotels to our Luxury and Upscale brands will give us representation for Kimpton in Manchester, Edinburgh, Glasgow and London. Building on this momentum, we announced further signings for Kimpton in Barcelona, Tokyo and Bangkok in the third quarter. And our accelerated international expansion of the brand means we've now secured Kimpton representation from 14 countries around the world.Moving on to our Upscale portfolio. And our new brand in this space, voco, has enjoyed a strong start since its launch in June. The brand is sympathetic to a wide range of asset types and is really resonating with owners. We've seen a great deal of interest for both conversion and newbuild properties. In addition to the 4 hotels, which we'll rebrand to voco as part of the U.K. portfolio deal, we've signed a further 6 properties to date, including our third in Australia. We are due to open the first hotel in the fourth quarter and expect to have more than 15 signings in total by year-end. This is ahead of our initial expectations for the brand and means that voco is well placed to grow to over 200 properties over the next 10 years.In the Mainstream space, we have also achieved a significant milestone for avid hotels this quarter, with our first property now opened less than 1 year after the brand was launched. Initial feedback has been overwhelmingly positive, with guests commenting in particular on the grab and grow -- grab-and-go breakfast and the quality of the sleep experience.We have signed 25 more properties in the third quarter, bringing our total pipeline to 150 hotels. We have a further 3 properties under construction and expect another 9 hotels to break ground by the end of the year. We are also taking avid to new markets, announcing last week the launch of the brand in Europe. We've signed a multiple-development agreement with an existing partner, which will bring 15 avid hotels to the German market. This announcement builds on the strong growth momentum we've seen in Germany over recent years and creates a platform for avid to become a brand of scale in this key market for IHG.Looking now to our initiatives to enhance revenue delivery.I'm pleased to say that the rollout of our new Guest Reservation System and cloud-based hotel technology platform IHG Concerto is substantially complete. We have over 95% of this data migrated to the new platform, with the remaining hotels expected to transition over the coming weeks. This means the first phase of the project has come in ahead of schedule and on budget. What's really encouraging is this huge amount of positive feedback we received from the hotels on the simplicity and ease of navigation of the new system, with post-migration hotel satisfaction surveys achieving an average score of 9 out of 10. We had been planning to hold an investor and analyst event in December to showcase the system, hosted by our Chief Commercial and Technology Officer, Eric Pearson, who is leading the project. Unfortunately, Eric is having to take some time away from the business on short-term medical leave, so we've decided to postpone the event for the time being. We will share more details on our planned future enhancements to GRS at our full year results in February.I'll now move on to talk about trading in each of our 3 regions.Looking first at the Americas, where RevPAR was flat, with the U.S. down 0.5%. Commencing in the third quarter of 2017, we saw significant demand generation from the displacement and recovery efforts following Hurricanes Harvey and Irma. These tough comparables resulted in a mid-single-digit occupancy decline in the third quarter of this year in the markets impacted by those hurricanes. Our overall RevPAR performance was in line with the industry to the upper midscale segment, where more than 2/3 of our U.S. rooms are positioned. While the industry will continue to lap strong comparables in the fourth quarter, the fundamentals for U.S. lodging remained strong, with hotel demand remaining at a record level, accelerating U.S. GDP growth, continued wage growth and record-low levels of unemployment.Elsewhere in the region, RevPAR in Canada was up 2%, benefiting from continued strength in urban markets. In Latin America and the Caribbean, strong levels of demand in Colombia and Brazil helped drive RevPAR growth of 7%, while in Mexico, RevPAR was up 5%, aided by soft comparables from the prior year earthquake in the Mexico City area.Moving on now to our other regions. Third quarter RevPAR for our Europe, Middle East, Asia and Africa region was up 2.5%. In Continental Europe, RevPAR was up 4%, as we continued to see market recovery in France, up 10%, with double-digit growth in Paris aided by the Ryder Cup and Paris Fashion Week. A more favorable trade fair calendar in Germany drove RevPAR up 2%. And in Russia, double-digit RevPAR growth was aided by demand from the FIFA World Cup. In the U.K., RevPAR was up 1%, with strong demand in London from the Farnborough airshow and Middle Eastern leisure business driving RevPAR growth of 4%, offsetting softer occupancy in the provinces where RevPAR was marginally down.Elsewhere in the region, we saw a low single-digit RevPAR decline in the Middle East and Australia due to new supply coming into the market, while Japan saw low single-digit growth, with key cities performing well.Finally moving to Greater China, where RevPAR was up 4.8% in the quarter. As expected, this is lower than the growth we achieved in the first half of the year due to the lapping of strong comparables which commenced in the third quarter of 2017. In mainland China, RevPAR was up 4.5%, with mid-single-digit growth in Tier 1 and Tier 2 cities. This was driven by continued strong levels of transient and corporate demand offsetting some adverse impacts from Typhoon Mangkhut in September and a change in timing of the Mid-Autumn Festival. Tier 3 and Tier 4 cities saw a slight RevPAR decline due to new supply coming into Sanya and difficult trading conditions in Changbaishan. Excluding these locations, Tier 3 and Tier 4 cities also saw mid-single-digit RevPAR growth. Hong Kong and Macau were up 5% and 4%, respectively, showing an expected moderation from the exceptional levels we have seen in recent quarters.I have spoken before about the strength of our position in Greater China. There is significant long-term potential for IHG in this region, and we continue to deliver a market-leading performance. We grew our net system size by 17% year-on-year in the third quarter and opened 32 hotels compared to 13 in the same period last year, our best-ever quarter for openings. The region is on track to deliver a record performance for both signings and openings for the full year.Turning now to capital returns.As I've set out today, we're making strong progress against our initiatives to drive growth. And this is what gives the board the confidence to announce today a special dividend of $500 million, with share consolidation. This will be subject to shareholder approval and will be paid in the first quarter of 2019. This will bring our total shareholder cash returns since 2003 to $13.5 billion, with over $5.5 billion coming from our operational cash flows. This underlines the highly cash-generative nature of our business and our commitment to our well-established strategy of returning surplus cash to shareholders.So to summarize.We have delivered a strong third quarter. Our net rooms growth continues to accelerate as we focus on driving industry-leading growth over the medium term. And we've delivered good RevPAR growth across the group despite the impact of strong prior year comparables in the U.S. and Greater China. We continue to make good progress against our new strategic initiatives that underpin our growth ambition, particularly in relation to optimizing our brand portfolio. And our comprehensive efficiency program is on track to deliver the savings to reinvest behind our growth initiatives.Looking ahead, the fundamentals for our industry are strong. We have the right strategy to deliver industry-leading growth, and we remain confident in our outlook for the remainder of the year.With that, Megan, let's open up the call for questions, please.

[Operator]

[Operator Instructions] So we currently have a question from Richard Clarke of AB Bernstein.

[Richard J. Clarke, Research Analyst]

Paul, 2 questions from me really. The first one is just, I kind of understand the hurricane effect here, but your worst-performing brand in the U.S. has been Crowne Plaza, I think, minus 1.9%. I mean, is that a hurricane effect, or is that some sort of weaker performance? And therefore, where are we with the turnaround of that brand? And then secondly, upper midscale is not just underperforming the rest of your units in the U.S., but it seems to be underperforming in every geography. Europe everywhere seems to be seeing some underperformance of the upper midscale. Is there anything structural you're seeing there, budget hotels getting a little bit better; people sort of moving away from these sort of slightly more cookie-cutter brands, towards more boutique-y brands? I mean, were there anything you can sort of see that's happening that's maybe seeing Holiday Inn Express not being the great brand it once was historically?

[Paul Edgecliffe-Johnson]

Thanks, Richard. So look, on the second one and coming back on -- I'll just come back on Crowne Plaza afterwards. On the second one, our performance in the States in upper midscale was bang on with the upper midscale segment. So if you look at what happened in that segment, and the Smith data has just come out, I think got released overnight, you'll see that we're absolutely in line with that. If you look across geographies, it really is the midscale and the upper midscale segment that is still being preferred by anybody developing hotels because it's the best return. So that's where the greatest growth opportunities are. That does mean in some territories that you are seeing a greater level of supply coming into that, so whenever you think about what's going on in the RevPAR numbers, you've of course got to look at demand and supply, are they in equilibrium? In some quarters, in some markets of the world you'll find they aren't. An example will be in Sydney this year, where we and the others have found that, although it's a very good market and there's a lot of demand, just more people have built hotels to tap into that demand. So I absolutely wouldn't say that this is to do with consumers not wanting to stay at midscale hotels or not preferring our brands. We have no data that suggests that; indeed the opposite, that the affiliation to our brand is improving, and so I'm very confident around that. In terms of Crowne Plaza, no. I mean, Crowne Plaza has been on a journey in the U.S. with the Crowne Plaza Accelerate program. We've been -- we're moving, but -- and -- but the performance you're seeing there is much more orientated towards what's going on with hurricanes. And yes, if you have a few large hotels in markets like Dallas and Houston that would have been badly hit, then you will see an outsized impact on the overall estate from that. So there's nothing structural that I'd point to.

[Operator]

We have a second, follow-up question from Monique Pollard of Citi.

[Monique Pollard, Vice President]

Just a couple of questions from me. Firstly, on China RevPAR. Obviously Hong Kong RevPAR [ part, ] could you strip out for us what it would have been excluding any impact from the typhoon? Did that have a material impact in the quarter? And then secondly, now that Concerto is rolled out and operational in 95% of the hotels, obviously you're seeing initial feedback good, can you give us a time line for the rollout of some of the more advanced features such as the attribute pricing, et cetera? And then finally, when we think about going into the fourth quarter, obviously that's where the Americas RevPAR comp gets particularly tough, so should we sort of think about it in terms of a 2-year run rate? Is it reasonable to assume that the U.S. RevPAR from here gets weaker still?

[Paul Edgecliffe-Johnson]

Okay, thanks very much, Monique. So look, in China there is a little bit of impact in Hong Kong. It's really difficult to isolate it. I mean it was probably a little bit of a drag, but I'm not going to call it, particularly -- I mean, if I've got 5% growth in a market, I'm still reasonably happy with that. We're lapping against a slightly tougher comp, so I wouldn't call it as anything material. In terms of the next phase of GRS, one, I guess that we'd always hope to get the system rolled out by the end of this year, possibly into the first quarter of next year, so I'm pleased that it's gone a little ahead of schedule. It's always good when technology projects get brought in on budget, so it's a bit of a relief, if I'm honest, that it's all gone so smoothly. And we're now working on the next iteration and the next functionality. Of course, the beauty that we now -- of the system we now have is it's cloud based. So you can just deliver that additional functionality down over the Internet, and all the hotels are then -- they now have a system of additional functionality. So we don't necessarily have to do the big bang approach that all hotels then have the system. We can trial it in different brands and do different things, but we're going to be starting piloting that and the new features next year. It is more likely to be a phased approach, so you won't suddenly see everybody get everything at the same time, because I think that the benefit of some of the functionalities is going to be greater in, for example, InterContinentals and Crowne Plazas are [ on attributes ] and Regents where we have more different room types to merchandise than it is perhaps in an avid. So we'll just be -- we'll be thoughtful about that. And we will come back at prelims and talk about that in more detail. Looking in the fourth quarter comps, it is quite complicated looking at what we're lapping. If you look at -- if you go back to 2016 and look at Q3 in the States there, that was a strong quarter. Then we lapped a strong quarter in 2017 with some benefit from the hurricanes. And then -- so then if you're looking at what's the fourth quarter in the Americas is going to look like, I mean, particularly in the U.S., clearly there was benefit throughout the quarter from the hurricanes. My best read on it overall is it's not going to be dissimilar in performance to what we saw in the third quarter in the results there, might vary a little bit around, but I don't see any material change in that outcome.

[Operator]

We have another question from Tim Barrett of Numis.

[Timothy William Barrett, Leisure Analyst]

I have 2 things, please. On the special dividend, I guess it's fairly clear, but we can't see a balance sheet at this point. And can you therefore talk around the size? And adding another 0.5x on net debt, are you confident that you won't go above 2.5x? Or are you just saying that you've got a medium-term tolerance at that level? And then a second thing, if we've got time: Can you give early thoughts on next year in terms of what you're seeing very early on in terms of meetings and events and long-lead-time bookings?

[Paul Edgecliffe-Johnson]

Thanks, Tim. Yes. So look, in terms of leverage, multiples, et cetera or an awfully long time -- but 2 to 2.5x net debt-to-EBITDA is what I'm comfortable at, and to being towards the top end of that in current economic conditions. And that remains the same. So yes. Obviously, I'm not going to give an exact number because that will now give, I guess, sort of an EBITDA target, but our expectation is that it would take us towards the upper end of the range, certainly based on consensus, but not to the top end of that range and certainly not over it. Obviously, that gets paid out in the first quarter of '19. And that's based on the trailing 2018 number, which is I think the best -- given it's going to get paid in January, February time, the best comparator to use. And then look, on 2019: It's always difficult -- and the amount of business that we have on the books because we're not a big group house. So we don't have anything like the amount of big groups in-house a Marriott and Hilton would have, but it's still favorable out there. As I've talked about the drivers of demand, low unemployment in the U.S., good economic growth, wage growth still good, leisure spending still good. And these are all the things that drive demand. So if I look at our business, in a non-hurricane market, it's still good. Rate, we're still up. Group bookings are up slightly for Q4. And so there's a lot of positive data that we have both economic and within the business that shows that we're still in a good environment when you exclude that hurricane impact. Then looking more broadly across the business, china is still strong. There's a lot of demand, and supply and demand are in equilibrium. In the Tier 1 markets we are still seeing low levels of supply, so RevPAR is very strong. Tier 2 and Tier 3, a little bit more supply coming in but demand remaining very strong. And then the markets around EMEAA, they are as always a bit mixed. The Middle East is still tough because of the amount of new supply coming in there. As I mentioned, Sydney is a little bit tougher in particular because of the supply coming in there. Most of the other markets are in good shape, and so there's nothing I'd call out on those today.

[Timothy William Barrett, Leisure Analyst]

Okay. And your answer to that point earlier about supply in upper midscale and midscale, are you signaling anything different in 2019, or just more of the same?

[Paul Edgecliffe-Johnson]

No, no. It's really that, if you get to a market where a lot of people are opening a lot of hotels all at the same time, you may just see some -- that, that supply has got to be soaked up by the demand growth. So that's really all that I'm flagging; that if it's a question as to, is it about consumers not preferring the brand, absolutely not. I think that -- none of our data shows that. It's simply the amount of new hotels coming in. And if you look at the STR data, I think that would demonstrate that as well.

[Operator]

So we have a follow-up question from Tim Ramskill of Crédit Suisse.

[Timothy Ramskill, Research Analyst]

Paul, I've got 3 questions. I'm going to tell them one at a time, if that's all right.

[Paul Edgecliffe-Johnson]

Sure.

[Timothy Ramskill, Research Analyst]

So the first is again just around the cash return and your comments about being comfortable with leverage at the upper end of your target in current economic circumstances. I mean, just help us think about how to interpret that. I mean, the way I would sort of add some color is I guess you can pay down leverage quite quickly if you stop doing cash returns, probably by the best part of 0.5 of a turn. So is it therefore just the case that you just carry on happy at the top end and only when it becomes very apparent that the economic circumstances are different would you take a different approach?

[Paul Edgecliffe-Johnson]

So obviously, as you said, the business is highly cash generative. And it always have been. And that's what's allowed us to return so much cash to shareholders over the year, together with the asset disposals from the real estate we used to own. And that doesn't change. I'm not going to get tied into an exact algorithm as you'll expect us to exactly at this point we then pay back because they aren't special. And the board will have to evaluate what's the right timing and what's the right quantum, but effectively if I am comfortable to continue to run it at the top end of the -- of that range, then yes, it would mean that the money will come back in due course. It's more the timing of it that I think is the factor that we'll just keep under wraps for now.

[Timothy Ramskill, Research Analyst]

Okay, great. The second question is around kind of how you think about managing the business in a more difficult sort of economic circumstances. So clearly, there's a lot of concern in the market about where we're at in the cycle. You'd be well aware of that given the questions you face, but if we go back to the prices, you cut roughly 10% out of the cost base at that point in time relatively quickly. Just help us think about how again -- what flexibility you've got around costs if indeed the trading environment became more challenging. Obviously, I'm conscious that you're in the process of restructuring costs quite materially already within the business but more redeployment rather than taking costs out.

[Paul Edgecliffe-Johnson]

Yes, so -- and just to be clear. So I don't want anyone to misunderstand what I've said. My view is actually that the trading environment is still good. In the U.S. the trading environment is still a very good trading environment for us, for all the factors I've talked about, low unemployment, good wage growth. Corporate spending remains strong. So there's lots and lots of factors there, just got to look beyond hurricanes. In China, we continue to see extremely strong growth. And in EMEAA, once you take out the Middle East, the markets there are good. So that sort of put that to one side. And I'll treat it as more of an abstract question, if that's all right, Tim. The first natural hedge that you have, I guess, in our cost base is around bonuses. And if you do not hit your target, then that naturally creates quite a bit of EBIT hedge without having to look at anything else in the business. Beyond that, you have discretionary spending, as every business does, on air travel, et cetera. And then beyond that, you get into your more fixed-cost base of people, which is 70%, 75% of our people and which we can go after. There's always things that you can do there. And the restructuring that we've done has been more around moving people into the right area of the business, so taking costs out of, say, our finance back office to invest it into new brand -- the new brands that are launched. It is also worth pointing out that it's not just costs. It's also the volatility of the revenue base. It is quite a different company than it was back in, say, 2009. We don't have any of the big owned hotels. We don't have the HPT guaranteed payout. We have more geographic diversity. So I think we're in very good shape.

[Timothy Ramskill, Research Analyst]

Okay, great. And my last one was just perhaps the easiest of all, but the system growth organically that you're running at, the 4.6%, that's obviously sort of probably going to end up better than you were talking about at the start of the year where you were sort of saying, well, it might be 4% and then we'll accelerate toward industry-leading levels later. What do you -- would you describe as being the reasons why you've ended up doing a touch better than expected?

[Paul Edgecliffe-Johnson]

So yes, I am pleased with where we are at this point. So the 5.1%, which if you then take out the Regent and the Principal rooms takes you down to 4.6%, is a good performance for us. If you look at last year, where we were doing sort of around 4%, but then included within that was 3,500 rooms from Makkah which were those rooms we talked about before that had very low fees. So it is quite a material step-up. And it's a combination, more hotels getting opened. And this point -- in the first 9 months of the year, we've opened 40,000 rooms versus 33,000 rooms last year, including the 3,000 in Makkah. And we've signed a lot more. We've signed 74,000 rooms in the first 9 months versus 51,000 last year. So the combination of the step-up in signings that we've seen over prior year is now starting to come through into openings; and some of the initiatives that we've been driving, particularly over China where, for example, Holiday Inn Express is growing very strongly. But a combination of factors.

[Operator]

We have another question from Jaafar Mestari from Exane BNP Paribas.

[Jaafar Mestari, Analyst]

I've got 2 questions, please. The first one is a follow-up on the cost base. I appreciate your profile is fairly different from the last cycle. Exposure is very much top line. You have ongoing cost savings, but precisely on that part, at a time where you're looking to add more resources for owner support, launching new brands, et cetera, how are you making sure the timing of that is right and you're not adding more costs before you're delivering them? As of H1, you're actually slightly ahead, delivery versus investments. Can you please comment on that and then whether that's something you'll make sure remains the case for the next few years? And then separately, on the new strategic initiatives. So back in February, the 2 things you've announced were, one, adding new brands; and two, evolving the owner proposition. So we've seen many new brand initiatives. When can we expect to hear more on the owner support, et cetera? Maybe China Franchise Plus qualifies, for example, but what about the U.S., more management resources, more portfolio deals, et cetera?

[Paul Edgecliffe-Johnson]

Okay, thanks, Jaafar. So look, in terms of the cost base and making sure that we are taking on costs or changing the cost base at the right time, the first thing I would say is that the business model is advantaged in this respect; of course, we have the System Fund, which means that we're not in a position that, if there was ever a fiscal downturn, that a lot of other companies are aware, they're marketing all runs through their P&L, so the first thing they turn to is cutting the on-P&L marketing. This is all paid for out of the owner's money, which remains constant because it's linked to revenues. Or it marginally might come off, but it's unusual that, that happens. So we are quite privileged from that perspective. At the first half, we had spent, I think, a little less than we had saved at that point. My expectation by the end of the year is -- though I would like to have spent everything that we have saved, my guess is we will probably not quite manage to get all that money out the door. And I will point out what the benefit would be in the P&L from that at that point. So we'll try to make sure that it gets deployed because, otherwise -- we know it does create some noise in the numbers, but I think that will probably be a bit of an underspend against savings delivery. In terms of the owner proposition, yes, there's plenty that we're doing around that. And this is an area that we'll consider bringing out more at the prelim results back in February because there are certainly lots that we're doing to improve our owner support. And in terms of portfolio deals, et cetera in the U.S. you talk about, there is not many of those around phase-in on the ground. If there are any, we'll certainly talk about them, but around the owner proposition, yes, we'll talk more about that in February.

[Operator]

So we have another question from Stuart Gordon of Berenberg.

[Stuart J. Gordon, Senior Analyst]

Just one question just on the U.S. just so as I can understand the moving parts. I think last year was quite a complex RevPAR movement. There was a lot of moving parts, hurricanes, group bookings being canceled, even solar eclipses. I mean I think, all and all, it was around about a 30 to 40 basis point tailwind still in last year. Would it be right in just assuming just for simplicity that it's a similar -- that there's a similar headwind in these numbers? Or is there anything else we should be thinking about it?

[Paul Edgecliffe-Johnson]

Thanks, Stuart. And look, as you say, it is quite complex. And as I mentioned earlier, you have to look back at what was going on in 2016 and how strong that was but various factors as we start to think about the longer-term comparability. I'm going to try to avoid quarter-by-quarter trying to split out all of the impact by basis points because I'll be pointing to, well, holiday shift is 5 basis points. Eclipse is 5 basis points, et cetera, et cetera, which I don't really think happens -- helps us a great deal. I think things like the shifts in the Jewish observances and timing of Fourth of July, et cetera are sort of neutrals. And I would say that all of the impact is around the hurricane. But as I say, I think we're going to continue to see some hurricane impacts into the fourth quarter, probably a similar level of drag. And then in first and second quarter of 2019, there will be an element of drag, but it then -- but it sequentially reduces. So hopefully, that helps, Stuart, even if I can't give you an exact number.

[Stuart J. Gordon, Senior Analyst]

No, that's fine. And just as a follow-up on that. I mean, group bookings have, I assume, come back as you would have expected. There was nothing in the year-on-year group bookings that's changed.

[Paul Edgecliffe-Johnson]

Look, this is on the books for the fourth quarter. Generally, it's pretty good. So I'll say, look, I think that we will still see an impact from the hurricanes into the fourth quarter, but the macro environment is good. Rate was still up in the third quarter. It was up by 110 basis points or so. And group bookings were up. The number of books were up. And so once you take out the hurricane impact, then the fundamentals are still very positive.

[Operator]

We have another question from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

First question is on the big increase in signings. Could you remind us what the financial impact is? Because you get the upfront fees, don't you, so year-on-year, I think you'll be at least 25,000-plus extra, extra rooms. Secondly, removals, you're still guiding towards 3%, but you were half that at the 9-month stage, so it sounds a lot to leave in the fourth quarter. I'm just wondering about the degree of conservatism there. And finally, in terms of recommencing cash returns, does that mean there's no more sort of M&A that we should expect?

[Paul Edgecliffe-Johnson]

Thanks, Jamie. Okay, so just on the cash returns, it doesn't mean there's no more M&A. Well, I think, if we look at the M&A that we've done certainly over the last sort of 15 years of our history, almost all of the M&A has gone the way of selling stuff. Very little has been buying stuff, which is the nature of the industry. So we bought Kimpton in, what was that, 2014, for around the $400 million mark. When we bought Regent, I think the cash out of the door, that is all from our ordinary CapEx utilizations, so there's no usage of longer-term shareholder money, if you like. There are still some small opportunities out in the industry, but there's not very many. And we're not in the business of war chest-ing, but you shouldn't read that there's nothing and that we would never be able to do anything. If the right opportunity comes up at the right price, then we'd certainly have a look at it. In terms of removals, yes, it is a little lighter. And we said this at the half year. Will we get right up to the 3% level by the end of the year? Look, we might. If I had to guess, we might be in -- a little bit light on that, so -- but I would expect it to be in the upper half of that 2% to 3%. It might be in the midpoint of that rather right at the top end, but it depends if we can actually get -- if we can get a few hotels out because some of these, it is that we are working with the owner to get the hotel out. They want to keep the brand. We want it to go. But if we can get the hotel out, then we will, but we'll just have to wait and see how that resolves itself. And look, in terms of signing fees, they vary by -- obviously by region and by brand. On the InterCons you get large fees because there are some technical services. It's a very complex build, and we're very involved with the owner on that to make sure that it's built appropriately to brand standards, et cetera. Holiday Inn Express and avid, very much lower fees. If there's any big impact, then we'll certainly pull it out in the full year results and make that clear, as we historically would do, but we're not guiding right now to what the number would be.

[Operator]

And we have the last question from Jarrod Castle of UBS.

[Jarrod Castle]

Two from me, please. One, I think some of your competitors are talking more positively about the oil states, so I just want to get your views going into next year, how you're feeling about that. And then secondly, obviously the pipeline is growing very, very well, and I'm just wondering, is there any kind of hesitation from kind of, in particular, U.S. investors given the fact that we are starting to see kind of interest rates go up now? Or do they focus more on the demand environment at the moment when deciding to invest in your brands?

[Paul Edgecliffe-Johnson]

Thanks, Jarrod. So yes, I mean, the oil markets certainly are a lot better than they were. Permian Basin is a good market for us. There are some ups and some downs. There's no material impact as we look at it at the moment at the group level, but we're not certainly negative on them. There's just nothing that I'll pull out as making material impacts on the numbers. In terms of the returns that owners are getting from the hotels, I think it's there are puts and calls in this in that in -- the construction costs over recent years have increased. You have seen some increase in raw material costs, particularly if you're having to import from China. Interest rates are going up a little. So investors are certainly getting more selective. And we are seeing more and more owners looking for the highest-ROI opportunities, which is things like Holiday Inn Express, Staybridge and avid, which is driving a lot of that interest. But they are very long-term investors, so if you build a hotel, you're not thinking about what happens in the interest rate cycle in the next year. You're thinking about a building which is going to be there for 30 to 50 years, so it does tend to be more orientated towards what's the longer-term return on an investment you're going to make.

[Operator]

We have no further questions on the line. Paul, I'll hand back to you for any further remarks.

[Paul Edgecliffe-Johnson]

Excellent. Well, thank you very much, Megan. And thank you, everybody, for dialing in and listening. And happy, as always, to take any further questions. Please do just give us a call. And we look forward to seeing you all soon.Thanks for your interest. 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 lines. Have a lovely day.