Intercontinental Hotels Group PLC /New/ Q3 FY2023 Earnings Call

Hello and welcome to IHG’s 2023 full year results presentation. I’m Stuart Ford, Head of Investor Relations at IHG Hotels & Resorts, and shortly you will be hearing from Elie Maalouf, our Chief Executive Officer, and Michael Glover, our Chief Financial Officer. Before we proceed, I am obliged to remind all viewers that the company may make certain forward-looking statements as defined under U.S. law. Please refer to the accompanying full year results 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 results release, together with the usual supplementary data pack, as well as the presentation slides accompanying this webcast, can all be downloaded from the ‘results and presentations’ section under the investors tab on IHGplc.com. Now over to Elie.

Hello and welcome to IHG’s 2023 full-year results presentation. I’m Elie Maalouf, Chief Executive Officer of IHG Hotels & Resorts. I was honored to take on this role in July 2023, and to now be presenting my first set of annual results. Our results presentation follows a slightly different format this year, as we are holding a separate live webcast and Q&A session to talk about IHG’s update on strategic priorities. All material background for that update is contained in the full year results announcement that we have released. This webcast that you are currently watching is specifically to cover the performance in 2023. In a moment, Michael Glover will talk you through our financial results, but before that, let me share some key highlights. We saw excellent progress in 2023, with key metrics for our trading performance, hotel openings and signings, profit and earnings all significantly ahead of last year. RevPAR improved significantly, up 16% versus 2022, and up 11% versus 2019. Despite tougher comparables as we progressed through the year, Q4 RevPAR still finished up 8% year-on-year, and up 13% versus 2019. Looking at system size, our gross growth was 5.3%, and net growth was 3.8%. We added 275 hotels to our system, delivering 16% more room openings than 2022 after adjusting for Iberostar. Signings were up 26% on last year, driven by one of IHG’s best ever quarterly signings performances in Q4. We continue to successfully capture conversion opportunities, which represented over 35% of both openings and signings. Our Essentials and Suites brands had another strong year, and Luxury & Lifestyle is a rising proportion of our future growth. IHG’s overall pipeline increased 6% year-on-year to almost 300,000 rooms, representing secured growth equivalent to more than 30% of today’s system. Our fee margin continued to expand, growing by 3.4 percentage points in the year and helping to drive operating profit to just over $1 billion, up 23% on 2022. Earnings per share grew 33% year-on-year, and is 24% ahead of where earnings were back in 2019. 2023 saw another record year of cash generation, with free cash flow totaling $819 million. We are pleased to propose a final dividend of $0.104, contributing to total dividend growth of 10% for the year to $152.3. After completing buyback programs in each of 2022 and 2023, and while continuing to invest in our business, we have announced a further $800 million buyback program for 2024, demonstrating our commitment to routinely return surplus capital to shareholders. Let me now hand over to Michael who will take you through the details of our financial results for the year.

Thanks, Elie. I’m Michael Glover, Chief Financial Officer for IHG Hotels & Resorts. Let me provide some detailed insights into the strong financial performance we achieved in 2023. I'll begin with our headline results from our reportable segments. We generated revenue of $2.2 billion and an operating profit of $1 billion and $19 million, reflecting growth of 17% and 23% compared to 2022, respectively. Revenue from our fee business rose by 17% to $1.7 billion, and operating profit from this segment increased by 23% to $992 million, or by 25% on an underlying basis. Our fee margin improved significantly by 340 basis points to 59.3%, a point I will elaborate on shortly. Adjusted interest rose to $131 million, and our effective tax rate for the full year was 28%. Later in this presentation, I will discuss the outlook for these items to assist with modeling. Earnings per share benefitted from the $750 million share buyback program completed in 2023, as well as the annualization of the previous $500 million buyback executed in the second half of 2022. Altogether, along with the reduction in our share count due to the buyback programs, earnings per share rose by 33% to $375.7. Now, let's summarize RevPAR performance by region. In the Americas and EMEAA regions, we observed a sustained recovery in RevPAR compared to 2019 levels over the past 12 to 18 months. As is well known, trading in Greater China was uneven in 2022, but we saw a sharp and sustained improvement in 2023, with RevPAR for the year up 1% versus 2019. Q3 RevPAR was particularly strong, up 9% versus 2019, thanks to a better-than-expected increase in domestic leisure trips. Q4 RevPAR dropped back down to slightly below 2019 levels, which was anticipated due to the seasonally higher business demand in that quarter, still lagging behind leisure demand due to the delayed return of international airlift capacity. I will revisit the three regions in more detail shortly. Regarding RevPAR performance against 2022, we saw significant improvements in the first half of the year due to a lower base impacted by COVID in the previous year. As we progressed through 2023, we faced stronger comparisons, and the growth rate slowed, which was expected; however, it stabilized well above the previous year's levels. It's important to note that as we approach 2024, we will no longer present trading metrics in comparison to 2019 given the near-complete recovery of most of our markets. We are showing our global demand breakdown among Leisure, Business, and Groups, and the revenue drivers from room nights and rate progress. Previously, we shared this data for the U.S., and now we present the global perspective as it is now relevant given the full recovery pattern. Leisure demand, which recovered first, has shown sustained strength. Business demand has also strengthened, both in occupancy and pricing. We have returned to our regular annual renegotiation of corporate rates, which continues to drive ADR. Additionally, the ongoing return of international airlift to and from China has bolstered demand across Asia, and this will continue to be a positive force in 2024. Groups, which were the last to recover, have advanced, and while revenues for 2023 were still 5% behind 2019 levels, they turned positive in the final quarter. Current group bookings are 17% ahead of the same time last year, indicating a complete recovery in this area. As highlighted earlier, we have seen further growth in our fee margin, which now stands at 59.3%, an increase of 340 basis points compared to 2022. This improvement was largely driven by our EMEAA and Greater China regions, which both saw significant margin recoveries as performance continued to grow. Margins in these regions have surpassed pre-COVID levels. In contrast, the Americas region saw a slight decline, down 210 basis points to 82.2%. As previously indicated, we made investments in 2023 to support various growth initiatives. Nevertheless, margins remain significantly above 2019 levels and are still sustainably strong. It’s important to point out that in the appendices, you can find further details regarding our revenue components, overheads, and operating profit. Our fee business overheads increased by 8.5% year-on-year, although the underlying inflation rate was around 5%. Integration costs for Iberostar, the launch of Garner, and other investments in systems and growth initiatives resulted in overheads growing beyond our typical expectations. However, the outlook for fee margins remains promising. Our efficient cost structure and operating model allow for investments in growth while also increasing margins by an expected average of 100 to 150 basis points annually, similar to what IHG has accomplished over the past decade. I will cover this topic further in our separate presentation on our strategic priorities. Regarding system growth, we achieved gross additions of 5.3%, opening 48,000 rooms in 2023, which is 16% more than the previous year when excluding Iberostar. Additionally, 13,000 rooms left the system during the year, resulting in a removal rate of 1.5%, consistent with our historical average. Consequently, our net system growth was 3.8%, in line with our expectations of close to 4% growth for the year. We saw significant growth in conversions, which accounted for 39% of our openings this year. The number of rooms from conversions increased by 21% year-on-year, and we also experienced a 12% increase in new-build openings. Current consensus indicates a projected 4% net system growth in 2024, which aligns with our internal expectations at this early stage in the year. We signed 79,000 rooms during the year, a 26% increase over 2022 when adjusted for Iberostar. In Q4 alone, we signed over 28,000 rooms, up 50% compared to the same period last year, reflecting one of the strongest development activity quarters on record. This reinforces our future growth potential and clearly shows the ongoing appeal of our brands and enterprise system. Our six Luxury & Lifestyle brands accounted for 23% of signings, further enhancing this segment of our portfolio. One in two Luxury & Lifestyle development projects now includes a component for branded residences. In terms of signings by type, conversions more than doubled compared to 2022, and new build signings also increased over the prior year. Now, let's highlight key points for each of the three regions, starting with the Americas. RevPAR rose by 7% compared to 2022 and by 13% compared to 2019. Occupancy increased by 1.5 percentage points year-on-year, with rates up by 4.6%. The first quarter of 2022 was impacted by travel volume declines due to the Omicron variant, making comparisons tougher from April onward. Q4 RevPAR showed a 1.5% increase versus 2022, representing sequential growth compared to 2019, which was up 14%. In the U.S., RevPAR growth was 0.1%, as it faced challenging comparisons against strong demand in Q4 of 2022. By contrast, the U.S. industry overall saw slight declines in RevPAR for midscale and upper midscale during Q4. Forecasts for 2024 suggest positive low-to-mid single-digit RevPAR growth for all chain scales. As for gross system growth, we recorded 2%. Momentum improved later in the year, with 40% of new openings occurring in the fourth quarter. We were pleased to see two Garner conversions open by year-end, only three months after the brand became franchise-ready in September. Additionally, the pace of openings for avid properties accelerated, with eight new locations added during the year and 18 more already in construction. In the Luxury & Lifestyle segment, we saw the first Vignette open in the region, entering Dominica with the InterContinental Cabrits Resort & Spa, along with three new Kimpton properties. We signed 100 deals across the Holiday Inn and Holiday Inn Express brands, indicating the lasting appeal of these brands and their untapped growth potential. We also achieved signings for three Holiday Inn Club Vacations hotels in Mexico, marking the brand's first expansion outside the U.S. In the Luxury & Lifestyle segment, we recorded 29 signings, which represented a 58% increase in rooms from 2022, many in highly competitive markets such as New York, Napa Valley, Washington DC, Turks & Caicos, and Hawaii. In the Premium segment, signings tripled, with strong growth at both voco and Crowne Plaza. With our increased development activity outside the U.S., we achieved 51 signings in Canada, Mexico, Latin America, and the Caribbean, which accounted for nearly 20%. For the year, total signings surpassed 28,000 rooms, or 34% more than in 2022 when excluding Iberostar. In our EMEAA region, RevPAR rose 23.7% compared to 2022 and 15.4% compared to 2019. Occupancy improved by 7.9 percentage points, while rates climbed by 9.8%. The U.K., benefiting from an earlier easing of restrictions, recorded a 14% RevPAR increase for the year compared to 2022, and a 5% rise in Q4, despite tough comparisons. Performance variances elsewhere reflected the timing of recovery following the easing of travel restrictions, with Q4 year-on-year RevPAR in Australia up 7%, Continental Europe up 8%, South East Asia & Korea up 8%, and Japan up 20%. In the Middle East, Q4 RevPAR dipped 1% mainly due to high comparisons from the FIFA World Cup held a year earlier, yet it rose 24% compared to 2019 levels. Gross system growth was 9.2% year-on-year with over 21,000 room openings in the region, nearly a third occurring in the fourth quarter. This included 16 additional Iberostar Beachfront Resorts as part of a long-term commercial agreement established in late 2022, and 26 openings across the Holiday Inn Brand Family. The InterContinental brand had a particularly strong year, with eight openings in cities like Jaipur, Bucharest, Durrat Al Riyadh, and Rome. We signed nearly 25,000 rooms in the region during the year, including 10,000 in the fourth quarter. As we look to expand rapidly in Saudi Arabia, a key growth market for IHG, we added 14 new properties to our pipeline, including the Regent Jeddah, marking the brand's debut in the Middle East. Overall, looking at development activity excluding Iberostar in both 2023 and 2022, it was encouraging to see openings up 25% and signings up 24%. Now turning to Greater China, where RevPAR surged 71.7% year-on-year. With COVID restrictions lifted late in 2022, the region saw rapid recovery, with 2023 being the first year we recorded RevPAR exceeding pre-pandemic levels—a 0.7% increase over 2019. Occupancy reached 61.1%, a 19.1 percentage point increase from 2022, while rates rose by 18%. Q3 RevPAR, significantly driven by domestic leisure trips, surged 43% year-on-year and increased 9.3% compared to 2019. In Q4, RevPAR was up 72% year-on-year, aided by a previous year period that experienced heavy local travel restrictions, although Q4 saw RevPAR dip slightly below 2019 levels. It’s crucial to note that RevPAR in Greater China recovered at a much quicker pace than we have seen globally, and the slight decline in Q4 versus 2019 is simply due to a demand mix leaning more toward business, contrasted with the robust domestic leisure demand seen in Q3. Gross system size growth was 9.8% year-on-year with the opening of 16,000 rooms, more than half of which opened in a busy final quarter of the year. Openings during 2023 included 51 rooms for the Holiday Inn Brand Family, with Express surpassing 300 properties in the region. Furthermore, 14 additional Crowne Plaza hotels opened, bringing this leading brand to a total of 124 hotels in Greater China. We welcomed our first three Vignette Collection hotels in the region, all opening within two months of signing, showcasing the brand's agility. An additional four voco hotels also contributed to conversion openings, which represented 32% of the total for the year. Across the Luxury & Lifestyle brands, there were 15 new openings, including another flagship for Regent in Shanghai, and six openings for InterContinental. All these additions combined helped us reach the milestone of 700 open hotels in Greater China, a remarkable achievement for our regional team. We signed over 26,000 rooms into the pipeline during the year, which included 20 Luxury & Lifestyle hotels, with this segment now representing 20% of both the existing system size and the pipeline in the region. Overall, openings in Greater China were up 29% compared to 2022, while signings were 19% higher. Turning now to capital expenditure. We spent gross CapEx of $253 million, and net CapEx was $157 million after proceeds from recyclable investment disposals and system fund inflows. Key money of $101 million, which was up from $64 million in 2022, is indicative of our increased development activity back to pre-COVID levels, and also a mark of our growth in the Luxury & Lifestyle segment. Importantly, it is also a reflection of our discipline in only deploying funds where the returns justify the investment. Maintenance CapEx was $38 million, in line with prior spend as we continue to ensure that our business and enterprise platform is fully invested. Turning to the System Fund, we continue to benefit from depreciation levels exceeding CapEx, which follows the completion of our major investment in the Global Reservations System. Moving now to cash flow. Adjusted free cash flow reached a record high of $819 million in 2023, once again demonstrating the highly cash generative nature of our business model. Adjusted earnings converted 129% into free cash flow for the year. Net cash outflow, after the payment of just over $1 billion across the dividends and share buybacks, was just over $300 million. Together with adverse foreign exchange movements, this meant that the closing net debt position increased by $421 million. Our strategy for uses of cash remains unchanged. After investing behind long-term growth, which remains the foremost priority, we look to sustainably grow the ordinary dividend. In this regard, we are pleased to propose the final dividend will be $0.104, representing 10% growth on last year’s. A year ago, we announced a $750 million buyback program, which completed in December. This repurchased 10.6 million shares at an average price of £55.88 per share, and reduced the share count by 6.1%. The 2023 program, together with ordinary dividend payments, returned $1 billion to shareholders during the year, which was equivalent to 10% of IHG’s $10 billion market capitalization at the start of 2023. We are pleased to announce that a new share buyback program will commence immediately, targeted to return $800 million over the course of 2024. On a prospective basis, given expectations for growth in EBITDA and cash generation in 2024, we would expect this to result in leverage around the lower end of our target range of 2.5 to 3 times at the end of 2024. It is worth mentioning a few housekeeping points for those who maintain forecast models of IHG’s performance. Interest costs will rise from 2023’s $131 million. This is due to higher net debt and our blended bond interest cost increasing to 3.7% following the recent issuance of a new bond. Our adjusted interest expense also includes the charge on System Fund balances, which increased in 2023 given the rise in SOFR benchmark rate that is used for this charge. Where the SOFR rate ends up in 2024 will impact the charge for the year. So, at this stage, our expectation is adjusted interest expense to increase to between $155 million and $170 million for 2024. Our adjusted effective tax rate is expected to be around 27% in 2024, compared with 28% in 2023. This is also a rate that could be applied in years beyond, based on current geographic mix of profits and current tax legislation. We still advise that our normal course gross CapEx spend could total up to $350 million. However, given our increased development activity and growing focus on the Luxury & Lifestyle segment, our normal course net capital expenditure is likely to be up to $200 million, an increase to our previous direction of around $150 million. Elie, the regional leadership of IHG, and I will be talking a lot more about our growth ambitions in the separate webcast that provides an update on our strategic priorities. But as a quick reminder, and as included in our results announcement, the baseline drivers for IHG’s value creation are as follows: Fee revenue growth of high-single digit percent on average in the medium to long-term, through the combination of RevPAR and net system growth. Those should also drive annual fee margin accretion of 100 basis points to 150 basis points, which taken together should result in EBIT growth of around 10%. We expect to continue converting around 100% of earnings into free cash flow and that should enable routinely returning additional capital to shareholders, such as through annual share buyback programs, which further enhances earnings growth. The resulting opportunity is for compound growth in earnings per share of 12% to 15% annually on average over the medium to long-term, driven by the combination of the above. With that, let me now hand back to Elie.

Thank you, Michael. To summarize, we operate in a very attractive industry benefiting from long-term structural growth drivers of expanding GDP, growing populations, rising middle class and wealth, and people’s fundamental desire to travel and physically interact for both business and leisure. IHG has a well-proven ability to successfully drive long-term growth in both demand and supply, with full-year RevPAR growth of 16% and net system growth of 3.8% once again demonstrating this. Our well-invested portfolio of 19 brands forms a powerful network of nearly 950,000 rooms across more than 6,300 hotels. We have geographic reach across more than 100 countries and a full range of product segment diversification from midscale to upper luxury. Our pipeline of nearly 300,000 rooms represents secured multi-year growth of over 30% of today’s system size. With year-on-year growth of 23%, our operating profit exceeded $1 billion for the first time, and helped drive earnings per share growth by an outstanding 33%. We are highly cash generative which supports our capital allocation strategy. We returned $1 billion to shareholders last year through ordinary dividends and share buybacks, and will exceed that total in 2024. And with that, we thank you for listening to our 2023 full year results presentation, and very much hope that you will also join us for the separate update on our strategic priorities and future growth ambitions later today.