Intercontinental Hotels Group PLC /New/ Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to IHG's conference call for the 2021 full year results. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Keith Barr, our Group Chief Executive; 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. The 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. I'll now hand over the call to Keith.

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 for the year. Thanks to the collective efforts of our teams and working closely with our owners and listening to our guests, we delivered a strong performance in 2021 that gives us great confidence in the shape of this recovery and things to come. Our room signings and openings were significantly ahead of the prior year, and we're seeing excellent momentum across the business. The impact of travel restrictions around the world were, of course, still felt, but with global RevPAR down 30% relative to 2019 for the year as a whole. But trading improved significantly on 2020 with RevPAR some 46% higher and occupancy at times at record highs in some local markets. By the fourth quarter, global RevPAR was down just 17% versus 2019, with nearly half of our hotels back to prepandemic levels. In December, the Americas was actually up on 2019. This significant trading improvement, coupled with the actions we've taken to deliver sustainable cost reductions, translated into EBIT more than doubling. Our high-quality fee streams and disciplined use of capital drove significant free cash flow of $571 million, which is back above 2019 levels. On the strength of this performance and our outlook for future growth and profitability, we have taken the decision to resume the dividend with the proposed final payment equivalent to that which was withdrawn in March 2020. Throughout the pandemic, we have made sure that as we dealt with its challenges, we have not lost sight of delivering on our plans to position IHG for long-term growth. We made important progress in 2021 on multiple fronts that will ensure we emerge in this period a stronger company. We've continued to invest in the quality and consistency of our estate, including completing our Holiday Inn and Crowne Plaza review. We've reduced our cost base to create a more efficient model with $75 million of recurring savings. We've launched Vignette Collection to further strengthen the attractiveness of our portfolio. And we have kept investing in the enterprise that underpins it, developing our technology offer for guests and owners and delivering a new loyalty program that this year will truly transform the experience for our guests and owners. We've also made sure that we're set up to grow in the right way through our ambitious 2030 Journey to Tomorrow responsible business plan, with key steps in 2021 including upgrading to a 1.5-degree science-based carbon reduction target. We'll talk in more detail about each of these shortly. But for now, let me hand over to Paul to take you through the financial results.

Thank you, Keith, and good morning, everyone. Starting as usual with our headline results from reportable segments. Revenue of $1.4 billion and operating profit of $534 million increased 40% and 144%, respectively, against 2020. Underlying revenue from the fee business increased 38% and operating profit 104%. Adjusted interest, including charges relating to System Fund, increased to $142 million, as expected. Our effective tax rate of 31% was in line with our previous guidance. We expect the effective tax rate for 2022 and most likely for the next few years to continue to be around 30%. In aggregate, this performance resulted in an adjusted earnings per share of $1.47, up very strongly from the $0.31 in 2020. Turning now to our drivers of performance, where, to show the status of the recovery to our previous peak trading, I will also compare against 2019's performance. Group RevPAR continued to recover rapidly and across the year was just under 30% behind 2019's level, including the adverse effect from hotels that were temporarily closed. This reflects rate of just 8% and occupancy 16.5 percentage points behind. During the year, we added 44,000 rooms to our system. Our continued focus on the long-term health and quality of our established brands resulted in the removal of 50,000 rooms. Nearly 70% of these removals related to Holiday Inn and Crowne Plaza, which I'll talk about more in a moment. These additions and removals brought net system size growth on a year-on-year basis to negative 0.6% and on a 2-year basis to negative 0.4%. Our usual summary of total RevPAR growth and total rooms available on an underlying basis can be found in the appendix. Looking at our RevPAR performance over the year. You can clearly see differing trends in monthly RevPAR by region. Both Americas and EMEAA saw sequential monthly progress with both regions having a strong summer boosted by leisure demand, driving a significant recovery in rate. Momentum continued in both regions during the second half of the year. Our Greater China region saw more volatility in performance, largely driven by localized lockdowns and government-mandated travel restrictions. I will now take you through our regional performance in more detail. Starting with the Americas, where RevPAR recovered to only 20% lower than 2019 with the U.S. down 17%. In the fourth quarter, U.S. RevPAR improved to down just 5% but with 2% growth in rate. This included RevPAR being ahead of 2019 levels across Holiday Inn Express and our extended-stay brands. Across all our franchise hotels, which are largely in the upper mid-scale segment and in nonurban locations, RevPAR was almost at par with 2019, though in our managed estate, which is weighted towards luxury and upscale hotels in urban locations, RevPAR remained 23% below. During the year, we opened 16,000 rooms across the Americas, of which more than half were for the Holiday Inn brand family. This was more than offset by 31,000 rooms exiting, including 20,000 across Holiday Inn and Crowne Plaza. Underlying fee business revenue increased 51% to 81% to 2019's performance, and underlying fee operating profit increased 75% to 86% to 2019, driven in part by delivery of sustainable cost savings and an $11 million payroll tax credit. Our owned, leased and managed lease portfolio improved profitability by $18 million though were still $46 million down on 2019 due to weaker demand in urban markets where these hotels are located. Towards the end of the year, we sold our 3 owned EVEN hotels, maintaining franchise contracts. These hotels contributed a loss of $3 million in 2021. Looking at our future growth, we signed 18,000 rooms, ahead of the 14,000 signed in 2020, taking our Americas pipeline to 97,000 rooms. Looking at our U.S. business and leisure mix in more detail. Leisure demand stayed strong in the fourth quarter with room nights consumed up 2% on 2019 and rates up over 7%. As you'll recall, we are largely exposed to domestic business demand, and this steadily picked up through the year with business room nights down only 8% in the fourth quarter and with rate down less than 5%. The strong rate environment across each segment is encouraging as we continue to see demand build back.

Thanks, Paul. Our industry continues to evolve, accelerated in part by the pandemic. I want to take a moment to discuss how IHG is responding and adapting as a business. As Paul talked about, we're seeing a strong recovery in demand, particularly in resorts and leisure and in more suburban areas, where we've seen some of our hotels get back above 2019 levels. The areas that are still relatively more challenged are urban, so the New York, Chicago, Paris, and London of the world. But as more offices return to work, more groups and meetings come back, and the practicalities and ease of international travel are restored, we're confident of a full recovery for the industry and a resumption of its attractive long-term growth characteristics.

In terms of pricing, I think there were two aspects to the question... So I think if you look at the same data that we are seeing, generally the consumer is quite healthy, particularly in the U.S. And I guess our forward booking indicators, which have extended, give us confidence. We’re seeing in terms of leisure demand, which is that truly discretionary spend, continuing to accelerate across ‘21 and into ‘22, and we believe that we will see a record level of demand into Q2 and into Q3, kind of set – spring break into summer timeframe.

I have three questions. First, you mentioned strong signing momentum in the fourth quarter. I assume there is still significant room for improvement in the U.S. market. You noted an increase in franchise applications, so I would like to hear your perspective on the construction environment there and when you anticipate seeing an uptick. Second, the estate looks quite positive about achieving over 4% net unit growth this year, which means there are still more than 8,000 rooms to be opened throughout the year. Could you outline the building blocks and timing for those openings, considering that the recent signings will likely affect 2023? Lastly, I am interested in your views on pricing. While you introduced the attribute-based pricing system earlier this year, there appears to be considerable anxiety among U.S. consumers. Can you provide any data points that would reassure us that you can successfully increase real rates?

Thanks, Keith. Yes, we are encouraged by the current environment for signings. The increase in franchise applications is pleasing and showcases the strength of our brands. Our owners are clearly eager to open more hotels because they yield excellent returns. If you consider the current climate, real estate investors now see hotels as more attractive compared to retail and other commercial real estate like office spaces, which are less appealing at the moment. As a result, more capital is being directed towards hotels, which benefits us. We hold a significant share of signings within the industry, and there is still potential for recovery to the levels we experienced around 2018. This is partly dependent on the financing environment. Once financing conditions improve and supply chains become more stable, I believe we will witness an increase in signings that will ultimately boost our openings over time. Regarding our growth expectations for 2022, it will depend on how many rooms we open and how many we remove.

Great. Thanks, Paul. In terms of pricing, I think there were two aspects to the question. There was a little bit there about attribute-based pricing and the health of the consumer and so forth, too. So I think if you look at the same data that we are seeing, generally the consumer is quite healthy, particularly in the U.S.

Just firstly, separate to the Crowne Plaza/Holiday Inn program, I think the exits were quite a bit higher than expected in Q4. Just why was that? And how confident are you then in the exit rate going forward being around 1.5%? Or to put it another way, is there anything that could sort of derail that and bring it to exits at sort of higher level as we look into '22 or '23? Back on those franchise applications, thanks for giving the color on the U.S. Just wondering how that sort of indication for the future signings is looking in the other regions. And also, a little bit on the lending environment and the other sort of elements and the backdrop in those regions would be helpful.

In terms of the exits and the fact that we’ve said that our underlying rate of exits is – if you look back over multiple years, is around the 1.5%, in 2021 it was a little ahead of that; in 2020, it was behind that. And there were some hotels in 2020 which, ordinary course of business, we would have exited. But given it’s in the middle of a pandemic, we couldn’t really. So they have then gone in 2021. So if you look across 2020 and 2021 combined, the underlying, ex Holiday Inn and Crowne Plaza, rate of removals is at a normalized 1.5%. In terms of franchise applications and, more broadly, what we’re seeing from owners, owners want to open hotels with us around the world.

Thanks for your thoughts, and I think that is an important aspect. We are continuing to see positive trends in our system size growth and strong performance across our brands. That coupled with effective management of our brands and distribution will ensure we continue to deliver premium returns for our shareholders.

Four quick things. On distribution channels, has anything interesting happened in this period of recovery particularly in relation to OTAs within the mix or just generally in relation to distribution? Secondly, I guess the tail end of the year is less business heavy than the rest of the year. So when do you think through the '22 you'll be able to say more confidently the level to which business is recovering?

Well, thank you. I'll talk a little bit about distribution. And candidly, it's still pretty noisy in terms of distribution and where contributions are coming from because the recovery is happening at different rates at different parts of the world. And so in areas where we have seen a full recovery and you're seeing more business travel, you're seeing much more of a normalization to our traditional distribution contributions. In markets where it's been much more leisure oriented, you are seeing an increase in some of the OTAs because, again, those are infrequent leisure customers and you're seeing decreases in things like GDS.

My question is away from the financials and is actually referring to your penultimate slide when you talked about people and your diversity programs and recruiting diverse talent. I wonder if you could speak and say a bit more about how those diversity programs might differ around the globe. And I'm particularly interested in whether you're doing anything around neurodiversity, i.e., focus on finding ways to get autistic people recruited into organizations. And I wonder whether that's something that's on your agenda at all.

Thank you very much. Now our Journey to Tomorrow commitments for 2030, the people aspect is a huge component of it. And I think to your first point, diversity is different around the world. And having lived on many parts of this world, in Asia and Europe and in the U.S., we consciously try not to have a one-size-fits-all approach. We look actually at what’s happening in the markets and what’s the right focus we want to have. So for example, 12, 13 years ago, we focused on localization in China because our China business, which is our fastest growing, was being run principally by foreign nationals. Today, you get – and we – today, you go there. It’s run principally by Chinese nationals. We’re focusing on bringing women into the workforce in the Middle East.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.