InterContinental Hotels Group PLC (IHG) on Q2 2021 Results - Earnings Call Transcript
Operator: Hello, everyone, and welcome to the IHG Interim Results to the 30th of June 2021. My name is Brika, and I'll be the event specialist running today's call. . And I will now hand over to our host, Stuart Ford, to begin. So Stuart, please go ahead, when you're ready.
Stuart Ford: Thanks very much. So good morning, everyone, and welcome to IHG's conference call for the first half results of 2021. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Keith Barr, our Group Chief Executive Officer; and 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 do refer to this morning's announcement and the company's SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. For those analysts or institutional investors who are listening via our website, can 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. That release, together with the presentation and the usual supplementary data pack can be downloaded from the Results and presentations section under the Investors tab on ihgplc.com. With that, I'll now hand over to Keith.
Keith Barr: Thanks, Stuart, and good morning, everyone. In a moment, Paul will talk you through our financial performance, but first, let me share some key highlights from the half. In February, we set clear plans on how we are positioning IHG for growth as the industry recovers from the pandemic. Building on the big investments we've made in our brand portfolio, in IHG Concerto and our guest reservation system, enhancements to loyalty and owner economics and the work we've done on our cost base. This has really been about making sure that everything is in place to succeed in this new environment and accelerate our growth as things improve. And they are improving. The impact of travel restrictions around the world are still, of course, being felt, with global RevPAR down 43% relative to 2019, but demand has been progressively recovering with a significant improvement in the second quarter sustained into July. We'll talk in more detail about this shortly, but there's a lot to be confident about when we look at some of our biggest markets like the U.S. and Greater China. Some locations are at record occupancy. Resort destinations are in massive demand. Domestic flights are filling up and corporate and group business is starting to come back. This is giving us great confidence and it's giving our owners confidence too. In terms of growth, as we said previously, we plan for 2021 to be a transitional year with a higher-than-average removals rate. On a gross basis, our net system size grew by 5% for the half including 132 openings, up 46% on last year. On a net basis, net system size growth was flat year-on-year. It's critical that we keep investing in our business, in our brand portfolio and in the enterprise that underpins it as we focus on accelerating our system growth from next year onwards. And we continue to take big steps forward during the half. We're making rapid progress on our review of around 200 Holiday Inn and Crowne Plaza hotels, with our focus on protecting the quality and consistency of the estate, supported by a huge amount of investment from our owners into many of those properties. And you'll have seen that we've also announced today the launch of a new Luxury & Lifestyle collection brand in the coming weeks. There were a number of excellent signings across the brand portfolio in the first half as well, 203 hotels in total, which is more than 1 a day and up almost 1/4 on last year. I'll talk about each of these elements in a little more detail later on. But for now, let me hand over to Paul to take you through the financial results.
Paul Edgecliffe-Johnson: Thank you, Keith, and good morning, everyone. You'll see that throughout our materials, we are comparing our performance against both 2020 and 2019, but I'll focus my comments on the latter comparison as it is the most meaningful. Starting as usual with our headline results from reportable segments. Revenue decreased 44% to $565 million, and operating profit decreased 54% to $188 million. Underlying revenue from the fee business decreased 32%, and operating profit decreased 44% driven by the adverse mix effect of weaker performances in the managed business. In central operations and overhead, the net operating loss reduced to $40 million driven by the $8 million benefit from the system fund reporting change and the cost-saving program we implemented last year, which remains on track to deliver a sustainable $75 million reduction. Adjusted interest, including charges relating to the System Fund, increased to $72 million as expected. This reflects that although net debt is lower, gross debt and gross cash are both higher. Our interim effective tax rate remained elevated at 36%. We estimate the effective tax rate for the full year will be in the mid- to low 30% range, although forecasting in this area remains challenging. In aggregate, this performance has resulted in an adjusted earnings per share of $0.404, down 73% against the first half of 2019, although up strongly from the $0.049 cents this time last year. Turning now to our drivers of performance. The restrictions in our key markets around the world contributed to an occupancy decline of 21 percentage points, with rate down 17% against the first half of 2019. This resulted in group RevPAR down 43% on a comparable basis, which includes the adverse impact from hotels that were temporarily closed. Group RevPAR was impacted by the owned, leased and managed lease estate which declined by 72%. The fee business estate performed significantly better with RevPAR declining 42%. This variance in performance continues to impact our RevPAR sensitivities, which in 2020 was a $15 million movement in EBIT per 1% movement in RevPAR. We're now starting to see some small improvements in the sensitivity, which are trending a bit better than $15 million. As a reminder, our RevPAR sensitivity is referring in 2021 versus 2019 and is calculated before cost savings, with the majority of the $75 million having been delivered in the first half. During the first half of the year, we added 17,000 rooms to our system. Our continued focus on the long-term health and quality of our established brands resulted in the planned removal of 19,000 rooms, 13,000 of which related to the Holiday Inn and Crowne Plaza estates in the Americas and EMEAA regions, which I'll talk about in more detail later. These additions and removals brought net system size growth on a year-on-year basis to 0.1% or up 3.3% versus 2019. Our usual summary of total RevPAR growth and total rooms available on an underlying basis can be found in the appendix. Turning now to the drivers of our RevPAR performance in the first half. Q1 saw continued impact from government-mandated restrictions in a number of our key markets. However, both occupancy and rate saw sequential monthly improvements from March, reflecting vaccination rollouts and the easing of restrictions. By June, it was encouraging to see rates back at 90% of 2019 levels and occupancy down only 18 percentage points. This reflects the sophistication of our revenue management tools and the mix impact from our leisure and resort hotels. Occupancy and rates continued to improve in July with nearly 50% of our hotels achieving RevPAR above 2019 levels. And in the more recent weeks, we've seen rates on par to 2019. Our recovery in the second quarter was driven by domestic leisure market. In the U.S., resort locations, which represent around 5% of the Americas estate, led the recovery with RevPAR 3% ahead of 2019. Our nonurban locations, which are weighted to franchise mid-scale and upper mid-scale properties and represent more than 2/3 of the Americas estate, strongly outperformed urban market. In EMEAA, recovery was unsurprisingly led by markets which eased domestic restrictions such as Australia and the U.K. from mid-May as well as the Middle East. And in Greater China, RevPAR was 33% ahead of 2019 levels in Tier 4 locations, owing to these markets being dominated by leisure-orientated and resort hotels that benefited from strong domestic demand. I will now take you through each of these regional performances in more detail. Starting with the Americas. RevPAR was down 34% versus 2019, with the U.S. down 30%. In the second quarter, U.S. RevPAR improved to down 23%. Underlying fee business revenue was down 29% and underlying fee operating profit was down 27%. This strong relationship reflects that the estate is largely franchised together with the good progress on cost savings. We opened 9,000 rooms across the Americas with around 5,000 of those in the second quarter, and we signed a further 8,000 rooms, half of which were for our Holiday Inn brand family, taking our Americas pipeline to 97,000 rooms. Looking at our business and leisure mix in more detail. Demand from business travelers have been relatively resilient over the past year and in the last quarter has started to accelerate as corporate demand and group meetings start to return. Leisure demand has recovered more rapidly, particularly in the last few months, where activity has been close to 2019 level. Moving now to Europe, Middle East, Asia and Africa, where RevPAR was down 68% in the half, with the second quarter down 65%. Government-mandated restrictions in Continental Europe and lower levels of international travel across Southeast Asia resulted in RevPAR down 82% and 67%, respectively, in the second quarter. The U.K. fared better with a 60% reduction in the second quarter as leisure travel was permitted from mid-May onwards. Underlying fee revenue was down 67% to $53 million underlying fee operating profit declined by 95 million to a loss of $3 million. Looking briefly at the development environment, we opened around 2,000 rooms in the half and removed 6,000 rooms, of which 5,000 were Holiday Inn and Crowne Plaza properties. A strong pickup in signings saw a further 9,000 rooms added to our pipeline. Turning now to Greater China, where RevPAR was down 26% for the half and 16% in the second quarter. Tier 1 cities were down 26% for the second quarter, reflecting their greater weighting to upscale and luxury hotels and international inbound travel. Tier 2 to 4 cities saw RevPAR increase 4% for the second quarter, reflecting their greater mix of leisure and resort destination and the pickup in demand from domestic travel. Underlying revenue was down 23%, and underlying operating profit was down 32% to $25 million, impacted by $9 million of lower incentive management fee income. We opened 7,000 rooms in the half and had a very strong period of signings with a further 16,000 rooms added to our pipeline, bringing the region's combined open and pipeline hotels to over 1,000 properties. Moving on to look at the progress made with the review we announced in February of around 200 Holiday Inn and Crowne Plaza properties. We've been working closely with those hotels which were identified as being below where we would like them to be in areas such as customer satisfaction and property conditions. In the first half of the year, 56 hotels or 13,000 rooms exited for these 2 brands in the Americas and EMEAA regions. In addition, improvement plans were agreed with over 30 hotels, whereby they will stay in the system. We expect to have completed the review by the end of this year. The conclusion of this review combined with the significant investments made by owners to date across the remainder of the estate will help drive further consistency and quality. From 2016 to 2019, our continued focus on quality led to an average hotel removals rate of 2.2% per year. Within this, the rate of removals in the Holiday Inn and Crowne Plaza estates in the Americas and EMEAA was higher at 3.1% and the remainder of the estate at 1.6% a year. We expect, post completion of the review, to see a lower average removal rate across the estate with Crowne Plaza and Holiday Inn exits falling back in line with our underlying rate of around 1.5%. Turning now to CapEx. We spent gross CapEx of $42 million and net CapEx of $1 million. Maintenance CapEx was $23 million lower than last year, given reduced expenditure at hotels and corporate offices. We anticipate higher spend in the second half of the year. We also expect key money to increase in the second half. On the System Fund, given the latter stages of GRS projects, CapEx spend is now lower, and depreciation is higher which, combined, lowered net CapEx by $29 million. Our medium-term guidance remains unchanged at up to $350 million gross per annum. We expect our recyclable investment and System Fund capital investments to net to 0 over the medium term, resulted in net CapEx of $150 million per annum. Moving on now to cash flow. In the first half, our adjusted free cash flow saw an inflow of $147 million compared to an outflow of $66 million in the first half last year. Our net cash inflow, which included an adverse exchange rate, movement led to a $71 million reduction to our net debt. In that context, our strategy for uses of cash remain unchanged. Our first focus is to reinvest to drive growth. Secondly, we want to generate sufficient funds to pay a progressive ordinary dividend. Lastly, where there is further cash available which is truly surplus, we will return this to shareholders, as we have previously demonstrated. We've seen trading improve significantly during the first half of the year, leading to profitability rebounding, and we are confident that the proven highly cash-generative nature of our business model will allow resumption of dividend payments in due course. With signings and openings returning strongly and a lower structural rate of removal, we are well positioned for long-term system growth. This system growth, combined with RevPAR recovery and the significant sustainable reductions we made to our cost base, positions us well for further substantial improvement in profitability. Thank you, and I'll now hand you back to Keith.
Keith Barr: Thanks, Paul. I'd like to spend some time looking at our industry and how we are supporting our guests and owners as demand returns. As Paul mentioned, we're seeing strong recovery in demand with positive forward-booking indicators over the summer around domestic leisure and good signs of returning corporate demand and group's activity. You can see this trend coming through wherever the virus is more under control and where vaccinations are rolling out at good pace. Confidence breeds confidence. As more people travel, more consumers start to think about their next trip. As businesses turn to hybrid working, more think about how to bring their teams together or to meet clients face-to-face. As more guests head through the doors of our hotels, more of our owners start to turn their thoughts to growth and opening new hotels with us. And the conversations they're having with banks and lenders are easier than they were a few months back. We can see all of this playing out and we're focused on making sure we can perform strongly in the markets where this is the case and be there for our hotel teams and owners in the markets that still have a little way to go yet in the recovery. For our guests, it's very clear how much importance they place on cleanliness and safety. And we've enhanced our standards and training programs with science-led protocols. The importance of seamless technology and a growing preference for sustainable practices also continues to come to the fore, and both these elements are represented as key priorities in our strategy. In terms of growth fundamentals, as pressure on independent hotels have increased during the pandemic, that part of the market continues to shift to brands of scale. Our own makeup of signings across a number of our brands reflects that, and we're well-placed to continue that trend, bolstered further by the launch of our new collection brand. We remain completely focused on delivering industry-leading net rooms growth. Our 4 strategic priorities are in place to help us achieve that, putting an even sharper focus on our brands, our services and solutions, owner returns and reputation. Starting with customer-centricity. It's critical that we put our 2 sets of customers, our owners and our guests, at the heart of everything we do. Challenging ourselves to always operate with insight and make informed decisions is how we create tailored services and solutions that increase demand, strengthen guest preference and deliver strong owner returns. It is something we've taken to a different level, and during the first half, we saw that reflected in our guest satisfaction index being net positive throughout the period, ahead of our competitors. Outside of the work we've done around cleanliness and safety, we've broadened the appeal of our IHG Rewards loyalty program with new promotions and earn-and-burn opportunities and we're supporting returning business travel with tailored campaigns and enhancements to our meetings and events offer. When it comes to our owners, we've been there to support them through the pandemic, including consistently trying to reduce costs where we can. So much great work has been done to offset extra costs around safety and cleanliness protocols with changes to operating procedures. And using procurement, we've been able to deliver significant cost savings, for example, across our mid-scale breakfast offering, all whilst maintaining the highest-quality guest experience. We have also created comprehensive hiring toolkits and increased our partnerships to support owners with recruitment as occupancy increases. If we look at our priority to create digital advantage as a company, this is about how we drive direct bookings to our hotels, create rich, integrated digital experiences for our guests and deliver revenue-enhancing propositions to owners. Our investments in our cloud-based technology platform, IHG Concerto, has allowed us to rapidly deploy technological developments to support a safe and secure guest experience and reduce unnecessary contact. Contactless check-in is receiving strong guest feedback and is already live in 3,000 hotels in the U.S. and Canada. With IHG Concerto, we can also develop and roll out performance-enhancing tools faster and easier than ever before. The next phase of our guest reservation system, attribute pricing, is making good progress to enable the curated merchandising of rooms and selection of add-ons for fully tailored stays. There's a huge lift this year to catalog the inventory of nearly 6,000 hotels and almost 900,000 rooms, but we're working towards having a truly differentiated offer. Turning now in more detail to how we are building loved and trusted brands. First, our Essentials and Suites brands, which have demonstrated both great resilience during this pandemic and continued further growth. Holiday Inn Express is a key growth engine for us, and we're investing to ensure it remains the preferred choice in its segment for guests and owners. A big moment, as we get back to more normal times, has been the return of our signature self-service breakfast in the U.S. and plans are in place to roll this out globally as market conditions allow. The brand has also reached the incredible milestone of 3,000 hotels with nearly 70 opening in the half and the pace of openings in the Americas and Greater China on par with 2019. Its 667 properties in the pipeline represent over 20% of the current system size with a strong growth outlook in all regions. As we continue to grow the brand, we also keep pushing to ensure it can offer even stronger returns for our owners. Our evolved Formula Blue public space and guest room designs in the Americas include a new purchase-ready format that is using our procurement scale to deliver cost savings of more than 10%. Equally, for Holiday Inn, which was recently voted by consumers as the most trusted hotel brand in the U.S., we have optimized our breakfast offer for guests and owners. And our new build prototype, which brings fresh and modern design to our hotels across the Americas, is delivering a 5-point uplift in guest satisfaction. In Europe, our Open Lobby concept is being adopted in almost the entire estate and also generating meaningful uplifts in guest satisfaction and increased food and beverage revenue for owners. If we turn to avid, which we expect to be our next brand of scale, we continue to see strong guest satisfaction scores across the open estate. Its low cost to build and operate and competitive price point make it attractive to owners and guests. And we think its appeal is likely to increase in a constrained economic environment. avid is already our second-highest contributor to net system size growth after Holiday Inn Express, and we've got a pipeline now of 175 hotels with the open estate expected to reach 50 by the end of the year. Our Candlewood Suites and Staybridge Suites brands have really been exceptional throughout this pandemic. And in June, we saw them deliver occupancy levels of around 80%, in line with 2019. Our new prototype designs, which offer owners lower build and operating costs, are now committed in over 170 Candlewood Suites and more than 160 Staybridge Suites. And momentum for the brand has continued with strong signings for both, including our first Staybridge Suites in India. Turning next to our Premium and Luxury & Lifestyle brands. Looking at Premium, we continue to see very strong interest in our conversion brand, voco. We've made excellent signings in the Middle East and following its launch in the Americas and Greater China last year, we've secured signings in Chicago, Washington and New Orleans in the U.S. and Nanjing in China. Notably, the pace at which hotels are converting into our system, a key part of the voco offer, is really helping owners maximize returns and quickly benefit from our global scale. At Crowne Plaza, the actions we have taken to further strengthen the brand is resonating with our guests. Over 70% of the U.S. estate has recently updated, and we've been sensing a significant improvement in the latest J.D. Power guest satisfaction ranking. We look at our Luxury & Lifestyle brands, our hotels are performing well, seeing strong outperformance in guest satisfaction across all brands. And we're seeing a number of our owners choosing to invest significant capital into new hotels or in renovations to their existing properties. There were some very strong luxury signings and openings in the half. For Six Senses, we signed 4 hotels, including 2 in Greater China, and we opened a stunning property in Botanique, Brazil. We're seeing good momentum for Regent with an iconic signing in Kyoto, Japan. And the renovation of the InterContinental Hong Kong, which will rebrand to a flagship Regent, is well underway and on track to open next year. For Kimpton, openings in France and Australia are further step in its international expansion, alongside some great domestic openings in the U.S. Hotel Indigo, the largest boutique brand in the industry, continues to break into new markets, and we're on track to take the estate from just over 100 properties today to double that in the next 3 to 5 years. Let me now share the steps we are taking to further round out our brand portfolio. Over the past 4 years, we have transformed our brand offering, growing to 16 brands through organic launches of avid, voco and Atwell Suites, and enhancing our Luxury & Lifestyle offer with the acquisition of Six Senses and Regent. Each one of those brands represents a really clear and compelling growth opportunity for us, adding momentum to our already more established brands that are still the growth engine of the business today. As we've engaged with owners and developers on our expanded portfolio, it's become very clear that there is strong demand and appetite for a collection brand from IHG in the Luxury & Lifestyle space, something that could create more opportunities to work with us on properties that today may not have quite the right fit in our portfolio. Before I talk about the collection brand, let me first recap for you where we've already got to with our strong positioning in Luxury & Lifestyle. Building on the heritage InterContinental Hotels & Resorts, the world's first and largest luxury hotel brand, we are already the world's #2 luxury and lifestyle player by system size and pipeline, with the acquisition of Regent and Six Senses and the international expansion of Kimpton and Hotel Indigo, creating an impressive portfolio for both guests and owners. From 2 brands in 2014, we now have 5; and from 240 properties, we now have over 430 today. With more than 100,000 rooms, Luxury & Lifestyle is already 13% of IHG's total system size. And our brands in this space represents 17% of our total pipeline. As you can see, our strategic expansion has been designed to fill different guest needs across luxury and upper upscale, but we want to go even further with the launch of our new collection brand. We're keeping a tight lid on the brand's name and features for just a few weeks longer, but it will perfectly complement our existing 5 brands and also offer a different price point to our upscale conversion brand, voco. This collection brand will allow IHG to fast-track further growth in segments worth over $100 billion and where 1.5 million rooms are currently independent. We expect the brand to grow to more than 100 properties over the next decade. With independent hotels having seen significant trading pressures, owners are increasingly looking to access the scale benefit of branded systems and their marketing, loyalty and technology platforms. This trend has already seen conversion grow to become 1/4 of IHG's signings over the last 18 months. While all of our Luxury & Lifestyle brands represent attractive conversion opportunities, owners of high-quality independent hotels that join the collection brand will be able to do so with limited capital outlay and with the retention of their hotel's distinctive identity and character. Owners will gain access to our world-class revenue delivery systems, distribution channels, loyalty offer and procurement scale to drive higher returns. The brand will also be fully supported by dedicated luxury operations, marketing, sales and reservation teams. The rapid success we've already had with voco underlines IHG's proven track record of creating distinctive high-quality propositions capable of scaling fast and delivering commercial outperformance. For guests, we know there is pent-up demand for distinct experiences, unique service, especially from affluent millennial and Gen Z travelers. But they also want the trust and assurance of a big brand as well as the benefit of a big loyalty program. We'll be able to meet all those demands by creating an exclusive collection of high-quality hotels and leading urban and resort locations. We have made significant progress with Journey to Tomorrow, our new 2030 responsible business plan, which starts a decade of ambitious commitments. Starting with our people. We are continually investing in our culture that we support, develop and empower colleagues and attract new talent into the business. We have programs to increase the diversity of IHG's leadership and talent, and ongoing education is paramount, which is why conscious inclusion training has been provided to all corporate colleagues and leaders globally. It has also been the seventh consecutive year in a row that IHG has been recognized as the best place to work for equality. In our communities, we are working to improve the lives of 30 million people around the world by driving economic and social change through skills training and innovation. Our IHG Academy is extending the reach of its training and resources with new strategic partnerships to deliver even more skills development, hospitality training and career pathways. And with such a global footprint and strong pipeline of hotels, it's vital that we work closely with our owners and partners to ensure we operate and grow in ways that protect the world around us. Our environmental targets include reducing carbon emissions in line with climate science. Supporting this, we are improving our collection of energy usage data across our hotels through the upgrade of IHG Green Engage, our environmental management system. To pioneer the transformation to a minimal-waste hospitality industry, we're in the final stages of supplier contracts that will remove the single-use miniature bathroom amenities right across our global estate in 2022. And as part of our actions to reduce the water footprint of our hotels and help secure water access to those at greatest risk in our communities, we have also launched 2 further stewardship projects in Shenzhen, China and Hayman Island, Australia. So to sum it up, the long-term attractiveness of our markets remains clear. While there continues to be some volatility, demand has returned strongly in the recent months, and forward-looking indicators for the duration of the summer are positive. We're also seeing the return of transient business and groups demand as corporate activity ramps up in the second half. Our owners are confident too as reflected in another 132 hotels opening in the period and 203 signings, both sizable increases on last year, and we expect this pace to further accelerate as the development environment strengthens. We are executing against the strategic priorities we outlined at the start of the year. We are well-placed to gain further share with leading brands in the largest markets and segments, supported by our powerful technology and loyalty platforms and a clear commitment to do the right thing by our people, communities and planet. Our category-leading brands, together with our new brand launches, give us great confidence in our ability to deliver sustainable, industry-leading net system size growth in the years ahead. And all the actions we have taken over the last 18 months position us to exceed our prepandemic levels of growth and profitability. We are, therefore, confident in the strength of our positioning and future prospects. With that, Paul and I are happy to take your questions.
Operator: . The first question from the phone line comes from Jamie Rollo of Morgan Stanley.
Jamie Rollo: I've got three questions, please. The first 2 are just on the rooms growth numbers. Can we sort of pin you down on some clearer targets for that, please? You've been targeting industry-leading for some time, and it's been sort of close to 0, I guess, for two years, including this year. I get that better removals should add sort of 50 basis points from 2022, but your signings are still down quite sharply in Q2, down by about 1/4 from 2019, which could weigh on openings over the next couple of years. So clearly, next year is going to be better than 0 at a net level. But if industry-leading is, say, 5%, is that sort of a realistic number for next year? And then secondly, specifically on the new brands, which all sounds great, I mean avid seems to be the one with the most opportunity and that's the largest in the pipeline. But its own pipeline has fallen by 20% in the last year. Is it fair to say that's a bit behind target? It just looks like there's been no sort of signings. Sort of opening, what's in the existing pipeline? And then finally, on the cost savings, if my math is right, it looks like first half fee costs were about $60 million below H1 '19 using the restated numbers, which, annualized, is well above the $75 million. So it looks like there's just a bit more permanent savings than just temporary in there. So should we not expect the $75 million to be beaten at some point?
Keith Barr: Thank you, Jamie. I'll pick up on the rooms growth piece, and then I'm going to let Paul talk about the avid signings and on the cost savings stuff, okay?
Paul Edgecliffe-Johnson: Yes. Jamie, certainly, in terms of the cost savings, we saved significantly last year, as you know, we saved about $150 million. And if you look over the very long term, we've always been tight on costs if you think about how much margin we've added to the business over the years and the strength of our efficiency initiatives. And yes, as you look at our costs in the first half versus 2019, we have done the majority of the $75 million of saves that we've said will be structural and permanent. But equally, this is a growth business and the imperative is to make sure that we can optimize the success of the business long term. So we are happy to invest back in. We still have some positions that are open in the company because it's actually hard to recruit every position at the moment. So we'll be investing back in to make sure that we are as well set as possible. If that all does get invested as planned, then we expect to come in around the $75 million structural reduction. It could be a little more than that, you will have to wait and see. In terms of avid, yes, as you say, a really good rate of growth there, and it's going to be a very significant brand for us. It's our second-highest contributor to growth. Yes, we've talked before about the nature of an avid owner, which is not the institutional owner or family-office owner of, say, our InterContinental. So they have had to focus over the last 12 months or so, more on their operating business than on new development activity. We are starting to see a real change in that. I'm sure Keith will come on to talk about this when he talks about the future growth. But these owners are now very much focused back on getting sites, getting hotels and having the pipeline under construction. And that'll all be very well for the future of our mainstream brands, so very pleased with the progress with avid.
Keith Barr: Thanks, Paul. And so, Jamie, more broadly on rooms growth. I think -- first, let me talk a little bit about sentiment then get into the numbers. I mean I was traveling in the U.S. 2 weeks ago, catching up with some of our U.S. owners. I was at the analyst conference and I was talking to people at the HOA conference the other day. You are seeing, really, the development sentiment in the mainstream segments begin to come back and accelerate as performance has been very, very strong in that segment over the summer. And lenders are now feeling more confident moving forward too. So I think that it was right for there to be a bit of a pause in many ways for the segment in this industry for a period of time. You are now seeing that sentiment move in that direction, which will lead itself to acceleration for Express, for avid and for Atwell as you get in there. So if you remember back in 2017, we talked about needing to accelerate industry-leading levels of growth. And look what we've delivered in 2019. From a gross perspective, we led the industry from all the major players. And our net basis was effectively -- it gets slightly behind Hilton, probably equal to Marriott effectively or maybe higher than Marriott. So we showed that over a number of years, we can progressively get to that point. And we said 2021 was going to be a transitional year. And if you look at the removals we had, of course, we had the SVC portfolio, which had an impact of 102 hotels, and we're doing the Holiday Inn and Crowne Plaza review, which will strengthen those brands for the longer term. And then we had a normal level of removals and they kind of almost fall in those 3 distinct buckets. So when we think about our owners now having more confidence, we're seeing ground breaks begin to move forward. I would expect that '22 and '23 looks a lot more like 2018 and 2019 as we -- how we accelerated into that level of growth moving forward too and have -- very, very confident in our business to be able to achieve that. And I think, honestly, that number you put out there is realistic. 5% is sort of kind of where we -- the industry needs to be getting to be one of the top players.
Jamie Rollo: And any specific targets for avid you could share with us?
Paul Edgecliffe-Johnson: We've got a pipeline already of 175 hotels and system size of 38. This is going to be a multi, multi-hundred-unit brand. I mean it will take it a while to get up to Holiday Inn Express' 3,000 and probably beyond my time in the industry, given it's taken some decades to get there. But no reason why it can't get there over time. This is a brand with a very long runway ahead of it.
Jamie Rollo: Okay. Great. 5% for next year. Okay. Brilliant.
Keith Barr: Thanks, Jamie.
Operator: We now have a question from Bilal Aziz as from UBS.
Bilal Aziz: Two for me, please. Just thinking beyond the summer now, can you perhaps remind us of your business versus leisure mix into the third quarter? And perhaps share some data points on the business side which are giving you more confidence on bookings for the third quarter. I noticed one of the U.S. peers gave midweek occupancy already. And then tied to that, it feels like you're formally indicating high group profits versus 2019. Perhaps if you could flesh out how linear you think that could be based on all the variables you see now. Or perhaps another way to think about it, what's the level of RevPAR decline you're comfortable with to get back to 2019 profits, please?
Keith Barr: Great. Thank you, Bilal. I'll let Paul talk about the profitability, and I'll talk a little bit about the business and leisure mix, what we're seeing moving forward -- what we've seen to date and what we think the future may hold. And so we've traditionally talked about our business-leisure mix being around 60-40. That changed a little bit, clearly, during the pandemic. But again, that's a good way to think about our mix. And within that 60%, you've got group being probably about 10% to 15% range overall. So I think taking a step back, thinking about throughout the pandemic, we saw essential business travel continue in our hotels, which drove occupancy levels. At the worst of the pandemic, we still had 60% occupancy levels at some of our Suites properties or in the 40% for our Essential properties. And that was essential business travel, and that's continuing on. So those individuals who are going to manufacturing plants to service them, the people who have to travel from city to city to do their job, that's happening, and that's accelerating. We are now beginning to see corporate travel come back, which is more discretionary in nature. Looking at some of the airline numbers I saw the other day, they were saying 50% to 60% of corporate travel coming back and that would begin to step up into Q3 and Q4. We are seeing some groups, meetings and events begin to book and taking place in our hotels in COVID-safe ways. So we're definitely seeing that accelerate. The real question is going to be to what degree does discretionary business travel come back in Q3 and Q4 and how does that accelerate into then to 2022. I'm not sure that anyone has hard and fast data on that other than we're saying is we're seeing building momentum in that space for Q3 and Q4, talking to our corporate customers. We're hearing they want to go out and connect with clients, they want to go out there and see their teams. Anecdotally, we stopped traveling as a hotel company for the most part for the better portion of a year, and we're now back out on the road. I was in Atlanta, Salt Lake City, Los Angeles. I'm getting over to Paris soon. We're getting our teams together. Our franchise support people are out there. So we're traveling to do our jobs, and we're seeing other companies doing the same too. So hard to say exactly what level of uptick you'll see in Q4. We do think you will see a continued movement of leisure though as well because a lot of people couldn't travel this summer either affordably because pricing has been so aggressive over the summer for leisure and resort destinations or basically empty nesters, people without kids, can travel in those periods of time now. So we're going to be doing that. So we think leisure will continue to be solid. Essential business travel will continue, and that discretionary business travel will come back into play and really being -- accelerating into '22. But it's going to be directly correlated to vaccination rates, consumer confidence and lifting of travel restrictions, which are honestly, those are beyond our control, but they're all trending in the right direction for the most part. I'll let Paul talk about profitability now.
Paul Edgecliffe-Johnson: Yes, so you correctly note that if we were back at the same level of demand and rate, then we would see a more profitable business. I think it actually goes a little beyond that. I think that what we've proven over the last 18 months is the resilience of the business, the power of the brand. The way we have helped our owners run their businesses, which has been very much appreciated and I think will drive even more business to us from them over time, the way we've treated our employees, our colleagues, the way we have supported them I think will drive greater levels of loyalty. And so I think we will come out of this with a stronger business than we went into it with. We've also worked, as Keith's been talking about, to develop a new brand, which has huge opportunity. In terms purely of the profitability side, then we have saved structurally $75 million from our cost base. And you'll remember that we talked about the change in the accounting around some of the credit card fees, which has brought in another $20 million, $25 million of profit. So when you combine those 2, that's about $100 million additional profit that comes into the business. When you think about the prepandemic sensitivity of RevPAR to profit, then you were talking about 1% was about $13 million or so. And in due course, it will revert back to around that. So on a purely numerical basis, if you were taking that $100-or-so million and $13 million, it's 7.5% or 8%, I think reduction to RevPAR would still drive the same level of profitability. I think one of the really encouraging things we're seeing is that rate has been so strong. There was a question, would rate take a long time to recover? We've actually seen in recent weeks that across the business as a whole, aggregate rate higher than we saw in the same period of 2019. It's just an indication of when demand is there, then we can get back to full rate in the business. Thanks very much.
Operator: The next question comes from Vicki Stern of Barclays.
Vicki Stern: Just firstly on the signings, you've given some helpful color there, particularly on the U.S. in terms of how trends have shifted a little bit more favorably recently. If you could just sort of flesh out what you're seeing in some of the other markets, and I suppose more broadly, what it's going to take, if you like, to get things back to where they were before in terms of signings rates. In terms of unit growth, I think Marriott were indicating a slowdown in construction starts in recent months, and that potentially could weigh on their unit growth over the next sort of 1 to 2 years. Just curious what you're seeing there. It doesn't sound as if you're sort of particularly concerned in your answer to Jamie's question. So yes, keen to hear your thoughts on that. And then coming back on that point, Paul, about pricing, yes, it's been kind of notable just how quickly pricing has recovered. I mean some of the industry is sort of going beyond that and suggesting that unlike in previous cycles, we potentially see price come back in line with occupancy as opposed to with a sort of lag. Obviously, that's how things have gone so far. But if you could just sort of flesh out what you think things might look like as we get back into a sort of more normal mix business versus leisure, et cetera.
Keith Barr: I'll let Paul take pricing, then I'll talk a little bit about signings and about ground breaks, Vicki.
Paul Edgecliffe-Johnson: Yes, so in terms of pricing, it is a really interesting one because people did point to the previous cycles and said, well, look, it could take some years before we see full pricing. And it's absolutely not what we've seen. I think it's an indication of the strength of the revenue management discipline that exists in the industry. And it's not just us, it's others. We have very good revenue management capabilities, revenue management tools that we've talked about, and I think you know well. There's also the question as to whether you -- because there's a bit of a supply squeeze, perhaps that you see rate accelerate even faster. We know the demand's there and I think we all studied in our basic economics that when demand is greater than supply, then you see a lot of pricing power in -- for hotel owners. So maybe we'll see that, but it certainly augurs well for the future.
Keith Barr: Thanks, Paul. Vicki, I think if you talk about from an industry perspective, most of the big players have been talking about the U.S. hit peak signings at an industry level, probably it was 2017, 2018. And so the U.S. has structurally been in a bit of a slowing, still growing but a bit of slowing. And when you look at now though, we have more quivers in our arrow than we used to -- arrows in our quiver, I should say, than we used to have. We now have avid, we have Atwell, we've got voco, we now have the collection brand. And so we have more opportunities to maintain and grow signing share in the U.S. than we previously had to. So that gives us confidence there. But what we are really seeing is acceleration in EMEAA and Greater China. So effectively, both of those regions in Q2 were ahead of where they were in 2019. And so we're definitely seeing the opportunity for conversion -- so I would say China is back to normal. So that is the normal from a new-build perspective, from a ground-breaks perspective, from a conversion -- that feels just like 2019 and has for a period of time. EMEAA is clearly beginning to accelerate with a mixture of new build and conversion, and the brands give us that opportunity to gain share there and similarly in the U.S. too. So I think we're very, very confident in our ability to go back to what Jamie's question was, to get '22 and '23 from a growth perspective should look a lot more like 2018 and 2019. And in terms of ground breaks, I think it's a slightly different portfolio mix. When you think about mainstream owners can break ground, open in 12 to 18 months versus if you're upper upscale or luxury hotels could take 3, 5, 6 years to build too. So I think that might have been why Tony made those sort of comments around ground breaks overall.
Operator: We now have Jaafar Mestari from Exane BNP Paribas.
Jaafar Mestari: I have two, if that's okay. I wanted to come back on the Holiday Inn and Crowne Plaza portfolio reviews. Just to understand how the rest of the process works, you've got 56 exits so far, and you've got 30 agreements to invest and to remain in the system. Just curious what exactly is the status of the remaining 114 properties. I guess my underlying question is, is it good to have another 114 properties still TBC because they would have already left if they had no interest? Or is it bad because they're longer, more complex negotiations and ultimately exits may be higher on the remaining than they've been so far? And then separately, you're talking about investment for growth in H2. There's obviously the new brand launch, but historically, you never had to isolate an envelope of x million for the brand launches, all being part of savings and reinvestments. I'm just curious if there's number we should have in mind if you're able to put a cap on how much you're going to be investing in particular in CapEx.
Paul Edgecliffe-Johnson: Thanks, Jaafar. So in terms of the Holiday Inn and Crowne Plaza, we are pleased with the progress, and we think that this will really help the Holiday Inn and Crowne Plaza brands grow over time. It's a story that we've been working on for a really long time. If you think back to what we've been doing with Crowne Plaza, Accelerate, which has seen a lot of hotels upgraded, owners have been putting a lot of CapEx into Crowne Plazas, in the estates, in particular. And once we're through this and we see the hotels exit that they will exit, we'll actually have had 75% of the Crowne Plaza estate renovated in the last 5 years. So it's going to be a really high-quality estate, and that will mean that it's in a much better position to grow going forward. In terms of exactly how many of the 200 will go, how many will stay, well, we're still in discussions with owners. I think that my best steer would be to model out what we've seen to date, which would take you to something like 130 exits and 70 hotels staying with significant refurbishment capital coming in. It might differ a little bit from that, but that will be my best guidance, if you like. In terms of investment for growth in the second half of the year, so as Keith talked about, we are a growth business, and the focus has to be on growth. So if we see opportunities to, for example, add some further developers in markets where there's a lot of opportunity or to invest behind getting the hotels open faster, we'll do that. It isn't really about investing behind the new collection brand. There's not a lot that we can invest behind right away. Over time, we will put a few million dollars behind it, but it's not very significant. This is around making sure that wherever we are in the world, we have the capacity to take on board this very significant level of demand for our brands, to make sure that we are optimized for growth, having reshaped the business and taken a lot of cost out. So that's how we're thinking about it.
Jaafar Mestari: Okay. Super. And then maybe just as a follow-up on that. If there isn't a number we should have in mind for H2, then it looks like obviously the phasing of profit this year will end up being very different from what we would have expected with the saving of cost savings, with the $6 million of liquidated damages, et cetera, et cetera, but it looks like it's mostly phasing. On a net basis for full year '21, are you going to be investing a significant chunk of OpEx that you may not have expected to invest 6 months ago? It doesn't sound like it.
Paul Edgecliffe-Johnson: Well, I think of the $75 million, we've said that the majority has been done in the first half, so maybe some 2/3 or so. So we will invest more in the second half if we see the opportunities. If there aren't any opportunities, then we won't invest it. But -- and we are, as you know, if you think about our track record, we are very sensible investors, whether it's OpEx or CapEx. So if we see opportunities to invest in capabilities that will allow us to grow faster, we'll absolutely do it. And I hope they will be there.
Operator: We now have a question from Richard Clarke of AB Bernstein.
Richard Clarke: Just to -- maybe just want to start on Slide 11, I know you're not giving us a July RevPAR number. But just in terms of the U.S. and the Delta variant, has that continued to tick up through July and maybe expectations from there with business and leisure? And my eyes are just drawn a little bit to the left-hand side of that chart, the prepandemic, your leisure travel was up 7% to 11% and your business travel was down 3% to 4% in January, February. And it's a long time ago, but if you can remember what caused that dynamic, that would be interesting. And second question, just on the System Fund, your System Fund revenues are down year-on-year despite franchise fees being up about 30%. And I know you've taken some of the credit card revenues out, but I think you're also lapping the pause on the technology fee through that. Is that -- is there any sort of additional fee savings going through there? You've made a cumulative loss on the System Fund of about $150 million. Do you get to claim that back over time? Just the dynamics looking there. And then third question, I actually noticed you signed quite a lot of hotels in Crowne Plaza and Holiday Inn. You obviously talked about the impact on the removals on your growth. Are these going to start really meaningfully contributing to sort of gross room growth going forward? Is that the ambition? Or do you just expect they kind of stay where they are going forward?
Keith Barr: Thanks, Richard. I'm going to let Paul pick up the first 2, then I'll pick up the signings on Crowne Plaza and Holiday Inn.
Paul Edgecliffe-Johnson: So thanks, Keith. July was a really good month actually, and the sequential improvement that we saw was the highest we've seen year-to-date. So it did continue to be very good and August has been good trading as well. You can see in the industry numbers in the U.S. And we saw more than half of our hotels with RevPAR better than 2019. So it certainly continued. And we -- to date, we haven't seen much impact from Delta over in the States. There's continued growth in demand both on leisure and in business. There's a lot of people who want to get away on leisure break who haven't been able to because hotels are full or the airlines are full. So there's still a lot of pent-up demand. And as Keith talked about, there's a lot of people who want to get out traveling again, seeing clients, seeing their teams, and I think that, that's going to auger well. Going back to January and February 2020, gosh, that feels a long time ago, doesn't it? I think you -- in terms of business there, you're seeing a of a reduction in group activity, and you're seeing a bit of an increase in holiday breaks back then. So that would be my best explanation for that. In terms of System Fund revenues, yes, it's always a bit complex as to what's going on. I think the -- probably the most important question there is what happens to the cash. And last year, we talked about the fact that we were happy to effectively subsidize the System Fund and let it run to a cash flow negative position so that we could keep investing in the business, and that will mainly get paid back this year. So we'll be pretty much cash flow neutral on it by the end of 2021.
Keith Barr: Thanks, Paul. Rich, I mean our focus for Holiday Inn and Crowne Plaza for a number of years has been they're strong global brands that have great, great growth potential, and they have continued to grow, again, around the world. I think about our time -- my time in China, Crowne Plaza now is the leading brand in that segment. I believe it's now over 100 hotels open. I mean it's a powerhouse brand. And that continues throughout Asia and into Europe. And we're even strengthening it in the U.S. And as Paul noted, 70% of the portfolio will now have been basically invested in and renovated, which again just raised the profile of that brand. And same thing with Holiday Inn, whether that' been Open Lobby in the U.S. with the new prototype, which takes the cost to build and operate down in the U.S. and also been voted the #1 most trusted hotel brand. So there's huge potential for growth for both of those brands. You look at kind of we signed 32,000 rooms in the first half and the 4,300 were Crowne Plaza, almost 5,000 were Holiday Inn too. So definitely, brands that can continue to grow around the world, accelerating more in certain markets than others, but very, very confident in their futures. And the investments that we're making now with this review of Holiday Inn and Crowne Plaza sort of the last big step of making sure that we address some of the concerns that we had to make sure they continue to be strong and grow.
Operator: We now have a question from Leo Carrington at Credit Suisse.
Leo Carrington: Could I ask about the brand launch in Luxury & Lifestyle? Did you -- or why didn't you consider seeding this collection with the acquisition of an existing soft brand? And previously, you've indicated that you have all the brands you need or you had all the brands you needed. So does this new brand or new collection represent an opportunity that just didn't happen before the pandemic? And last question on this topic, or last question overall, near term, what kind of hotel numbers do you think you'll be able to track for the new collection? Have you already been sounding out owners for this collection?
Keith Barr: Thanks, Leo. I mean if you reflect back, I think it was February in '17, Paul and I basically signaled that we were going to be either acquiring or launching brands, and we actually did signal the first 5. We actually called out, not by name at the time, but it was avid, it was Atwell, it was voco, Six Senses and Regent. And we said that there were going to be other brand opportunities potentially in the future, but we had prioritized them in that order for very strategic reasons. We saw the scale growth opportunity of avid and Atwell in kind of that mainstream segment. We saw the conversion opportunity of voco in upscale and the strengthening of our luxury positioning to go with Kimpton and lifestyle with Hotel Indigo, with Regent and Six Senses. It then became clear to us, we wanted to do a collection brand at some point. We just want to make sure that we got these other brand launches out there and successful. And there's some -- few other segments we could go into. Why this is such an important brand for us now is, a, we've strengthened our technology platform, we've strengthened our loyalty platform which are critical components of delivering to a collection play and wanted to make sure that we could really have that enterprise that could deliver high returns for our owners, increased investment in our procurement function as well too, so getting all those things right for a collection or a softer brand, and they're in place now. And it also enables us to go after different opportunities, luxury, lifestyle, independent hotels. It could let us lean into the all-inclusive space as well, too. So it gives us a lot of optionality. And really, it's why not -- why seed it or not seed it? We can do this organically. We can build this brand organically, leverage our investments we've made in technology and loyalty and not have to utilize capital to go acquire something. And there's enough owner interest out there already. We've had a number of conversations with strategic owners who want to sign up for this brand, too. So we'll have more information coming out in a few weeks' time. But yes, I expect that you'll see us quickly signing a number of hotels this year and that begin to accelerate. We said 110 years. That's sort of a -- it's a good number to have, but we probably could be more than that as well. But again, we'll be seeding it with some great assets that we work with some great owners already.
Operator: We now have Tim Barrett of Numis Securities.
Timothy Barrett: I have two on connected fees, please. A few people have mentioned that Slide 11 is really helpful, and I think it is. But I wanted to take the question to its sort of logical conclusion really and to find out if you've got any updated thoughts on structural changes in business demand in the very long term. And then another question was on owner finances. It's a topic that hasn't come up much, but obviously in EMEAA, occupancy in the 30s means owners are still burning cash. Is there anything you're worried about around owner finances for the balance of this year?
Keith Barr: Thanks. So I'll let Paul take owner finances, then I'll talk about the structural impact on business demand.
Paul Edgecliffe-Johnson: Thanks, Keith. So, Tim, we're not -- we're trying to support owners throughout this period to the very greatest extent that we can. You'll remember what we put in place last year, and that's been really appreciated by the owners. And in the U.S., I mean, we're getting paid by owners just as we were prepandemic, so we have very strong return there. Same in China. It is tougher in some of the markets of EMEAA, but what we're seeing is that lenders are very supportive. Our brands are very strong, and they look at the owners of the hotels and they know that once restrictions are lifted, demand comes back, rate comes back, the owners will have very successful businesses again. So a lot of support there. And on occasion, we're having to be flexible with the owner. We're in long-term relationships with them. And that's what you do when you're in a long-term relationship. But there's nothing I'd particularly call out. And I'm sure that as recovery comes in those markets, then just as we've seen in the U.S., those earnings will come back to a robust health.
Keith Barr: Thanks, Paul. I said this before but I do think the death of business travel has been grossly exaggerated, and I fundamentally -- I think we fundamentally believe it will come back over time. The shape and profile may look a little different than it used to but fundamentally, that people need to connect, that people are going to need to travel for business. And remember, a huge portion of our business travel is essential business travel. It has been here throughout the pandemic. And so this is more about the discretionary piece, the groups, meetings and events in that travel. And I really do believe it's going to come back based upon the conversations we're having with our corporate, the conversations I'm having with other CEOs. But it will come back over a number of years. It won't be back tomorrow. But travel budgets' going to be increasing next year. I'm hearing that from many, many people. I know our travel budget is increasing next year. And again, truthfully, it's about opening up, right? We're still seeing a lot of the world has not reopened. But when we seen like the U.S. reopen, demand came back, and that was leisure, essential business travel and discretionary. We're now beginning to see that happen in parts of Europe. Asia will be the next piece to it, too. So I think it will take time. And then there'll be new sources of demand too that will come into play as well that we're going to see. So will the business-leisure mix fundamentally change for this business? It could move a little bit. People are talking about that. Maybe with this new lifestyle of people working a bit more from home and working from hotels, there's going to be more of that leisure piece coming into it. But the bigger question is, do we believe that the demand for this industry business and leisure is going to come back to prepandemic level. The answer is yes. It will come back. The shape will take a bit of time.
Operator: We have our final question from the phone lines from Alex Brignall from Redburn.
Alex Brignall: I have three, just to be consistent. So on the RevPAR side, I guess if we look at the growth in the signings, the new -- has now become even more skewed towards China. Could you just remind us of the mix impact that you get just when we're looking at index kind of RevPAR numbers? There's obviously a mix impact sort of the places where you grow and China has a lower RevPAR, so what that might do for kind of mix as we go through the next few years. The second is on churn. A few kind of hotel franchises have called out higher churn and some would put it down to kind of maintenance requirements that are needed for -- to maintain kind of brand standards and obviously you're seeing that in Crowne Plaza. How might that continue going forward? Does -- in the event that there remains a bit of pressure certainly for some years, then the requirements of maintaining brand standards seems like quite a lot. Do you think there's going to be a drop in standards? Or do you think that will therefore sort of be higher churn overall? And then the third question, I guess, goes back to the one that Tim just asked on business travel. I guess there's a couple of ways that I'll ask it. The first way is other industry operators have talked about permanent business reductions in places and maybe in international travel. If you sort of talked about consistency in kind of where you are operating, but there are permanent reductions at higher levels, is it fair to assume that deflation in higher-end hotels drops through to deflation and lower-end recoveries? Tends to be the case historically. And I guess the second way of maybe asking the question is if we look at airline capacity excess in the business, my aerospace analyst tells me confidently that expectations for 2024 airline capacity globally are 20% below what was anticipated pre-COVID, largely driven by business travel expectations. So I'm just trying to reconcile that, which is lower construction by Airbus and Boeing with what you're telling me, which is that business travel will be as it was before. They don't seem to add up.
Paul Edgecliffe-Johnson: Thanks, Alex. So I mean in terms of RevPAR and mix impact, we've always provided all the data per brand, per region. So I think that's actually relativ
