Intercontinental Hotels Group PLC /New/ Q1 FY2022 Earnings Call

Hello all, and a warm welcome to the IHG First Quarter Trading Update to 31st of March 2022. My name is Lydia, and I'm your operator today. It's my pleasure to now hand you over to our host, Stuart Ford. Please go ahead, when you're ready.

Many thanks, Lydia. Good morning, everyone, and welcome to IHG's conference call for the first quarter of 2022. I'm Stuart Ford, Head of Investor Relations at IHG. I'm 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 discussions today, the company may make certain forward-looking statements as defined under U.S. law. Please refer to this morning's announcement and the company's SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. The release together with the usual supplementary data pack can be downloaded from the results and presentations under the Investors tab on ihgplc.com. I'll now hand the call over to Paul.

Thanks, Stuart, and good morning, everyone. I will start, as usual, with a review of our trading performance. You will have seen that we're still providing monthly RevPAR data in our release as well as giving you both the year-on-year movement and the performance relative to 2019. RevPAR has continued to recover and gained momentum through the quarter. On a group basis, RevPAR was up 61% on last year. Relative to 2019, RevPAR was down 17.7% for the quarter as a whole, broadly similar to quarter 4, which was down 17.1%. This was despite January experiencing particularly challenging trading conditions due to the impact of the Omicron variant, resulting in RevPAR that month being down 24%. Trading improved to down 18% in February and to a deficit of just 12% in March. Average daily rate was up 27% on 2021. This meant it was almost flat against 2019 levels, while occupancy was down 11 percentage points. Global occupancy was 52% for the quarter as a whole. And by March, it had risen to nearly 60%. Clearly, it's been another period of differing trading conditions by region, but the strong demand we've seen in markets that are fully reopened means we remain confident of a full recovery. We've seen particularly strong leisure demand and the increasing return of business and group travel. With the pace of demand, together with the strength of our brands, we have experienced strong pricing power. Looking now in more detail at our regional performance. For the Americas, RevPAR was down 8% versus 2019 and by just under 6% in the U.S. RevPAR sequentially improved in the U.S. through the quarter, from down 12% in January to down 6% in February and a deficit of only 1.5% in March. ADR across the U.S. business was up 4% in March with leisure rates up more than 10%. Events, conventions and conferences showed very encouraging improvement. Leisure performance was further boosted by a strong spring break vacation period. This contributed to leisure rooms revenue for the quarter being 10% higher than 2019. With what's on the books, we can see in the coming calls that both leisure room demand and rate are anticipated to exceed 2019 levels. This gives continued reassurance on pricing power, which we expect will only strengthen with further rebuilding in corporate and group activity. Development in major urban markets has been recovering in recent months. In January, the top 25 U.S. markets were 24 percentage points behind the rest of the country in RevPAR versus 2019. By March, that gap had narrowed to only 14 percentage points with the top 25 markets down 10% and the rest of the country up 4%. There remains a wide disparity in the pace of recovery of these major urban markets. In March, San Francisco was still down approximately 50% versus 2019, whilst New York and Boston saw significant improvements to be only 20% lower than pre-COVID. A number of more leisure-orientated urban markets, such as Miami and San Diego exceeded 2019 levels. Moving on now to our Europe, Middle East, Asia and Africa region, where RevPAR was down 33% relative to 2019. In the U.K., RevPAR was down 15%. Similar to the U.S., non-urban and leisure properties were key performance drivers. London has also seen strong recovery in recent months. Continental Europe was 45% down with the slower recovery owing to lockdown restrictions remaining in place for longer in several markets. RevPAR performance in Australia was 38% lower than 2019 for the quarter as a whole. However, the resumption of international flights at the end of February, shortly followed by the full reopening of Australia's internal borders, maintenance recovery accelerated towards the end of the quarter. Performance in the Middle East was strong with RevPAR for the quarter at only a 7% deficit to 2019. Within this, the UAE was 2% up driven by the final months of the Expo event in Dubai. Recovery in Saudi Arabia continued as holy site capacities have further increased, resulting in March being up by more than 12%. Finally, moving to Greater China, where COVID restrictions have resulted in a challenging trading environment. RevPAR across the region was down 42% against 2019. Strict lockdowns affected demand across a number of Tier 1 and Tier 2 cities. And with these feeder markets effectively shut down, occupancy in Tier 3, Tier 4 and resort locations was also impacted. Within Tier 1, Shenzhen was impacted most severely from COVID restrictions during the quarter with RevPAR down 77%. Guangzhou in close proximity was down 49%. Tightening of restrictions in Shanghai did not take full effect until March. However, RevPAR was still down 40% for the quarter. These restrictions have been in higher RevPAR locations with around one-third of the estate temporarily closed or repurposed for quarantining, there was a 17% ADR reduction. We don't know the future extent or length of restrictions. With what we saw on each occasion in 2021, whenever restrictions are relaxed, demand sharply returns thereafter. Turning now to net system size. Over 6,500 rooms were opened in the quarter. 2,000 rooms were removed, equivalent to less than 25% of our system, resulting in net system size growth of 0.5% year-to-date. Our net system size reached 885,000 rooms and our hotel count over 6,000. Annualized net system growth for the first three quarters of the year will be impacted by the effect of the Holiday Inn and Crowne Plaza review, which was completed by the end of last year. When adjusting for the abnormally high number of removals that were required, net growth was 3.4%. Before adjustment, year-on-year growth was 0.1%. The need for this adjustment will, of course, roll off by the end of this year. We signed more than 16,500 rooms into our pipeline in the quarter, 15% higher than in the equivalent quarters in 2021 and 2020. The pipeline increased 2.4% from the start of the year to a total of 278,000 rooms. The strategy we've been following to stimulate growth is evident in the signings performance. Signings for our luxury and lifestyle brands represented 20% of total signings in the quarter compared to their 12% weighting in the systems today. Following the completion of last year's quality review, we've seen the level of signings across the Holiday Inn Brand Family and Crowne Plaza increase by 22% on the same quarter last year. On a regional basis, in the Americas, we saw the strongest Q1 signings performance since 2018 with almost 8,000 rooms added to the pipeline. There was good breadth to the signings. For example, we signed three Kimptons in the quarter on top of the four signed across the whole of 2021 and a further eight avids were signed in the quarter, taking the combined open and pipeline distribution to 213 hotels. In EMEA, there continues to be strong traction for our premium and luxury and lifestyle brands. There were four intercontinental signings, including a resort destination in Cyprus and the debut voco signing in Japan. We continue to see strong owner interest and conversion opportunities with almost half of the rooms signed coming from conversion. In Greater China, 32 new hotels were signed in the quarter despite the challenges of COVID restrictions. The momentum behind Holiday Inn Express saw 10 new signings in the quarter, while our Crowne Plaza brand continues to demonstrate its attractiveness with 12 signings across the region. Finally, a note on the very recent financing of our revolving credit facility. In April, we refinanced our previous $1.35 billion bank facilities with a new five-year RCF at the same value and with pricing reset to pre-pandemic levels. As we were already back within our original covenant requirements, all the prior COVID-related amendments have been removed. So to summarize the first quarter, it had a very positive start to the year, driven in particular by strong trading in the U.S. as well as improvements in EMEA with forward booking data suggesting the momentum will continue. Net system size growth was 3.4% year-on-year on an adjusted basis. The pace of signings, driven by the particularly strong performance in the Americas led to an increase in our pipeline. We're making good progress on reversing to prior levels of net system size growth. With a growing pipeline, we are well placed for sustainable industry-leading growth. Whilst trading volatility remains in certain COVID-impacted markets, the strong demand and pricing power in the rest of the business gives us confidence in a full recovery. Just before opening up the call for questions, I'd like to say a few words about Ukraine and Russia. The devastating scenes of the war in Ukraine and the humanitarian crisis are deeply saddening, and all those impacted are in our thoughts. We continue to support our hotel teams and colleagues as well as charities providing aid on the ground and working with owners in other countries to help accommodate Ukrainian refugees. In March, we announced that we closed our Moscow office, and we are supporting colleagues working remotely. Future investments, development activity, new hotel openings in Russia have been suspended, and any profit will be donated to support relief efforts. Last month, we made a further announcement that we continue to evaluate the complex long-term management or franchise agreements with our branded hotels operating in Russia with independent third-party companies. We are in discussions with owners. This is a complicated process and will take some time. With that, I'll now pass back to Lydia to open up the call for questions.

Our first question today comes from Bilal Aziz of UBS.

Three for me, please. Firstly, just on the pace of room openings for the remainder of the year, I appreciate that Q1 is seasonally quite low. But pre-pandemic, you usually added somewhere between 8,000 to 12,000 rooms. So you're tracking just a bit behind that. So whilst clearly targeting a high net number at the end. So perhaps you could talk us through the acceleration or the risks around China in that. #2, just on the U.S. signings, please, clearly quite a good signing number, now above 2019 level. Paul, I think you mentioned previously that franchise applications were picking up. I was just wondering if you've seen any change in that dynamic as financing and construction costs continue to rise? And then very finally, just in EMEA, and I appreciate you don't give April figures, but if perhaps you could qualitatively just give us some insight into the pace of recovery so far, given some of the data has been particularly encouraging on that side?

Thanks, Bilal. Yes, so in terms of room openings and when they're going to materialize through the year, if you look back on pre-COVID, we always saw that the first quarter was the smallest proportion and back to 2018, then actually only 14% of our openings for the year occurred in the first quarter. And I think we're going to see that sort of shape through the year, in China and you referenced that, I mean we opened five hotels. We have a further eight that are ready to open, but we have to get the licenses in place. And the offices of the licensing agencies are closed, we can't get those necessary documents officially stamped and you can't open the hotel without that. So there is some pent-up demand, which will come through in the balance of the year as China reopens. There's a lot of demand still there for our hotels, and we're very pleased with the signings performance that we saw there. In terms of U.S. signings, yes, we were pleased with the pickup there, five sequential quarters of improvement, and this is the best signings since 2018. We continue to see a lot of interest from our owners, as they want to own our brands. They realize that they make a lot of money from them. There are challenges, of course; there have been challenges in getting construction crews, challenges in getting materials, challenges in getting financing. But that's the benefit for us of working with a very large entrepreneurial owner base of owners who overcome those challenges. That's what they do. So a lot of interest and demand continues. And yes, in terms of April data, really both in the U.S. and in Europe have strengthened a lot in Europe, you pick that one up, particularly, but also in the U.S., building up to what I think will be a good second quarter, a very strong summer of demand with good pricing and then to the balance of the year. What we've got on the books, although you have relatively short booking windows, is very encouraging.

The next question in the queue comes from Jamie Rollo of Morgan Stanley.

Three questions, please. First, regarding the first quarter, U.S. RevPAR performance declined by 6%, while the market was down only 3%. Was this primarily due to the chain scale mix with less luxury exposure, or are your brands also lagging behind their relative segments in the U.S.? Secondly, concerning Russia, could you clarify the percentage of your fees in 2019 in relation to the room numbers we already know? Is there a notable under-indexing compared to the approximately 1% of group rooms? Lastly, looking at the U.S. signings figures, the pipeline for the avid brand has decreased again, with more terminations than signings. What is currently happening with the avid brand?

Thanks, Jamie. So, yes, in terms of first quarter U.S., pleased with the performance that we've seen. And you've always got to take out the geographical mix and also how far we had recovered before. When I looked at the head-to-head for us against our major competitors, actually, the brands are doing very well against the relative rents that we compete against with Hilton. Really, that's what I focus on most, so seeing very encouraging performance there. In terms of Russia, it's a relatively small part of our business, as you said, Jamie, and the fees are relatively small there. So you're not going to see anything really coming through in the numbers. We have said that any profit that we did make in the region would be donated to humanitarian causes. But I don't think you're ever really going to see that coming through as a drag on earnings, if you like. And U.S. signings, yes, U.S. signings up pleasingly and across open and pipeline Avids, I think we're up to around 218 or so, more than 50 open Avids and a strong pipeline. You'll remember that when we launched the brand, we launched with a very large pipeline and we gave owners of our existing product opportunities to take down various sites, so they had the opportunity of that first-mover advantage. Where they haven't started construction, we're confident that they will get a hotel open on the site they're taking down. If they don’t, we’ll just take that back and resell it to someone else because we don't want to end up with a pipeline that doesn't get opened. There's a lot of demand out there. So we're pleased with the progress we're seeing with Avid.

And if I could just follow up on one of the previous questions, just on the obviously very good Europe rebound in the last sort of 4 to 6 weeks, trying to move the other way. Is it fair to say that April for the group is running sort of down in the high single digits to several hundred basis points improvement on March is down 12, but you're sort of not yet positive, is that a fair estimate?

I think that's about right, Jamie. Yes, absolutely. If we didn’t have China dragging us down, you'd be looking significantly better. I mean, Americas was almost at parity in March, and then it strengthened quite considerably in April. But until we have China normalized, you're not going to see the full strength of that come through in the reported numbers.

Next in the queue, we have a question from Vicki Stern of Barclays.

To start, could you share your current level of confidence in achieving the 4% net system growth by the end of the year, considering the construction delays in the U.S. and in China? Also, regarding the balance sheet, during the full year results, you mentioned feeling comfortable in the upper end of the 2.5 to 3x leverage range this year. Given the recent events, what is your current comfort level with that leverage? Lastly, can you provide insights into the recovery of business travel globally, especially since it seems to be lagging behind leisure travel?

Thanks, Vicki. We stated earlier that our goal was for 2022 and 2023 to resemble 2018 and 2019 more closely. We are aiming for a 4% net growth this year, though I mentioned that achieving this will not be easy; it requires effort from the business. We are focused on reaching this target. Positive factors include strong performance in the U.S. and numerous conversions in EMEA, but we face challenges, particularly in China, where logistics for materials and permits are proving to be difficult. We need to gauge how these risks and opportunities balance throughout the year, but reaching that 4% remains our goal. Regarding the balance sheet, there are no significant changes. For nearly 20 years, I’ve talked about maintaining a range of 2% to 2.5%, which has shifted to 2.5% to 3% due to accounting changes involving leases. In the current low interest rate environment, I’m comfortable at the upper end of that range. The business has demonstrated resilience and strong cash generation, so I have no reason to deviate from this approach. We declared a dividend recently, which reflects our commitment to returning cash to shareholders, but I have no new updates on that today. Regarding business versus leisure travel, business travel is definitely on the rise, and the growth rate is encouraging. It varies by region, with some Eastern Seaboard cities showing stronger demand compared to Western cities. London is performing well; I am currently at the InterContinental Park Lane, which had its best April since before the pandemic. We have exceeded the strong performance of April 2019 for groups and meetings, which is very positive. While this may not indicate a trend for all our hotels, it shows a rapid recovery.

And sorry, just to follow on from that. Are you seeing the same trends on price when it comes to that business travel recovery as you've been seeing on leisure?

So we are still behind in terms of business on rate, but it's only marginally behind. As that continues to build, I think we'll get back to parity on price. Similarly, with group, group is recovering, and the pricing has stayed within a few percentage points of where we were pre-pandemic. So you haven’t got that requirement to sort of build back up the pricing because it's been held, which is actually very positive.

The next question comes from Richard Clarke of Bernstein.

Three, if I may. Your U.S. peers, Hilton and Marriott have given some slightly cautious guidance beyond April that basically April is kind of as good as it gets relative to the 2019 position. I'm just wondering, I know you're not going to give us any specific guidance. But in terms of the direction of travel, do you still see drivers of momentum in the U.S. business beyond this month? And then second question, just on China, just a sense of what you're seeing on the ground in China. Are things getting incrementally worse? Are you seeing more lockdowns, more hotels being closed or are things beginning to ease? And any particular challenges of having your head office in Shanghai that's causing you operational issues in China there? And then the third question, just on extended stay because it seems the biggest move in the U.S. pipeline for me is Candlewood Suites. It's about 1,000 more rooms in Candlewood Suites. It's not a brand you talk about very much. It only exists in the U.S. Just maybe talk about the demand for that brand. Is it fitting into the zeitgeist of people wanting to work from anywhere or is it an infrastructure play, maybe just what's driving what looks like a good performance there?

Thanks, Richard. Yes, so, is April as good as it gets in the U.S.? I think we still have very short booking windows, so it's always hard to call. But my view is we’re going to see a very strong summer of demand for all the reasons I've talked about before, a strong rate across each of our segments. Demand is still building, and as more demand comes back for business and for group on top of very strong leisure, then that all bodes well for continued recovery. I guess no certainty, but I don't think April is as good as it gets personally. China has been challenging. We've seen that come through in the numbers. What's important to note is that our experiences in the last 24 months show that China demand does come back very rapidly as it has elsewhere in the world once restrictions are lifted. It has been very difficult for the citizens of Shanghai, and our colleagues in Shanghai are, of course, impacted similar to all other Shanghai residents, but they're very resilient and are focused on continuing to drive our business. If you look at the very strong levels of signings we saw in China in the first quarter despite the challenges, I think that just shows us how committed they are. So a very strong team out there. In terms of extended stay and Candlewood Suites, Candlewood Suites is a fabulous brand. It has very high customer satisfaction scores. Owners, of course, like extended stay products because it has very high margins and relatively small personnel on site. The return on capital employed is very good. So extended stay as a category has seen a lot of increased owner demand. We're pleased with that, along with Staybridge and, indeed, with Atwell Suites, our new launch, which we've got a number of really good signings for.

We have a question from Jaafar Mestari of BNP Paribas.

I have three quick questions. First, could you share what’s on the books for after summer? I understand it will be quite limited, but we usually have about 15% booked for Q4 at this time, and this year it’s only 10%. Any numbers you have would be beneficial, even if they’re small. Second, regarding the U.S. segment, you've mentioned some aspects that may be holding you back, like lower exposure to leisure, resorts, and luxury compared to the market. What positive mix factors could potentially come into play? Specifically, I’m curious about your exposure to oil-producing states, as you tend to outperform during times of increased drilling activity. Are you seeing early signs of that in the global energy landscape? Lastly, concerning new room openings, the consensus this year is 4.3%, while Marriott is at 3.5% to 4%, and Hilton at 5%. I assume you'll lead the industry this year. Without getting into specifics about competitors, how do you view the slowdown in momentum for some of the previously hot competitor brands that were regularly achieving 6% or 7% growth pre-COVID? Is this simply a lag because those categories are recovering more slowly, or is there something structural indicating that your winning concept may not work as effectively in '22 and '23?

Great. Thanks, Jaafar. So, the nature of our business means that we don't have a lot, as you said, on the books multiple months out. What we do see is encouraging from the rates that we’re able to get. Groups that are getting booked up at strong rates. So I wouldn't call out any particular numbers. Obviously, in the U.K. business, we are more predominantly a global business, more predominantly in the U.S., so just different factors at play there. But what we do have on the books and what visibility we have as we look forward gives us encouragement on rates and an increasing demand environment. In terms of U.S. segments, yes, leisure has been very strong, and we've seen recovery in the other segments of business and group. We are weighted into the Permian Basin, as you say, in an oil-producing area, and that has stimulated demand. But there are a lot of factors at play there that mean that perhaps before, if you're looking back in 2017, 2018, you were looking at a few basis points of difference, you might be able to isolate it to say, this is what's driving it. With large increases year-on-year, it is harder to pinpoint. In terms of the net growth on the competitive basis, we are obviously focused on our own growth and pushing our own capabilities. If you think back to 2019, we actually had the highest level of growth in the industry. We had more removals than our top competitors, but that still gave us very competitive performance overall. That’s where everything in the strategy over the last few years has been building to ensure we can be industry-leading, and it remains a top priority for us.

And we have a question from Alex Brignall of Redburn.

I have a higher-level question regarding what is driving demand and how sustainable it is. It seems like many people are suggesting that we're currently experiencing the peak of this situation. We’re witnessing a significant release of pent-up demand, and I’m curious if you have any insights or opinions on how long that might last. It’s clear that demand is strong right now, but the broader macroeconomic environment does seem to be under some pressure. I would appreciate any thoughts you might have on this.

Thanks, Alex. Overall, with the visibility that we do have and backed by the data, such as from the airlines on their forward bookings and rate and how much demand there is, we remain very positive about summer and believe that there's still a lot of consumer demand for our brands and there's still pricing power available. We're expecting a good Q2 and Q3, and a good Q4. It remains a very good industry and a very good environment for us to be operating in.

Great. To gain a clearer understanding, beyond summer and looking at the rest of the year, when you speak with your major clients or group business, do you perceive that 2022 will be a particularly strong year, or do you sense that the positive momentum will continue?

There's nothing that is coming through from any conversations with corporate clients that would suggest that. We're seeing meetings and events coming back strongly. We're having our owner conference in a few weeks, which is 6,000 owners getting together in Las Vegas and very significant delegate uptake for that. A lot of things have been postponed that are coming back, and the business does require people getting together. That's what stimulates additional sales and things getting done. Everyone is on a growth trajectory, so they want to meet to stimulate that growth. I think we returned to what we saw pre-pandemic.

We have no further questions, so I will turn the call back over to Paul Edgecliffe-Johnson for his closing remarks.

Thanks, Lydia, and thanks, everybody, for joining us this morning. Good to talk to you all. Just to let you know that our second quarter update and the financial results for the first half of the year overall will be out on Tuesday, the 9th of August. So I look forward to speaking to you all then, if not before. Have a great day, everyone. Bye for now.

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