Intercontinental Hotels Group PLC /New/ Q4 FY2020 Earnings Call

Good morning, everyone, and welcome to IHG's 2020 Full Year Results Call. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Keith Barr, our CEO; and Paul Edgecliffe-Johnson, our CFO and Group Head of Strategy. Just to remind the 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 materially from those expressed in or implied by any such forward-looking statements.

Thanks, Stuart, and good morning, everyone. Before I get into our presentation, I wanted to first take a moment to recognize the very sad news of Marriott's CEO, Arne Sorenson's, passing last week. Anyone who knew him or heard him speak will know how passionate he was about our industry and his company. He was an inspiring individual to so many people. It was a privilege to have known him, and it goes without saying that he will be greatly missed. The thoughts of all of us here at IHG are with his wife and his children, and of course, everyone at Marriott. Over the last year, the COVID-19 pandemic has presented our business and indeed the entire travel and tourism industry with its biggest challenge ever. From the beginning, our aim has been to act quickly, effectively and responsibly for all of our stakeholders. We've taken steps to significantly reduce costs, preserve cash and maintain substantial liquidity to support our conservative balance sheet approach. We've implemented new safety and cleanliness procedures to protect colleagues and guests, increased resources and support for our teams working remotely, accommodated frontline workers in our hotels and helped the vulnerable in our communities. And we've worked hard to support our owners and their cash flow with new operating standards, fee discounts and flexible payment terms. So much important work has been done, and it's taken an incredible team effort in close collaboration with our owners, partners and colleagues to achieve it all. The impact of travel restrictions and physical distancing measures around the world meant demand fell to the lowest levels we've ever seen, with global RevPAR down 52% for the year. This led to a 75% fall in underlying operating profit. While the effect in our business has clearly been severe, we've also shown resilience, continuing to outperform in key markets and segments driven by our business model, our weighting to domestic demand, portfolio mix and the strength of our brands. The decisive actions we took to reserve cash throughout the crisis meant that our free cash flow was a $29 million inflow in the year with a $95 million inflow in the second half. This contributed to closing the year with $2.9 billion of total available liquidity or $2.1 billion on a pro forma basis for the forthcoming repayment of the CCFF. However, with visibility still remaining limited as to the pace and scale of market recovery, we are not proposing a final dividend today. Our focus remains on ensuring we are ready to grow strongly as demand returns. Through 2020, momentum for our brands continued with 285 openings and 360 signings, 1/4 of which were from conversions.

Thank you, Keith, and good morning, everyone. Firstly, starting as usual with our headline results from reportable segments. Revenue decreased 52% to $992 million, and operating profit decreased 75% to $219 million. Excluding the impact of system fund recognition changes which we announced in December, revenue would have been $20 million lower and operating profit, $21 million lower. On an underlying basis, the revenue decrease was also 52%. Underlying revenue from the fee business decreased 45%, and operating profit reduced 65% driven by the adverse mix effects of weaker performances in the managed business. As a result, fee margin decreased to 34.1%. The operating profit performance reflects the decline in the fee business, together with the impact of the owned, leased and managed estate, which went from a $52 million profit in 2019 to a $59 million loss this year. This reflected the majority of these hotels being closed throughout 2020 with those that remained open operating at very low occupancies. Operating profit on a reported basis included the system funding year deficit of $102 million and operating exceptional items of $270 million. The exceptions predominantly comprised the impairments already taken in the first half of the year. These are detailed in the appendix. Adjusted interest, including charges relating to the system fund, reduced by $3 million to $130 million. Our effective tax rate of 38% differs from our previous mid-20% guidance range, largely due to a significantly reduced level of profit before tax, which resulted in unrelieved foreign taxes and other non-tax deductible expenses. We estimate our effective tax rate for 2021 to be similarly elevated, though forecasting in this area remains challenging given the sensitivities in the calculations and the uncertainties in the near-term outlook. In aggregate, this performance has resulted in an adjusted earnings per share of $0.313. Looking now at our drivers of performance. Group RevPAR was down 63% on a comparable basis. Our RevPAR definition includes the adverse impact from hotels that were temporarily closed. The travel restrictions and physical distancing measures in our key markets around the world contributed to an occupancy decline of just under 30 percentage points, with rates down 17%.

Thanks, Paul. I'd like to spend some time looking at the fundamentals of our industry and why, despite the historic lows we saw last year, the longer-term attractive growth characteristics remain unchanged. Prior to COVID-19, our industry saw a decade of consecutive growth with the overall travel and tourism sector outpacing the global economy. The market also continues to shift to brands of scale. The top three branded global players, of which IHG is one, now have 17% of the open rooms globally, and notably, 43% of the active pipeline. This means we will continue to collectively take share and increase our relative scale against the rest of the industry. The resilience of our mid-scale and upper mid-scale segments, which represent around 70% of our system and pipeline, is undeniable. In the four years prior to 2020, the segment contributed around 40% of the overall branded industry growth, and we've consistently seen that in periods of weaker demand, RevPAR in these segments fall less than the industry overall. So as economies rebound and populations continue to grow, the inherent desires and need to travel return. We also expect that the pandemic will have accelerated trends such as the importance of seamless technology and a growing preference for sustainable practices, both key priorities in our strategy. As a business, we entered 2020 in a strong position, having strategically accelerated our rooms growth through the investments made in our brands, guest experience and owner offer. This leaves us well placed to capitalize on strong industry fundamentals. Before I move on to our strategy, I want to take a moment to talk about our purpose. The experience through COVID-19 has outlined the importance of purpose, giving new meaning to our potential to effect positive change and highlighted the growing expectation that we must deliver change in a challenging world, which is why we evolved our purpose from true hospitality for everyone to True Hospitality for Good. We remain committed to looking after all those we interact with, but now more focused on the difference we can make to our people, guests, communities and the environment. As we look to the future, our ambition to deliver industry-leading net rooms growth remains our unwavering focus, which means continuing to leverage our scale, expertise and systems in order to grow our brands in the industry's most valuable markets and segments. To help us achieve this, we will work as a business toward four strategic priorities that place an even sharper focus on our services, products, returns and reputation. The first, building loved and trusted brands. Since 2017, we've added five brands to our portfolio and invested in our existing brands to create a much richer offer. Each brand sits in a high-value segment and caters to a different stay occasion, which ultimately drives growth. You may have seen recently the change we've made to present our brands in four collections: luxury lifestyle, premium, essentials and suites, alongside a refreshed branding for our loyalty program, IHG Rewards. This is a more intuitive way to present the breadth of our portfolio to customers and forms part of our refreshed approach to use the IHG hotels and resorts master brand to more prominently enhance our brand reputation, sharpen our marketing, and help us capture a greater share of demand. So let me go into each of our brands in a little more detail. First, our newest organic brands, which are all rapidly scaling up. Our extensive expertise in the midscale and upper midscale segments have enabled us to successfully launch two brands in these resilient and high-growth areas, avid and Atwell Suites. We expect avid to be our next brand of scale. It's low-cost to build and operate, together with its competitive price point makes it attractive to owners and guests, and its appeal is likely to increase in a strained economic environment. Almost 90 hotels are under construction or have plans approved, and we expanded beyond the U.S. during the year with our first opening in Mexico and first signing and ground break in Canada. In the upper midscale segment, our all-suites brand, Atwell Suites, is also gaining momentum since launching in late 2019 with 19 signings in vibrant locations and construction underway on our first property in Miami. After a successful start in EMEAA, we launched voco, our upscale conversion brand, in both the Americas and Greater China in 2020, the fastest pace at which any of our brands has gone global. And we're on track to grow to more than 200 hotels within 10 years. The voco brand is now secured in more than 20 countries, from resort to all-suite properties, and represented 13% of our 91 conversion signings in 2020 with all the other conversions being across our other brands. Notably, the pace at which hotels are converting to our systems, a key part of the voco offer is really helping owners maximize their returns and quickly benefit from our global scale. Take the voco Franklin in New York, signed during the pandemic and opened just three months later. Guests love the brand, too. Hotels are seeing increased guest satisfaction scores. For example, the voco Paris, seen here, which signed and opened in 2020, saw double-digit uplift post-conversion. Turning now to our established brands, which are driving the performance we see today. Our Holiday Inn Express brand is a key growth engine of our business, and we continue to invest in it to ensure it remains the preferred choice in its segment for our guests and owners. Last year's launch of our evolved Formula Blue public space and guest room designs in the Americas will help owners better maximize their returns with a new purchase-ready format, leveraging our procurement scale and delivering a cost savings of more than 10% while in Europe, we're already seeing uplifts in guest satisfaction from the new room design that continues to roll out. The strength of the brand combined with the weighting of our distribution to nonurban locations and domestic demand led to Holiday Inn Express outperforming its segment in the U.S. through 2020. And with 132 signings, the pipeline represents over 20% of the current system size with a strong growth outlook in all regions. Moving now to our other established brands. Last year, Candlewood Suites and Staybridge Suites delivered occupancy levels of around 60%, made market share gains and achieved high customer satisfaction scores. These brands offered a great option to guests needing longer stays away from home during the pandemic. Our new prototype designs, which offer owners lower build and operating costs, are committed in over 80 Candlewood Suites and more than 100 Staybridge Suites. Momentum for the brands continued with 25 signings across both, including a second property in Dubai for Staybridge Suites and its first in Bangkok. In Greater China, we opened three HUALUXE properties, including a rebranding in Shanghai, and we grew the estate of our wellness-focused brand, EVEN Hotels, to 16 with the first opening outside of the Americas in Nanjing, Greater China. Our new-build Holiday Inn prototype, which brings fresh and modern designs to our hotels across the Americas, is implemented in around 90 hotels and delivering a five-point uplift in guest satisfaction. And in Europe, our Open Lobby concept is being adopted in 90% of the estate, generating meaningful uplifts in guest satisfaction and increased food and beverage revenue for owners. For Crowne Plaza, we opened 19 properties in the year, ten of which were in Greater China, marking the 100th for the brand in the region. We added 27 new signings, around 1/4 of which were from conversions, and we saw good increases in guest satisfaction scores at properties that have completed renovations to their public spaces and guest rooms. Our ambition to deliver industry-leading net rooms growth comes at the same time as ensuring we protect the reputation of our brands and the consistent, high-quality nature of the portfolio. From 2016 to 2019, our gross openings increased from around 5% to almost 8%, whilst our continued focus on quality led to hotel removals of 2% per year. In recent years, those exits have included a larger proportion of Holiday Inn and Crowne Plaza Hotels in the Americas, which reflects our continued focus on increasing the overall quality of those brands. Both are powerful global brands with significant further growth prospects. But to support this, we know we've got to continue delivery against the high guest expectations for quality and consistency, which should become even more important with COVID-19. Across the two brands, we have a total global state of around 1,700 hotels. There are around 200 that are currently being reviewed, focused on those that are below where we'd like them to be in areas such as customer satisfaction and property condition. Those hotels generated 2020 fee income of approximately $20 million. At a time of lower demand, we'll be working very closely with these hotel owners to improve the overall guest experience, including through the implementation of service or property improvement plans. We are confident this will support IHG being well placed for the industry recovery and ensure long-term sustainable growth. I'll now focus on our luxury and lifestyle collection and the opportunities we see across these five brands, which cater to uniquely different stay occasions. In the year, we opened 32 hotels, and now a portfolio of 431 properties in over 70 countries, from urban to resort locations, as owners continue to recognize the long-term attractive returns that assets in the segment offer. Last year, we signed 56 hotels into the pipeline. And of these, around 30% were conversions, which represents a growing opportunity across the portfolio. Taking each brand in turn. We signed seven properties for Six Senses, including in Italy, Japan and Saudi Arabia, taking the global pipeline to 31. Since we acquired Regent, four properties have been signed, taking the pipeline to six, with a further seven open. You'll also recall that we're renovating the InterContinental Hong Kong as part of a rebrand back to Regent, intending to open in 2022, making the hotel a global flagship for the brand. We continue to reinforce the position of InterContinental as the largest global luxury hotel brand. We've got more than 200 hotels in 60 countries, and we have reentered some key markets such as Italy and Morocco in 2020 through conversions of existing assets. More good progress was made with the international expansion of our Kimpton brand, with new openings in Mexico, Thailand and Japan and strong signings in key resort locations such as Mallorca. We also added another four deals in the U.S. And the acceleration of our boutique Hotel Indigo brand continues at pace, with 10 openings during the year, five of which were in the U.S., and 22 signings. We now have 125 hotels open and a pipeline of over 100 across 35 countries. As you can see here, we continue to focus on enhancing our luxury and lifestyle offer for our guests and owners. Whether it be the pace of conversion, such as the Regent Shanghai Pudong, the brand's first opening since acquisition, which signed and converted in 45 days, or expanding into new markets, such as the Hotel Indigo Cyprus, one of the numerous debut locations for the brand. Moving on to our second priority, which is to really make sure that we are thinking like our guests and owners in everything we do, being even more customer-centric in the things we're working on. It's critical that we put our two sets of customers, our guests and owners, at the heart of everything we do, operating with insight, making informed decisions. This will allow us to create the tailored services and solutions needed, increase demand, strengthen guest preference and deliver strong owner returns. We saw this come through from our response to COVID-19, which is shown by our guest satisfaction index being net positive throughout the year, outperforming our competitors. For our guests, a clean and consistent brand experience will continue to be paramount and our enhanced cleaning standards and operating protocols give them the confidence to stay with us. Since launching our IHG Clean Promise, which uses new science-led protocols in partnership with industry-leading experts, we have seen the number of positive third-party social media guest reviews on cleanliness increase by more than 30%. We understand that our guests need increased flexibility, which is why we launched our Book Now, Pay Later offer and free cancellations. For our corporate guests, we launched a new global Meet With Confidence offer, which provides clear safety protocols, greater flexibility on cancellations and is now embedding virtual and hybrid meeting solutions. Our IHG Rewards members traditionally account for around half of our guest days and proved to be the most resilient during the toughest COVID-impacted periods. We've made sure to look after them by protecting status and points expiry, and we enriched our offer with dynamic pricing for Reward Nights. This sets daily rates for hotels, enabling more than 80% of them to reduce their points pricing and offer 25% more value to guests outside of peak times. We also formed new loyalty partnerships and used our technology investments to offer more targeted and relevant promotions. When it comes to our owners, we have worked closely with them during these times of low demand to maximize their returns. As new safety and cleanliness protocols brings extra costs, we've worked with them to offset this by adapting operating standards elsewhere and delaying renovations, all whilst maintaining the high-quality guest experience. We've also offered flexible payment terms and utilized our scale to drive centralized food and beverage procurement savings, which we're going to extend into other categories of goods and services to deliver additional savings for our owners. Owners have also used our optimized revenue management tools to protect pricing and returns during periods of volatile demand. Our third priority is all about how we create digital advantage as a company. The dynamic environment requires organizations to rapidly enable new commercial propositions from the products offered to the prices set and the channels in which we operate. Our focus on creating a digital advantage is vital to us enabling seamless technology experiences across the entirety of the guest journey. This will drive direct bookings, create an integrated digital experience for our guests and deliver revenue-enhancing propositions to owners. Our investment in our cloud-based hotel technology platform, IHG Concerto, allows us to develop and roll out performance-enhancing tools faster and easier than ever before. The next phase of our guest reservation system, attribute pricing, is expected to be live across the estate by the end of this year, enabling a tailoring of stays and a selection of add-ons. Initial pilots in 2020 were conducted in each region, demonstrating to owners the ability to generate maximum value from their hotel's unique attributes. A seamless technology experience is also integral to the end-to-end guest experience. Leveraging IHG Concerto, we've been able to remotely and rapidly deploy technological developments to support a safe and secure guest experience and reduce unnecessary contact. Contactless check-in is receiving strong guest satisfaction scores and is live in over 1,000 hotels, while digital checkout is already live in 4,000 hotels. Linked to IHG Concerto, our owner-engagement portal provides real-time data on how their hotel is performing on a variety of different measures, most importantly, will suggest actions on how to improve performance. As we focus on maximizing returns in every way we can, we're also enhancing our hotel life cycle system to accelerate the time taken between signing and opening a hotel. The final priority area is how we care for our people, communities and planet. We have ambitious growth plans in the company, but equally important to us is how we grow. At IHG, we want to make sure we continue to work and grow within a culture that respects and invests in our people, embraces the opportunity to contribute positively to local communities and operates responsibly and sustainably in the world around us. Last week, we launched Journey to Tomorrow, our new 2030 responsible business plan, which starts a decade of new commitments. Starting with our people, it's crucial that we keep investing in our culture so we support, develop and empower colleagues and attract new talent into the business. We're committed to driving gender balance and doubling underrepresented groups across our leadership, supporting all colleagues, prioritizing their well-being and advancing human rights. In our communities, we want to improve the lives of 30 million people around the world by driving economic and social change through skills training and innovation, supporting our communities when natural disasters strike and collaborating to help those facing food poverty. 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 new environmental targets include lowering absolute carbon emissions in line with climate science across our owned, leased and managed hotels by 15% by 2030, and reducing carbon emissions per square meter from our franchise hotels by 46%. For new booked hotels, our ambition is that within 3 to 5 years, these will operate with very low or zero carbon emissions and to maximize the use of renewable energy. We will also pioneer the transformation to a minimal waste hospitality industry. We're targeting a reduction of food waste through a prevent, donate, divert plan and circular solutions for major commodity items. We're also on track to deliver our pledge to remove single-use miniature bath amenities from our hotels by the end of this year. And we will use new tools to reduce the water footprint of our hotels and help secure water access to those in communities at greatest risk. We've done some important work in all these areas in recent years, and there is a real energy in the business to deliver on these commitments and an understanding of how important these elements are to all of our stakeholders. So to sum it up. Last year was like no other, and I want to express my thanks to all our colleagues and owners for their unrelenting efforts through the COVID-19 crisis. Their dedication in helping guests and communities around the world brought to life our purpose of True Hospitality for Good. We also responded quickly and decisively to protect the business, including our actions to reduce costs, preserve cash and increase liquidity, all while realizing some remarkable operational achievements. We delivered outperformance in 2020 and demonstrated the resilience of our business model, thanks to the strength of our teams and brands, the segments in which we compete and our weighting towards domestic demand. Voco rolled out globally at record pace, and we took our other brands to new markets. We also continue to invest in the business for future growth, including the pilot of attribute pricing. The shape of the recovery thus far has varied globally, and the near-term outlook still has challenges and uncertainty. Long-term confidence remains unchanged, and our owners share that view. That is reflected in another 285 hotel openings still being achieved in the year and an average of 1 new signing almost every day in 2020. We will need to be patient. But the industry fundamentals are strong, and we're well placed to gain further market share with our preferred brands in the largest and most attractive markets and segments, supported by an even stronger technology and loyalty platforms. Our clear strategic priorities will take IHG forward into the next stage of our journey and, as the market continues to recover, support our ambition of industry-leading net rooms growth. With that, Paul and I are happy to take your questions. Ruby?

Our first question is from Bilal Aziz of UBS.

Just three for me, please. Firstly, some of your U.S. peers have talked somewhat explicitly about units growth expectations for next year, and you typically outperformed the market and flagged the vision to do so. So how should we think about that either on a gross or net basis for next year, please? Secondly, just on the improvement plan you've highlighted 200 Crowne Plaza and Holiday Inn Hotels. I appreciate it's very early in that process right now. But what sort of reception have you received from the owners? I mean how long do you expect this process to take place, please? And lastly, just for the RevPAR sensitivity we should be thinking about for 2021 of $15 million. Can you please highlight if that's all relevant for the level of decline you're expecting for the year ahead with potentially some incentive fees in China looking a bit more promising?

Thank you very much. I will discuss our expectations for net unit growth and provide more details regarding Holiday Inn and Crowne Plaza while allowing Paul to address RevPAR sensitivity. Reflecting on IHG's journey from 2017 to 2019, we introduced our strategy to accelerate growth. During that period, our gross openings rose from approximately 5% to 8% and our net openings increased from around 3% to the mid-5s. We clearly aimed to enhance our growth during that time and, in fact, in 2019, we opened more hotel rooms than any other major players, while still maintaining a commitment to quality with a reduction of about 2%. Our growth occurred with an existing ownership base of around 3,500 owners globally, predominantly small business owners in the U.S. Entering 2020, we experienced gross openings of around 4.5%, followed by the usual removals in SVC. In 2020, our owners focused intensely on operating their hotels, as most own 2 or 3 hotels with us and were less concerned with groundbreaking, pipeline, or signing new hotels, which led to a decline in signings. Nevertheless, our conversations with the owners remained positive, and we signed nearly one hotel a day in 2020. Looking ahead, we are confident that those owners who invested in IHG brands from '17 to '19 will continue to do so, helping to accelerate our growth back to an industry-leading position, although we are currently in a transitionary period. We have seen a slowdown in groundbreakings in some markets and construction has halted in various areas, but we expect to reaccelerate that process. Therefore, we anticipate a growth acceleration, but 2020 and 2021 will be transitional years. Additionally, as you noted, we are focusing on improving both Holiday Inn and Crowne Plaza, which are very strong brands with significant growth potential across the board. We have been dedicated to enhancing them yearly and have seen some removals in the U.S. Specifically, we have identified about 200 hotels worldwide that are underperforming relative to our expectations, and we will work closely with those owners to enhance performance. To put this in perspective, these 200 hotels, on average, have lower customer satisfaction scores compared to the rest of the brand and tended to experience declines in customer satisfaction scores in 2019 while other brands improved. They often have lower market share, are older properties, and have not fully embraced brand initiatives like Open Lobby and the Crowne Plaza renovation plans. Owners have reacted positively to our discussions, understanding that improvements are necessary for the Crowne Plaza and Holiday Inn brands within these hotels, especially as we continue to launch new prototypes in various markets including China. While we acknowledge that there will be some impact on our system and not all these hotels will successfully complete the improvement journey, we aim for most to remain, though some will inevitably exit. We will provide a clearer update on our initiatives in August at the half-year mark. Overall, I am very positive about the medium-term growth potential for the company. Though 2020 and 2021 are transitional years for several reasons already discussed, I am confident about our prospects for the future. Based on our performance in 2017, 2018, and 2019, we believe we can achieve similar growth again. Paul, would you like to address RevPAR sensitivity?

Sure. And thanks, Keith. So the RevPAR sensitivity on the franchise business is relatively straightforward if you're comparing it back against 2019, it's the $13 million that we've talked about. The sensitivity on the managed business and the owned really depends on how that recovery comes back and when and in which market. So we saw in 2020 that in total, it was about $15 million per point. But that's really just based on the shape of the trading across the year. So it might be the same in 2021, if you see almost a sort of a symmetrical recovery, then it would be the same. If it comes back faster or slower, then it will have a greater or lesser impact. So the $13 million is pretty well set. Whether it ends up being $15 million or $14 million, it's a little hard to say for now. So those are the sort of the parameters that we'll be operating within.

Our next question is from Jamie Rollo of Morgan Stanley.

First question relates to the previous discussion regarding the opening profile. While I acknowledge that this year will likely fall below the 5% to 8% pre-COVID range, looking ahead a few years, considering that findings in the fourth quarter showed a decline of one-third and that you have reduced 10% of your pipeline, doesn't this suggest a longer-term or medium-term impact on openings even after 2021? Specifically, it appears that Avid has stalled, and the pipeline hasn’t changed in a year. Are you still confident in the addressable market for that brand? Additionally, regarding dividends, could you clarify the financial metrics that need to be met for their resumption? Is it solely about having a leverage ratio below 3x, or do we also need to eliminate the covenant waiver? Is there a specific level of EBITDA we should consider? Lastly, you mentioned a slightly lower mix of direct bookings. Can you provide details on your OTA mix for the year, if possible?

Thank you, Jamie. I'll continue the discussion on growth while Paul will address the dividend and then I'll return to the OTA aspect. From a growth standpoint, Jamie, the strength of our ownership relationships, particularly in the U.S. mainstream, significantly contributed to the acceleration we experienced in 2017, 2018, and 2019. Like the rest of the industry, we noticed a slowdown in signings in 2020. We anticipate that the industry will likely see slower signings in 2021 as well, but there will be an acceleration as we move into recovery. When owners shift their focus from just keeping their businesses running to pursuing new deals and breaking ground, we can expect those mainstream owners to return, positively impacting our performance going forward, especially as lenders gain more confidence. Regarding our pipeline, we terminated around 8,000 more rooms last year compared to the previous year, mostly in the fourth quarter. We assessed the health of the pipeline and the likelihood of these deals proceeding. The U.S. pipeline remained fairly stable in terms of terminations, while we observed a slight uptick in terminations in China and EMEA. This is largely due to some projects having extended timelines, such as the Crowne and the InterContinental Shanghai Wonderland, which took 10 or 11 years from signing to opening. However, we've identified that certain projects in those markets will not move forward, whether due to a lack of development or other factors. Overall, the pipeline remains robust, as we confirmed in our review last year. Currently, we have about 1,800 hotels in the pipeline, with around 40% under construction. We expect to see gross numbers increase significantly in 2022, 2023, and 2024, leading to growth in net rooms during that timeframe. Transitioning to avid, we are quite confident, with over 200 hotels signed and more than 90 in planning or under construction. We believe there will continue to be strong demand in that segment, which has a low cost to build and a high-margin operating model that offers strong returns, making it appealing to owners. I am very optimistic about our return to industry-leading net rooms growth. While I think the industry may grow at a somewhat slower pace in the upcoming years, this will be influenced by economic activity and stimulus packages that should benefit us. Paul, would you like to discuss the dividend?

Yes. There are no restrictions in the agreements we have with the banks regarding the waivers that would prevent us from paying a dividend. However, we remain conservative and would aim to resume dividends when it is appropriate and the company generates sufficient free cash flow. We are considering all factors, and our history of returning over $13.5 billion to shareholders demonstrates that when we have cash available, we return it through ordinary or special dividends. Our thinking and philosophy on this matter remain unchanged, and there are no specific restrictions. Regarding the OTA mix, it has actually decreased year-on-year, but this may give a misleading impression. We mentioned earlier that more guests, since the pandemic began, have been booking directly with hotels, which caused a significant temporary drop in OTA contribution. This has since normalized to a more typical level, resulting in a decrease of over 100 basis points year-on-year. However, I expect it will recover as we move into 2021. We value OTA business because it often adds incremental revenue for us, and we have favorable commission rates with them that help drive additional business to our hotels.

And just coming back on the unit growth. So even if all of those 200 hotels leave the system, you're unlikely to be negative this year. Is that a fair estimate?

We need to evaluate the situation, Jamie, honestly. There is considerable volatility concerning openings. We are currently seeing construction starts restart, but there are also some supply chain challenges. Therefore, we can't definitively predict what overall growth will look like in 2021 until we progress further into the year and observe how construction reopens in various markets. However, I am very confident about accelerating growth into 2022 and 2023.

Our next question is from Vicki Stern of Barclays.

Just firstly on the cost savings, the $75 million. I think many of your U.S. peers are suggesting that in light of their cost savings programs, margins are going to come out of all this in a structurally higher place than they went in. Would you say the same is true for IHG? Do you look at that $75 million as something that will be sort of permanent even through the real recovery, when that emerges? Second question, sort of similar really on owner margins. To what extent do you think the sum of reduced brand standards that you've been implementing to preserve profits during COVID will stick and then ultimately potentially enhancing the owner margins as we go into recovery? And then finally, just on your latest thinking really on the structural business travel reductions, and again, sort of quite positive comments coming from the U.S. peers, perhaps less so from some of your European peers on any long-lasting impact from reduced trips as people do more Zooms and the like?

Paul, why don't you talk about group margin? I'll pick up owners and business travel.

Yes. Absolutely. So the $75 million of savings were put in place, but they are structural savings. So we would anticipate that those are sustainable, and hence, they would, yes, increase the margin for the group over time. With that said, we always will invest into the business. So if we see an opportunity as things step up over the next few years to invest a little bit more behind our new brands to make them grow even faster, then that's certainly something we will consider to put effectively some of that back into the business to stimulate growth. But absent that, yes, it would be a sustainable step-up in the margins.

Vicki, referring to our second strategic pillar of customer centricity and considering our owners, we understand that the quickest way to boost growth is by enhancing owner returns, something we've consistently achieved in the past. For instance, with the new Holiday Inn Express room prototype and guestroom design, we've managed to reduce construction costs by 10%, which will enhance owner returns. We've also achieved similar results with the new prototypes for Candlewood and Staybridge, as well as the new Holiday Inn prototype. Therefore, we are focused on reducing building costs to give owners greater confidence in achieving long-term returns and also examining operating costs. We're exploring how to utilize procurement to decrease operational expenses and assessing our operating standards to determine if there are elements that should not be reinstated, as they continue to affect margins. We are actively engaging with our owners and their associations to evaluate various items, including what we've removed and whether it should return, and if so, in what capacity. We remain committed to reducing both operational and construction costs, as strengthening these returns will further accelerate our growth and enhance our ability to leverage technology moving forward. Regarding business travel, I recently mentioned that the idea of its demise has been overstated. While some commentators have suggested that business travel will decline significantly, I believe it will only be slightly affected. Some business travel will certainly be substituted by technology, but we have less vulnerability to that due to our core business, which relies heavily on nondiscretionary travel and includes a significant leisure component. We don't have substantial exposure to group travel either. Thus, I anticipate that most business travel will return, albeit gradually over several years. It won’t all come back at once because planning for conventions, conferences, and large groups can take years. As confidence in traveling grows, travel budgets will slowly increase. Therefore, I have a positive outlook for the long term and am confident that medium-term business travel will rebound. There are additional influences at play; many CEOs are discussing reducing office space and allowing remote work, which means instead of commuting to an office every day, employees might only need to travel once a month. Furthermore, there’s talk of smaller office spaces and reduced meeting rooms, leading to a greater reliance on hotels as venues for gatherings that used to occur in offices, which could significantly drive demand. Consequently, I believe the recovery of business travel will be stronger than many are anticipating.

Just a follow-up on that. Does any of that change your emphasis across the different brands, perhaps brands or locations that you previously prioritized being less attractive, but conversely, some others that have become more appealing after all this?

I believe that leisure travel will continue to thrive, similar to the growth we observed after 9/11 and the financial crisis. There will be a notable increase in leisure travel this year as people are eager to escape their homes. This trend indicates that individuals will spend more time on leisure activities. Therefore, we plan to focus on more resort locations and enhance our presence in the leisure segment. Currently, there are few unattractive areas, except for the limited prospects for large urban hotels in developed markets, which we haven't been actively pursuing. Our focus has been on the mainstream select service sector, which is very appealing to owners and delivers high returns. Additionally, the luxury and resort sectors are performing well, complemented by successful conversions of brands like Kimpton, Hotel Indigo, and voco. Performance can vary across different markets.

Our next question is from Richard Clarke at Bernstein.

Three, if I may? Just completing the circle on margin, just prudently deducting EBIT from revenue on your owned and leased portfolio, it looks like the costs have come down there by $300 million. Is there a bankable opportunity there? I think the $75 million guidance is just on the fee business. So is there an opportunity to save costs there? Second question is just on performance into the start of this year. What are you seeing? And in particular, any impact in Texas? Are you over-indexed towards Texas and the storms there? Has that been a positive to you within the first quarter? And then lastly, you said to Jamie that you like OTA business. There's sort of a couple of new players, I guess, in the hotel distribution market with Airbnb distributing more and more hotels and then the Tripadvisor Plus Subscription products. Are these two things you would think about leaning into? And your thoughts on their entry into hotel distribution?

Great. Paul, do you want to pick up the margin question? And I'll pick up performance and then OTA.

Yes, Richard, regarding the owned and leased portfolio, we have definitely reduced many costs. I'll need to evaluate as we move forward whether any of these costs can be permanently eliminated. Keep in mind that most of our owned and leased properties are high-end urban hotels, which come with certain expectations for customer delivery. This remains extremely important to us. However, we always prioritize cost efficiency and aim to maximize the value of our assets. If we find opportunities, we will definitely pursue them, but there isn’t anything specific I can mention at this time.

Rich, regarding performance, our previous statements remain relevant today. We anticipate a domestic recovery will occur first, primarily led by mainstream travel. As restrictions ease, we expect an increase in leisure travel, followed by groups, meetings, and events, with long-haul travel likely being the last segment to recover until borders reopen. The primary factor influencing this recovery will be vaccinations, which will facilitate the easing of travel and hotel restrictions. I monitor both the rate of bookings and cancellations across all markets and the pace of vaccinations in developed countries daily to see how these trends align. Currently, Q3 and Q4 in the U.S. appear quite similar, and not much has changed heading into Q1 from an industry viewpoint. It seems a second-half recovery is more plausible as vaccinations become widely distributed, especially as places like the U.K. begin to reopen in June, followed by Europe, while Asia may lag behind. Some countries may not open their borders at all this year. Hence, we are clearly entering a recovery phase, but I expect it to be gradual. Regarding Texas, the industry is seeing effects from the tragic events where many individuals have been displaced from their homes into hotels. I haven't yet assessed the precise impact on our figures, but the situation has influenced the industry in both positive and negative ways. Some people unable to travel wanted to, while others have found temporary shelter due to displacement. The long-term impacts will depend on the extent of the damage and recovery efforts. Concerning online travel agencies, we have a solid relationship with Bookings and Expedia and engage in strategic discussions for further expansion. However, we have not partnered with Airbnb due to our commitment to consistent guest experiences and brand delivery, which conflicts with Airbnb's model. As for Tripadvisor Plus, our teams are evaluating that option, and I am unsure about our progress. Paul noted a 100 basis point decline in our OTA contributions last year because more travelers opted for direct hotel reservations. This is likely to return to normal as leisure travel resumes and travel restrictions are lifted.

Our next question is from Alex Brignall of Redburn.

I have one question regarding distribution and loyalty. 2020 was an unusual year due to a significantly low denominator. Companies like yours, Marriott, Hilton, and Hyatt all saw a decline in loyalty contributions. I expected yours to be somewhat more resilient, considering your business travel focus, which tends to be on the lower end. Can you discuss the main factors that influenced this? Will it rebound with a typical recovery, or will it remain lower? Additionally, what potential impacts could this have moving forward?

Our perspective is that it will return to normal over time. If you analyze the different segments, there is discretionary business travel and nondiscretionary business travel. Nondiscretionary travel has remained steady, while a significant portion of discretionary travel has disappeared, impacting our loyalty contributions. There are loyalty members who stayed only a few nights with us this past year, whereas the previous year they would have stayed with us for 50 to 75 nights. We have lost some of those discretionary business travelers, but we expect them to return over time. Leisure travel, on the other hand, has continued, with a mix of loyalty members and some who are infrequent and not loyal to any particular brand. Overall, the mix of business factors is influencing our loyalty contributions, and we believe that this will normalize in the coming years.

You seem to have a more positive outlook on business compared to others. If we were to consider that the share of leisure bookings has increased overall, does that suggest a shift away from direct distribution? OTAs generally claim they contribute more to leisure bookings than to business bookings. Is this a significant factor for you, or does your hotel mix lead to a different source of leisure bookings?

It's difficult to predict the future, especially with the ongoing changes in leisure travel. I anticipate that our mix will remain relatively stable once we return to normal. However, normalizing the industry could take a couple of years. I believe business travel will return, but it will take time. Leisure travel is likely to continue growing, and over the coming years, we will see a more balanced mix between business and leisure travel. We should consider 2021 and 2022 as crucial transition years following the pandemic. If everything goes as planned with the vaccines, we can expect a significant increase in revenue per available room over the next few years. Business travel, including group meetings, conferences, and events, will also rebound, contributing to direct bookings. I don't mean to be vague, but it's quite challenging to gauge the impact on these metrics in the next two years due to the uncertainty surrounding revenue recovery and the timing of different segments' recovery.

Our next question is from Leo Carrington of Credit Suisse.

First of all, on the incentive fees, some were still earned in all regions in 2020 despite the demand mix being weaker in the managed portfolio. Paul, can you outline the mechanics behind these incentives in terms of occupancy or RevPAR and help us understand how they might develop in 2021, probably in relation to a RevPAR recovery in various scenarios? For the second question, you mentioned your cost savings are while investing for growth. Do you have anything specifically in mind here to take advantage of changing competitive landscapes, or is this about the voco rollout, the attribute-based pricing, and so on?

Yes. We noticed that incentive fees particularly returned in the second half in China. Most contracts there are quite similar, involving a share of revenues and then a share of the hotel’s gross operating profit. In other regions, contracts may be more structured, where you may receive a base fee based on revenue, such as a franchise fee. Additionally, there might be a priority return on owned properties, meaning you won't receive your incentive fee until the owner reaches a certain profit level. This implies more operational leverage with those fees. We specifically highlighted the return of incentive fees in China, while in other areas, they will recover to a lesser degree as the profitability of managed hotels improves.

Great. I want to mention a few things about GRS and attribute pricing. We are launching version 2 of our guest reservation system under IHG Concerto, which focuses on attribute-based pricing. We conducted pilot testing last year and started a new pilot at the beginning of this year. We are wrapping up the pilot and plan to expand it globally, with completion expected by the end of the year. The majority of the rollout will occur in the second half of the year, particularly in the fourth quarter. This will allow us to activate attributes through our direct channels and non-room inventory, generating additional revenue for our owners by enhancing how we price and market those attributes, ultimately improving the customer experience. Regarding voco, could you clarify your specific question related to it?

The cost of investing in growth involved marketing and expanding the brand with new owners.

We have several initiatives for growth. For voco, which we launched in 2018, we have around 50 hotels open in the pipeline. For avid, launched in 2017, there are about 200 hotels in the pipeline. Atwell currently has about 19 hotels signed. In each of these brands, we are investing in the P&L to support hotel development, with teams focused on building and rolling them out. Initially, we support them, and as they mature, those costs transition to the system fund, creating a virtuous cycle for reinvesting in growth over time. As a new brand matures, the costs decrease on the P&L and move to the system fund due to incoming marketing dollars. Our current focus is leveraging brands like voco for conversions since they are significant brands designed for that purpose. We are also launching conversions in Six Senses, and we have InterContinental and Kimpton, offering a wide variety of brands that can easily be converted for high value for our owners.

Our next question is from Tim Barrett at Numis.

I was looking for a bit more color, so two things. You talked about the average or the kind of median owner having only 2 to 3 sites. But can you just talk a little bit around the shape of your owner base and whether there's any big multiples left similar to SVC or Eagle Hospitality Trust, those kind of people that you're worried about for 2021? And a similar question around owner finances. Many of them are still burning cash, I guess, at 40% occupancy. What's your general feeling for how their balance sheets look right now?

Thank you. Paul, do you want to pick those ones up?

Sure. Now that the SVC contract is no longer in place, our largest business owner in the U.S. operates fewer than 10 hotels with us. This trend is similar globally, as our ownership is very widely distributed, which is a major strength of our model. We have thousands of owners dedicated to making their hotels successful and are actively focused on their operations. In terms of potential portfolio losses moving forward, there is virtually nothing significant at risk. Regarding owner finances, as you mentioned, owners have been concentrating on strengthening their balance sheets and ensuring they're not losing cash on their hotels. They have significantly improved the GOP margins required to break even over the year, with our assistance. The stimulus packages in the U.S., including PPP schemes and grants to support employee wages, have played a crucial role in this. We have advocated for this support and, as part of an industry task force, communicated with the White House about the importance of assisting our owners, given our status as a major employer in the U.S. However, it will still be challenging for owners. You may recall that we implemented supportive measures at the beginning of the pandemic, which were well-received. It's encouraging to see that our owners still have sufficient financial capacity to meet their obligations to us. As I mentioned earlier, over 90% of our payments from U.S. owners are made within 90 days, and 85% are made within approximately 45 days. This is one of the key areas we continue to monitor closely. If an owner is unable to pay us, it may indicate financial distress, and we engage in discussions with them.

Our next question is from Andre Juillard of Deutsche Bank.

Two questions, if I may, on my side. The first one is about the saving plan and the $75 million you're expecting to be structural. Could you give us some more color on where they are coming from and how you expect them to be permanent out of additional investment you have eventually mentioned? And the second question is about the development and the pipeline. Considering that you mentioned that there would be a focus on midscale short term. But regarding the upscale segment and luxury segment, which should continue to be impacted and negatively impacted in the next few months, what is your perception? And are you still confident to continue all the developments you have signed?

Absolutely. Andre, so you'll remember that in 2020, we took out $150 million of cost, and that was addressing every cost category in the business, frankly. We reduced the salaries of everybody in the business. And some people, sadly, yes, had to leave the business as we looked at how we could do things more efficiently. And we reduced down all discretionary spend in the business and reduced down our travel spend, and our corporate bonus scheme didn't pay out in 2020. As we look forward into 2021, we're keeping many of those reductions. We have put salaries back up to prepandemic levels, and we are anticipating and certainly hoping that our bonus plan will pay this year. And that drives a level of cost increases versus 2020. We're also reinstating investments to the full level that we had before behind the new brands, as people are just talking about, say, behind voco, avid, Atwell, Six Senses, et cetera, et cetera, to stimulate additional growth. So the combination of all that leads us to being at a $75 million lower cost base than we were back in 2019.

In terms of development, there remains a very strong demand in the luxury and lifestyle sectors. Last year, we signed 56 hotels in this segment, including seven remarkable Six Senses hotels, which are expanding Kimpton into new international markets. This demand stems from the long-term nature of asset ownership in this area, as these hotels are built with a vision to be owned for 40, 50, or even 60 years. Property owners who have weathered the pandemic and are experiencing returns are continuing their investments. I am particularly confident about the progress in the resort market, and we foresee ongoing development in select luxury and lifestyle urban projects, especially in emerging markets. Midscale offerings will also play a crucial role in reigniting the company’s growth engine, which is poised to accelerate moving forward. Overall, the demand for our brands has likely reached an all-time high.

Okay. And maybe as a follow-up question on this side. You've been buying some brands for the past few years, and I think that Six Senses especially was a great acquisition. Do you see any brands being in the market under difficulty or not at the moment and being potential targets for consolidation?

I don’t typically comment specifically on mergers and acquisitions, but I can speak more generally. There are likely to be some brands available in the market over the next year, possibly due to significant pressures related to their geographic mix or asset ownership. Our focus remains on organic growth. Since I joined as Chief Executive with this team, we have expanded our brand portfolio by adding Regent, Six Senses, and taking Kimpton international, along with introducing Avid, Atwell, and Voco. We have filled the necessary gaps in our portfolio and will continue to grow this business organically. We will consider inorganic growth if it benefits our shareholders, but for now, I believe we have a strong brand portfolio that will support our recovery and accelerate growth in the coming years in the industry.

We do have one further question. Our next question is from Ivor Jones of Peel Hunt.

Just back to the 200 hotels on the naughty step. Was their fee income in 2020 proportional to the level in 2019? What did they earn in 2019? Secondly, things like book later and free cancellations, are they temporary? Or do you think they're now permanently part of the industry? And does it matter? Does it imply higher occupancy and lower price in the recovery? And finally, I think I understand this, but when you talk about discounted Reward Nights, does that imply that the system funds are overfunded with funds to redemption Reward Nights? And is there an opportunity to transfer cash out of the fund to the group? Or does that not matter?

For the 2020 fee impact, it would be $20 million, which is approximately $40 million based on 2019 figures, considering the changes in RevPAR, effectively doubling the amount. Regarding dynamic pricing in relation to Reward Nights, instead of having a set number of points to purchase a room throughout the year, we assess the cost in pounds and adjust the points accordingly. This approach allows for fluctuation based on seasonality and demand. Ultimately, this enhances the value of points for our members, but it does not release any resources in the rewards program; it simply increases the value for our members.

Great. I guess your second question about Book Now, Pay Later, free cancellation, it's more philosophical. What we're trying to do now is give customers the confidence to travel again when they're ready to travel again, so making sure we've got the right operating processes and standards and cleaning features in the hotel, so they have a great, safe stay and have just confidence to book. And so we put these things in place now so that customers go, you know what, I want to be able to book now, stay with an IHG hotel because I know if I can't travel, if government restrictions come into play, I can cancel. So we're just trying to capture as much available demand as we can right now. We don't think it's having an impact on pricing. We've adjusted our revenue management systems pretty dynamically this year to make sure we're focusing on driving rate as the recovery returns. And as business returns to normal in future years, we'll be putting more restrictions back into place on the consumers. But right now, we just want to do the right thing by them and give them the confidence to travel.

We have no further questions. So I'll hand back to our host.

Thank you, everyone. I truly appreciate you taking the time to join Paul and me today. I look forward to connecting individually with some of you as time goes on, as well as with our shareholders. I want to reiterate how incredibly proud I am of the team and their achievements in 2020. Their management of the crisis, finances, and care for people has been extraordinary. I commend them for being a strong executive team, focused on guiding our owners through recovery, capturing our fair share of demand, and accelerating back into growth while enhancing our brand portfolio. We have consistently demonstrated our capability to achieve industry-leading growth in terms of rooms, and we will continue to do so in the future. Our Q1 date is May 7, and I'm eager to catch up with you then. Until then, Stuart, unless you have anything else, please everyone stay safe, and I hope we can all return to a more normal life as vaccinations progress. Stuart, do you have anything else?

Nothing else for me. Maybe, thanks, Steve. Thanks, Paul. Thanks all for joining the call.

Thanks, everyone.