InterContinental Hotels Group PLC (IHG) on Q3 2021 Results - Earnings Call Transcript
Stuart Ford: Thank you, Stephanie and good morning everyone and welcome from me to IHG’s Conference Call for the Third Quarter 2021 Trading Update. I am Stuart Ford, Head of Investor Relations at IHG and I am joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer and Group Head of Strategy. Just to remind listeners on the call that in the discussions today the company may make certain forward-looking statements as defined under U.S. law. Do please refer to this morning’s announcement and the company’s SEC filings for factors that could lead actual results to differ from those expressed in, or implied by any such forward looking statements. For any analysts or institutional investors who are listening via our website, may I remind you that in order to ask questions you will need to dial in using the details on page two of the RNS release. The release, together with the usual supplementary data pack can be downloaded from the Results & Presentations section of the Investors tab of ihgplc.com. With that, I will hand over to Paul.
Paul Edgecliffe-Johnson: Thanks, Stuart and good morning everyone. I'll start as usual with a review of our trading performance. You'll see that in this morning's announcement we are comparing our performance against both 2020 and 2019. But I'll focus my comments on the latter as it is the most meaningful. Starting with comparable RevPAR for the Group, which increased to $68, only 21% below 2019. This was a significant sequential improvement from the decline of 36% in the prior quarter and 51% back in quarter one. Strong domestic leisure demand resulted in rate recovering to almost parity with 2019 and saw occupancy down only 15 percentage points. Absolute occupancy was around 60% in the quarter and a number of markets achieved occupancy and rate back at 2019 levels in the summer. The stronger trading, particularly in the Americas franchised estate has also led to further improvements to our RevPAR sensitivity, which is now trending closer to $14 million per point of RevPAR. As a reminder, our RevPAR sensitivity is referring to 2021 versus 2019 and is calculated before cost savings. In regards to savings, we remain on track to deliver a sustainable $75 million reduction in fee business costs while still reinvesting for growth. Further to these, we now expect around $25 million of additional temporary cost reductions for this year only, largely driven by vacancy rates for corporate roles and other headcount-related costs. Turning now to our regional performance; in the Americas, RevPAR was 10% lower. Rate exceeded 2019 levels and absolute occupancy recovered to 66%. Standout occupancy performances included 70% across the Holiday Inn Express Estate and 80% in our Extended Stay brands, which exceeded 2019 levels. In the U.S., RevPAR was only 7% under the 2019 level and was ahead for Holiday Inn Express and our Extended Stay brands. Strong demand over the peak summer months resulted in July RevPAR being ahead of 2019 by 2% in non-urban locations where we have nearly 3,000 hotels or around 90% of the estate. It's worth pausing for a moment to focus a little more on the trends we saw in the U.S. during the quarter across business demand, group activity, and leisure demand. Leisure demand stayed strong, with room nights consumed slightly up on 2019. Rates were up by almost 10%. We've seen that essential business travel demand has been resilient throughout COVID. What we are now seeing is increasing amounts of discretionary business travel demand coming through. This resulted in overall business room nights consumed down only 12% in the third quarter with the rate down less than 5%, a marked improvement on the prior two quarters. Group demand has similarly seen improvements each quarter and group pricing is holding firm. While room nights consumed were still down nearly 30%, rate was down only 8%. The strong rate environment across each demand segment is encouraging as we continue to see demand build back. Turning now to Americas system size, we opened around 3,000 rooms leading to gross growth of 3.3% year-on-year. We signed more than 4,000 rooms, taking our Americas pipeline to 97,000. Encouragingly, the pace of development activity picked up through the quarter with signings accelerating in September. We've also seen a sequential pickup in deal applications through the year, particularly during the third quarter. Moving now to Europe, Middle East, Asia and Africa where RevPAR was down 43%. Performance within the region continued to vary reflecting the differing levels of travel restrictions. In the UK, RevPAR improved to only 22% below 2019. London, which has a higher weighting toward international demand, saw RevPAR 51% below. This compared to markets outside London achieving 95% of 2019's RevPAR. Continental Europe improved to a 48% deficit and the Middle East to a 39% deficit as restrictions eased. In contrast, Australia saw a deficit of 68%, impacted by the reintroduction of travel restrictions. With the general reopening of travel and increasing demand across the region, the number of temporarily closed hotels was down to just 28 at the end of September compared to more than 200 at the start of the year. We opened over 4,000 rooms resulting in gross growth of over 5% year-on-year and signed a further 2,200 rooms into our pipeline. Conversions accounted for half of the signings in the period and we expect development activity to pick up further in the fourth quarter. Turning now to Greater China, where RevPAR fluctuated significantly in the quarter. July RevPAR was down just 6% as the recovery continued and benefited in particular from strong domestic leisure demand. The reintroduction of temporary restrictions meant that the August deficit was 55%. With restrictions then lifting again, September RevPAR swiftly recovered to a 26% deficit. Across Mainland China, Tier 1 cities continued to see a greater level of RevPAR deficit, down 32% given their historical weighting to international inbound travel. RevPAR in Tiers 2 to 4 cities, which are more weighted to domestic and leisure demand saw a 26% deficit. In July, Tier 4 was over 40% ahead of 2019 RevPAR levels given the strong demand in resort locations, including Sanya. Net system size in the region increased by 10.6% year-on-year with 5,300 rooms added in the quarter. We signed 6,300 rooms into the pipeline. COVID restrictions held back some development activity in the period, and we expect the signings pace to pick up significantly in the fourth quarter. Moving now to the group system size, our strong openings momentum continued with 5.2% gross growth year-on-year. The one-off quality initiatives we have underway this year mean that as expected, after exits, this netted down to a system size that was flat year-on-year. Further rapid progress has been made on the review, which covers around 200 Holiday Inn and Crowne Plaza hotels. Over 90 hotels have already exited or are confirmed to exit with more than 40 further hotels committed to improvement plans. Year-to-date, this review accounted for around two-thirds of our removals. By contrast, the rate of removals year-to-date across other brands has been broadly in line with our annual removals rate of around 1.5%, which we've seen for the last five years. We remain on track to conclude this review by the end of this year. Our 91 hotel signings took our pipeline to 270,000 rooms. Signings accelerated over the course of the quarter and this trajectory is expected to carry on through the fourth quarter as owner interest in doing deals with us continues to strengthen. So to conclude, trading continued to significantly improve, driven by strong domestic leisure demand and a strong pricing environment. We are encouraged by the return of more corporate travel and group bookings. We saw over 5% gross openings growth and outside of the Holiday Inn and Crowne Plaza review, our removals rate for other brands in line with our annualized rate of around 1.5%. Signings pace improved through the quarter and we expect this to significantly pick up again in the fourth quarter. Looking at the very short term, fluctuating COVID restrictions may well still make trading volatile in certain markets, but looking further ahead, the strength of our brands, platforms, and scale underpins our confidence to exceed prior levels of profitability and to deliver industry-leading levels of net system size growth in the coming years. With that Stephanie, could you open the call up for questions please?
Operator: Our first question on the line comes from Jamie Rollo at Morgan Stanley. Jamie, your line is open.
Jamie Rollo: Thanks, good morning everyone. I've got three questions please. First, Paul is there anything you can give us on any sort of early indications on the corporate negotiation season. It may be too early, so otherwise, any sort of color on recent trading and any sort of expectations on Q4 and whether that corporate recovery can continue, and therefore, you could see sort of Q4 RevPAR similar or better to Q3, which I think is what consensus is looking for. Secondly, on the signings in the Americas, they were still half 2019 level. I appreciate in EMEA and China there were other aspects dragging it down, but given sort of market was fully open, why is that still quite weak and how does that sort of frame your thinking about openings going forwards? And then just one more, on the savings, $25 million temporary. I mean they've been there now for nearly two years. I mean are we just not going to end up putting in a $100 million of permanent savings, do you think from next year? Thank you.
Paul Edgecliffe-Johnson: Thanks, Jamie. So in terms of the first question, and what we're seeing in the corporate rate renegotiation process, I think our corporate customers are very keen to lock in pricing. The pricing environment has continued to be very strong, and as I referenced, leisure pricing has been in many markets well up on 2019. So that's one of the key things that our customers are looking for is to make sure the prices are not going up too much in 2022. But it's been constructive conversation so far, but nothing particular I can pull out of it. In terms of recent trading, we are continuing to see this continued rebound in corporate demand and we certainly saw that through the third quarter looking at industry numbers beyond, yes, it is continuing. It's not an immediate bounce back to where we were in 2019, but it's encouraging to see and the rates that are being achieved again, encouraging to see it, and it's sequentially quite a significant improvement on what we saw in the first half. In terms of signings, yes, we're pleased with the step-up in signings in the third quarter that we saw in the U.S. It is still below what we saw in 2019, of course. Remember that there is a quite a long lead time for a deal to go from when an owner starts to get interested in doing a signing with us to actually getting ink on a page and a legal contract in place. And for quite an extended period of time, our owners have been focused on stabilizing their businesses, looking after their teams et cetera. And so it will take a while before that sort of normalizes. What we have seen though, is very encouraging, is a big step up in the pre-application. So the people who are calling us and saying they want to look at a new site with us, signing letters of intent and also in the lending environment, the regional banks have been calling our owners more to say we are open for business, we want to lend on your project. So again, that's a good sort of early indicator as to a step back up in the signings doubling in due course. On the savings, the $25 million additional, the intent is not that this becomes part of the permanent savings because we're a growth business and we are wanting to have all the resources, all the muscle in place to be able to deliver that level of net system size growth, which we aspire to. It is tough to find people of the caliber we're looking for. So we have had some positions open this year, but our intent is to fill those. So it's not our intent to run with $100 million. So we hope we'll find the people to take that down to $75 million.
Jamie Rollo: Thanks, and just back on the Q4 numbers, I know you don't formally guide, but any thoughts on market expectations for RevPAR to be down circa 21%, similar to Q3. Does that sound sort of reasonable?
Paul Edgecliffe-Johnson: I think it will partly depend on what we see in China and I think what we've seen is China can be very volatile. You look back on what we saw in the third quarter, it went from negative 6 to negative 50 to negative 25 sequentially by month. So quite where it ends up will depend on what restrictions the Chinese government puts in place and if we see it fully open again, I think it will all very quickly go back to a very strong level of trading there. With the restrictions, it will be tougher and that's quite a big swing factor. So it is very difficult to call with that factor still in mind.
Jamie Rollo: Sorry, are you saying China needs to be fully open and sort of back to normal for you to be down 21% or could it be better than that if China is back to normal?
Paul Edgecliffe-Johnson: I'm saying it's a big swing factor in what will be printed for the group as a whole and it's impossible to tell where that's going to come out right now. So if it comes out at sort of minus 10, which it could for China, then that will be a positive. If it comes out at minus 50, again if things all close down than that will be a negative and it's impossible to call that at the moment.
Jamie Rollo: Okay, great. Thank you very much.
Paul Edgecliffe-Johnson: Thanks, Jamie.
Operator: Our next question comes from Vicki Stern at Barclays. Vicki, your line is open.
Vicki Stern: Yeah, good morning. Just firstly on the achieving net unit growth back to sort of 4.5% plus from next year. If you could just walk us through again the building blocks in terms of that confidence. Obviously, you signaled the lower churn, but perhaps more color on the gross opening side and really why there's not that level of confidence in getting back to those 2018, 2019 levels from as soon as next year and within that, is there much expectation for conversion activity for example. And second question, just sort of following up on Jamie's really, can we talk about sort of how you see the signings momentum then phasing over the next few quarters. Obviously, there are a lot of unknowns, but assuming things continue to open up given those sort of pre-indications that you've been getting, I suppose, how do we think about how quickly you could get back to pre-COVID levels of signings over the next year or so. And then finally on pricing, just if you could give more color on what you think is driving that strength that we're seeing in price even on the leisure side. Wouldn't have thought pre-COVID that we'd have seen a recovery as swift in leisure even if the demand was coming back as quickly in terms of price. And given your comments there on the sort of rate indications, business guys wanting to lock in at sort of decent rates at this stage, just how sustainable you think that positive pricing dynamic is as we look into next year perhaps with a more normal business leisure mix. Thanks.
Paul Edgecliffe-Johnson: Thanks, Vicki. So in terms of a level of confidence in getting back to the level of growth that we were seeing before, I think if we look at what we've seen year-on-year in terms of our gross growth, so the 5.2. And then if you think about your normalized level of exits of 1.7, that would have delivered us 3.7. And what we're saying is we're seeing -- we're expecting next year to be back to -- similar to what we saw in 2018. So you are talking about then something starting with a four. So, yes, you'd have to see a few more openings than we saw this year, but not a lot, a few thousands. And then if you think about the step-up that we are seeing and sequentially we've been seeing, I think it's pretty reasonable when you look at just trading to date. So nothing more than that. You look at the very large pipeline, you look at the number of brands that are very attractive for conversions, so with Vignette, with voco in particular. There's a lot of owners who would like to move their hotels across into these brands and take benefit of all the revenue delivery that we have. So that's what's driving that. In terms of the signings momentum, I mean it's a hard one to be precise on because deals will get signed when the deal is ready and when we're confident on the project. What I think is very encouraging is the number of new inquiries and remember our owners want to do more hotels with us. And as long as the debt capital is available, then they will sign up. Once they have their existing business stabilize, which broadly in the U.S., they do, so it's a question of when rather than whether we get back to the sorts of levels that we saw before. And in terms of pricing and what's driving that, well, one of the statistics that frankly surprised me slightly was just the level of price that was being achieved from our leisure guests over the summer months and 10% ahead of what we're seeing in 2019. And I think it's the supply and the demand plus the levels of inflation that we're seeing in the broader economy, it might be ahead of 2019 on a nominal basis. But if you think about it on a real basis with some years of relatively high levels of inflation, it's closer to parity on a real basis. So I think that then high level of demand for leisure is then translating through into the pricing that we're seeing in business, the pricing that we're seeing in group and I think that will be sustained as I think we'll have a very strong leisure summer next year as well and we'll continue to get good pricing off the back of that.
Vicki Stern: Great, thanks very much.
Paul Edgecliffe-Johnson: Thanks, Vicki.
Operator: Our next question comes from Bilal Aziz from UBS. Bilal, your line is open.
Bilal Aziz: Good morning, everyone. Thanks for taking my questions. Three quick ones for me, please. Firstly, apologies if I missed it, but what were conversions as a percentage of the gross additions into this quarter and perhaps how do you think that number evolves going into next year please? Secondly, you spoke about China into Q4. Just a quick comment on the U.S. please. Are you expecting leisure to soften into Thanksgiving and Christmas or do you think both leisure and business will improve into Q4? And then very finally, just on your sensitivity and what you said is now close to $14 million and to $0.01 of RevPAR, can you perhaps flesh out what the next leg of improvement will be driven by particularly in EMEA as that now starts to I guess gradually improve and your incentive fees into next year please. Thank you.
Paul Edgecliffe-Johnson: Thanks, Bilal. So conversions, you didn't miss it. I don't think we talked about it. We don't give that level of granularity on a quarter normally, but conversions were about 25%; higher in EMEA, but lots of demand for our conversion brands given the revenue that they deliver and the strong benefits to owners, which is encouraging to see. In terms of leisure, will we see it soften into the Thanksgiving season? I think there is a lot of leisure demand out there, people wanting to travel and frankly given how strong the summer season was, there's some people who haven't managed to take all the trips they would like to have done. And so leisure has across the industry continued to be very good. I think that the Thanksgiving Season, probably for the industry will be strong and then it will probably soften a bit in the build up to Christmas, which is the normal pattern, but I think nothing else that we can particularly say at that point. In terms of the sensitivity, going into next year, it really all does depend on when the remaining owned and leased hotels and big management contracts get back to their normal level of profitability. Remember, it used to be $13 million of sensitivity per point of RevPAR. It went up and now trending close to $14 million. So it will come back in due course. It's an output rather than input, but we'll keep you in the loop as we trend through 2022.
Bilal Aziz: Brilliant, thank you, Paul.
Paul Edgecliffe-Johnson: Thanks, Bilal.
Operator: Our next question comes from James Ainley at Citi. James, your line is open.
James Ainley: Thank you. Good morning, everybody. Three questions please. Firstly, if I look at the industry data in the U.S. by segment, it looks like Holiday Inn and Crowne Plaza underperformed quite materially. Kind of why do you think that is? I mean perhaps if you purged the data for those hotels you are exiting, we'd have a slightly different picture. So interested in your perspectives on that. Secondly, you related to that hotel review of those 200 hotels. It looks like you're kind of rather more choosing to exit now than the last time you kind of gave us the numbers. Where do you think you might land on that review in terms of the exits and the re-investors? And then the third question on labor supply more broadly, how do you think your hotels are faring? Are you still seeing some limits to occupancy or services in hotels? And do you see any sort of signs of labor availability easing? Thank you.
Paul Edgecliffe-Johnson: Thanks, James. So in terms of Holiday Inn and Crowne Plaza and the comparisons you make by segments, I think the thing worth remembering is that Holiday Inn in particular has historically given the nature of the brand, a lot of them were built some time ago, they have a higher level of group business in there and a higher level of business travelers normally, than a typical hotel, which would have been a small box. We still have quite a lot of old boxes in there and that's really the differential you're seeing. In terms of Holiday Inn and Crowne Plaza and the exit rate, it's very much in line actually with what I've guided to and what we're expecting to see. So 90 who have now exited or said they're going to exit, 40 who've signed up. So it's a similar proportion is what I would expect to see by the end of the program. So it may be 120, 130 or so going and the remainder committing to a significant improvement, which will be great because it will significantly raise the quality of those brands and that will help us grow them over the long-term. So really important initiative there. And in terms of labor supply, there's a lot that we're doing for our owners through our procurement teams and our human resources teams to help find people for the hotels and that's of course one of the benefits of being part of a large system like ours is that we have those linkages. And we've also been providing owners with labor rostering tools and our plans as to how they make the most of the people that they have. It is still clearly a challenge, and I think it's going to stay a challenge to find everybody that the hotels need, but our owners are very resourceful. They are an army of entrepreneurs out there who are very skilled at running their own businesses and they know their local markets. So I think they are very well placed to do that with our help. Thanks, James.
Operator: The next question comes from Alex Brignall at Redburn. Alex, your line is open.
Alex Brignall: Good morning, thank you. Thanks for taking the questions. Following a similar sort of theme of signings and opening rate please. The first is just on that lag time between signings and openings. Clearly, you're talking about strong 2022 and 2023. You sort of look at the financial crisis, the slowdown came after that. Obviously, you got a strong pipeline. So theorizing or making assumptions about current signings rate, but at the current signings rate you have now, when would that start to drop through into lower openings please? The second question is on, it's encouraging to hear the comments about applications. There is some data out from CoStar about land acquisitions for hotel usage, which in this year is still 8% below the levels in 2019. So I guess first, nobody knows those the data as you guys, what's the sort of order of events? Do you think buying the land comes first then an application then there's signings. Could you just explain how that might sort of work chronologically? And then on conversions, you've given numbers on conversions as a percentage of total. Could you just talk about conversions on an absolute level versus pre-pandemic? I think and I could very well be wrong but on an absolute level they are still below the level that we saw pre-pandemic. And I guess my question is why would that be? Should we not see conversions on an absolute basis go up versus pre-pandemic if it's not sort of needing new sort of financing to build. So why they might actually be down versus pre-pandemic . Thanks so much.
Paul Edgecliffe-Johnson: Thanks, Alex. So I mean in terms of signings to openings and the period that it takes, it does, as you would imagine as I think as you know, it varies significantly across the brands. So for an InterContinental, which might be part of a large complex, you could be talking 60 months. Some are done more rapidly, but it does take some time. By contrast with an Avid for example, by the time you break ground to when the hotel opens, could be less than a year. And that's one of the great attractions for owners of the Avid brand and similarly with Candlewood, a Holiday Inn Express is that they are relatively simple boxes to build. So the key thing is get the hotel signed and signed with good owners and then get the ground broken and then once the ground is broken, then the hotel will manifest a certain period afterwards. I mean that's always been the case and there's no real change there. In terms of the order in which things happen, well, the key for an owner to be able to get debt finance is to have an application approved by us. And obviously, you'll need the debt finance to acquire the land. So the key thing for an owner is getting our franchise signed up. Often, they will have rights over a land or they'll have land identified, but it doesn't mean that they will necessarily own the land. Some do. They may have it as part of a historic arrangement. They may have another hotel on it that they are deconstructing to build our new one. So there's a variety, but you have to get the contract with us normally first. And in terms of conversions, the conversions have stepped up significantly and in EMEA more conversion discussions than we've ever seen before. I mean on an absolute basis, I would actually have to look at the numbers and refresh my mind as to what we used to do back in 2019 on an absolute basis. But we have seen owners having to focus on their operating businesses more, and on building their next hotels less and that will mean that you see fewer hotels getting done. So that will be the reason if there is an absolute differential. Nothing else behind it. Thanks, Alex.
Alex Brignall: Thanks very much, Paul.
Operator: We have no further questions registered on the line. So I'm going to hand back the call to Stuart for closing remarks.
Stuart Ford : Many thanks, Stephanie. No closing remarks from me. Paul anything there is to add?
Paul Edgecliffe-Johnson: Thanks everybody for listening and look forward to catching up with you very soon. Have a great day.
Stuart Ford: Thanks, all.
