Earnings Call Transcript - IHG Q2 2022

Operator, Operator

Welcome, everyone, from me. Just to refer to our stock exchange announcement on Page 2. It's the usual cautionary note regarding forward-looking statements in regards to anything that may be said on this morning's call. That statement as well as the presentation and our supplementary information can be downloaded from the Investor Relations section of the IHG PLC website. And with that, let me hand over to Keith.

Keith Barr, CEO

Thanks, Stuart, and good morning, everyone. In a moment, Paul will talk you through our financial performance for the half. But first, let me share some key highlights. We are well on a path to recovery and are edging ever closer to 2019 overall performance levels. We saw continued strong trading in the first half of 2022 with an increased demand in most of our markets. Global RevPAR for the half was up 51% versus 2021, and we saw strong momentum build in Q2 with RevPAR just 4.5% behind pre-pandemic levels. Looking around the world, the Americas region has already surpassed 2019 performance with RevPAR up 3.5% in the second quarter. Our EMEAA region saw excellent sequential improvement as travel restrictions have been lifted and leisure business came through strongly. By contrast, Greater China had a challenging period due to COVID-19 restrictions, although we have seen a strong recovery in recent trading as those restrictions have lifted. In terms of growth, our adjusted year-on-year net system size growth was 3% with gross growth of 4.8%. In total, 15,000 rooms were opened across nearly 100 hotels, and we passed the 6,000-hotel milestone globally. 31,000 rooms were added to our pipeline across 210 hotels. Our operating profit more than doubled versus last year, which puts it just 8% behind 2019 levels. And with net debt coming down further, together with the confidence we have in the strength and positioning of our business, we are pleased to be reinstating an interim dividend 10% higher than the interim payment in 2019, alongside launching a share buyback program that will additionally return $500 million of capital to our shareholders. Our performance reflects the continued focus on our strategy to build a stronger business for our guests and owners around the world while we continue to strengthen the foundations for future growth. I will come back and talk more about these areas later in the presentation. Let me first hand over to Paul to take you through more of our details of our financial results.

Paul Edgecliffe-Johnson, CFO

Thank you, Keith, and good morning, everyone. Starting as usual with our headline results from reportable segments. Revenue of $840 million and operating profit of $377 million increased 49% and 101%, respectively, against 2021. Revenue from the fee business increased 33% on an underlying basis and operating profit by 67%. Adjusted interest, including charges relating to the System Fund, decreased to $64 million. Our effective tax rate was 28%, down 8 percentage points. Taken together, this resulted in adjusted earnings per share of 121.7 cents. Turning to our drivers of performance. The increased demand in most of our markets led to overall occupancy 10 percentage points higher than 2021. Increased pricing power saw rate improve by 24%. This resulted in group RevPAR up by 51% on a comparable basis. This RevPAR performance compared to total fee business revenue that was up 33% on an underlying basis. The difference is driven by non-RevPAR-related revenue streams such as central fee income being broadly flat. When looking at 2022 versus 2019, the two measures are closely aligned, RevPAR down 10.5% and fee business revenue down 10%. In terms of net system size, we had year-on-year gross growth of 4.8%, which includes opening 15,000 rooms in the first half of this year. Our underlying removals rate was 1.8%, making our net system growth 3.0% on an adjusted basis. That underlying removals rate excludes the impact of the Holiday Inn and Crowne Plaza quality review completed last year and 6,500 rooms related to ceasing operations in Russia. I've talked before about targeting for this year net system size growth of 4%, noting that doing so will be stretching. That remains our ambition. But given that at the half-year stage we are at 3.0%, this does require a challenging acceleration of openings in the second half of the year. Looking at monthly RevPAR performance, since the start of 2021, there continue to be variances in the shape of recovery across our regions. Our momentum was briefly interrupted by the Omicron variant at the start of the year. Both Americas and EMEAA saw sequential monthly RevPAR progress to the half. Our Greater China business had a tough start to the year as COVID restrictions were tightened. We've seen these bumps before. And pleasingly, we've seen improvement in trading in May and June, and this has continued in July. I will now take you through our regional performance in more detail. Starting with the Americas, where comparable RevPAR for the half was up 45% on 2021, resulting in a deficit of less than 2% versus 2019. By the second quarter, each month saw RevPAR exceed 2019 levels, resulting in the quarter being up 4% overall. Across our U.S. franchise estate, which is weighted to domestic demand in upper mid-scale hotels, Q2 RevPAR increased by 5% versus 2019. The U.S.-managed estate weighted to upscale and luxury hotels in urban locations declined by just 2%. This spread of 7 points compares to a gap of 35 points this time last year. Underlying fee business revenue increased 40% on 2021, a deficit of only 1% on 2019. Meanwhile, underlying fee operating profit exceeded 2019 by 6%, which includes the benefit of our sustainable cost savings. Our owned, leased and managed lease portfolio generated operating profit of $9 million compared to a loss of $12 million in 2021. During the half, we opened 42 hotels or over 4,000 rooms across the Americas, of which more than half were for the Holiday Inn Brand Family. It was also a strong period for our extended-stay brands. We signed over 100 hotels, taking our Americas pipeline to over 100,000 rooms. Looking at our U.S. business and leisure mix in more detail, the momentum behind leisure travel has continued with occupancy and particularly rate, exceeding 2019 levels. We have not seen any indicators that demand momentum is waning. Business travel has continued on its trajectory of recovery with revenue in June at a deficit of only 1% to 2019 levels. Let me break this down further for you. Business rate in the U.S. has exceeded 2019 levels in every month since March, while demand has also steadily increased. There remains further potential for business travel recovery, especially within the meetings, incentives, conferences, and exhibitions segment. And as with leisure demand, we see no indicators that the recovery trajectory is abating. Moving now to Europe, Middle East, Asia and Africa, where RevPAR has also been recovering rapidly and was up 138% for the first half versus 2021. Compared to 2019 levels, RevPAR in the half was 21% lower, but the second quarter was down only 10%, indicative of the improving momentum through the period. In the U.K., RevPAR for the half was only 8% behind 2019. There was continuous improvement throughout the period with the provinces up 3% by June and London rapidly closing the performance gap. Continental Europe saw a similar recovery profile. Restrictions in these markets were generally slower to be lifted, resulting in first half RevPAR performance down 22% versus 2019, however, as travel limitations were eased in the second quarter, RevPAR improved to a deficit of only 6%. Lifting restrictions has taken longer in a number of other markets in Asia, but strong improvements in trading have been seen there more recently, too. Year-on-year underlying fee revenue increased 124%. Underlying fee operating profit was $56 million compared to a loss of $3 million in 2021. The owned, leased and managed lease portfolio saw its operating losses narrowed to just $4 million in the first half of 2022. Looking briefly at the development environment, we opened 7,000 rooms in the half. We removed 9,000 rooms from the system, the vast majority due to exiting 28 hotels in Russia. We signed 8,000 rooms in the half with conversions accounting for around 45%. Finally, moving to Greater China, where tightened COVID restrictions resulted in a challenging trading environment. RevPAR across the region was down 27% versus 2021 and 46% against 2019. Strict lockdowns affected demand across a number of tier 1 and neighboring cities. And with these feeder markets effectively shut down, tiers 2 to 4 and resort locations were also impacted. Underlying fee revenue was down 32% against the prior year, a decline of 48% on 2019. The business generated $5 million of underlying fee operating profit for the half. We opened 19 hotels or 4,000 rooms in a challenging development environment. By comparison, 36 hotels were opened in the first half of last year. There were 53 hotels signed in the half. The momentum behind our Crowne Plaza brand in Greater China continued with 16 signings across the region, and Holiday Inn Express saw further success with 15 hotels added to the pipeline. In respect to fee margin, our overall margin for the half grew 11.8 percentage points year-on-year. At 55.9%, this is ahead of 2019 despite the EMEAA region not yet being fully recovered and the challenges in Greater China. Margins are highest in our Americas region, where 90% of our hotels are franchised. The pace of demand recovery, along with our focus on costs, has meant that margins continue to grow, now at over 5 percentage points ahead of pre-pandemic levels. Margins in the EMEAA region have improved driven by the lifting of restrictions. Given that many markets only opened for travel later in the half, margin recovery will continue. In Greater China, our fee margin remained positive despite unfavorable trading conditions throughout the half. Turning now to capital expenditure. We spent gross CapEx of $72 million, while net CapEx was an outflow of just $22 million after proceeds from disposals and System Fund inflows. Our key money of $35 million was driven primarily by development activity in the U.S. Maintenance CapEx was up $6 million, reflecting our continued emphasis on investing in the business. Turning to the System Fund, we continue to benefit from depreciation levels exceeding CapEx now that the investment in GRS is complete. Turning to cash flow. Working capital saw an outflow principally due to an increase in receivables driven by the stronger RevPAR and a reduction in payables after the payment of bonuses in respect of the prior year. Cash tax net outflows were $77 million higher than the comparable period. Taking these and other movements into account, we generated an adjusted free cash inflow of $142 million, broadly in line with $147 million generated in the first half of last year. After payment of the resumed dividend, the net movement in cash for the half was an outflow of $24 million. However, noncash and foreign exchange movements resulted in net debt decreasing by $163 million. After investing behind long-term growth, which remains our foremost priority, we generated sufficient funds to reinstate and increase our interim dividend by 10% to $0.439 cents. Our growing profitability and decreasing net debt have resulted in leverage of 2.1x below our target range. Given the strong balance sheet position, we have announced today an initial $500 million buyback program, which we expect to complete in the next 6 months. This year's dividend payments to shareholders of around $235 million, together with the $500 million additional return of capital through the buyback are equivalent to around 7% of IHG's current market capitalization. So to conclude, we've seen trading improve significantly during the first half of the year with RevPAR for the group very close to pre-pandemic levels and our fee margin ahead of 2019. The proven, highly cash-generative nature of our business has allowed a 10% increase in the interim dividend and enabled us to restart returning surplus capital to shareholders. We have done this regularly since 2003. And with today's $500 million, it takes the aggregate capital returned to over $14 billion. With that, let me now hand back to Keith.

Keith Barr, CEO

Thanks, Paul. There is no question that the last two years have challenged our industry, but its fundamental growth drivers remain very strong and give us great confidence in the future for this business. People have an inherent desire to travel for both leisure and business. Whether for new experiences, to physically connect, interact or collaborate, people want to get out there and explore the world. The experience of this pandemic has possibly made that desire even stronger. While we understand there are uncertainties within the economic outlook, we are confident in our business model and the attractive industry fundamentals that will drive long-term growth. We have not seen signs of demand cooling. In fact, research shows that travel is among the most resilient areas of discretionary consumer spending. And we know there is also still further recovery of business travel and groups and events to come with positive forward indicators on that front. The majority of our owners are looking at their investment over the long term as well. And while there will be cycles, both up and down, during the lifetime of a hotel, we know that owners remain confident in the long-term cash generation and asset values this industry and our brands are able to offer. While this industry and IHG cannot, of course, be entirely immune to economic cycles, our expectation is that the industry will continue its track record of growing ahead of global economic growth that will continue to drive industry-leading levels of performance. Much of our confidence comes from the great strength and resiliency of our business model, as shown by our results over the last two years. Our system is formed of over 6,000 hotels across 17 brands in more than 100 countries. This geographic and chain-scale diversity reduces overall risk and means that we can benefit from different markets and segments being at varying points in economic cycles. Our asset-light model, in which we franchise or manage 99% of the hotels in our estate, allows us to grow at a pace with low capital requirements. Our income is based upon high-quality, long-term fee streams, typically around 90% of which is directly linked to the revenue of hotels. This business model allows high levels of cash generation. You've seen us remain cash flow positive even in the deepest depths of COVID. And cumulatively, between 2015 and 2021, more than 100% of our earnings converted into free cash flow. Our pipeline of 278,000 rooms is more than 30% of our current system size and locks in multiple years of growth. And very importantly, we operate in a high barrier-to-entry environment, one where it's very challenging to replicate the scale and strength of the enterprise platform we have built over many decades. It's an enterprise that has a strong portfolio of 17 brands with irreplaceable heritage and resonance with our customers. Our System Fund receives and spends over $1 billion a year on behalf of our owners, achieving massive scale advantage for them. This includes our recently transformed loyalty program, IHG One Rewards, which has over 100 million members and industry-leading technology behind it, which we have heavily invested in. We also have highly effective procurement solutions that provide invaluable support to owners through all stages of the hotel life cycle, something that is critically important in today's world in terms of helping them access quicker solutions and manage costs. And for all of these reasons, coupled with the long-term growth drivers of this industry, we have real confidence in the future and to make sure we continue to build our capabilities and capitalize on growth, we continue to put all of our focus and investments into our four strategic priorities. Let me spend a few moments on each.

Paul Edgecliffe-Johnson, CFO

Thank you, Keith. So let's move into our strategic priorities. First, building loved and trusted brands. Back in 2017, we identified white spaces in our portfolio where we could see a clear path to address long-term consumer trends and capitalize on notable sustainable growth opportunities. Fast forward to today, and through either organic development or acquisition, we've added six brands to our portfolio across our four segments of Suites, Essentials, Premium, and Luxury & Lifestyle. We started in 2017 with the launch of avid, a large-scale opportunity driving high owner returns in the mid-scale segment. The following year, we launched voco, our conversion-focused premium brand which was recently named the World's Leading Premium Hotel Brand by the World Travel Awards. In 2018, we acquired Regent, a brand with a rich history in the upper luxury segment. A year later, we acquired Six Senses, our high-end, luxury, resort-focused brand with wellness and sustainability at its core. Six Senses was recently voted Best Luxury Hotel Brand by Luxury Travel Intelligence. That same year in 2019, we launched Atwell Suites, our upper mid-scale, extended-stay brand in the U.S. And most recently, we launched Vignette Collection in August last year, our Luxury & Lifestyle conversion brand which is off to a great start. While lots of work goes into expanding a brand portfolio, we, of course, remain focused on ensuring that we are driving the growth of all 17 individual brands, investing and developing our existing brands, and integrating and scaling up our newer additions. Examples include Hotel Indigo, which we launched in 2004, and Six Senses, which we bought in 2019. Hotel Indigo, our premium lifestyle brand, reached its first 100 hotels opened after 14 years. Thanks to all the work going on into the brand, we expect to open the next 100 in less than half that time. We are already at 134 properties. We have a very strong pipeline of a further 120. During the half, we secured a further 16 signings, and we're on track for a record year of openings.

Keith Barr, CEO

Let me now hand back to Paul to continue with our strategic priorities.

Paul Edgecliffe-Johnson, CFO

Thank you, Keith. Now I'll take you through our regional performance in more detail. Starting with the Americas, performance has been strong with RevPAR looking good, but we see that there's room for improvement. In EMEAA, we need to overcome the restrictions that some countries are still facing, and we are experiencing strong interest in conversions. This year, we've managed to convert a significant number of hotels, and that's key for us moving forward as well. The recent trends we've seen in Greater China have shown promise as those restrictions begin to ease. We're working hard to ensure we're capturing that demand as soon as possible.

Keith Barr, CEO

As we look ahead, we are confident that the momentum we’ve built in the first half will continue into the second half of the year. We must remain agile and responsive to changing market conditions, but we believe that our strategy will continue to deliver results.

Operator, Operator

Our first question comes from Vicki Stern from Barclays.

Vicki Stern, Analyst

Just firstly, can we start with the 4% unit growth objective? You referenced there, Paul, in the prepared remarks that it's clearly a stretched target now given the required acceleration in H2. Could you just flesh out for us then the puts and takes there? And then secondly, wherever this year goes then, how are you feeling about the sequential improvement in unit growth into next year? I think you've previously been targeting about 1% higher unit growth next year. Is that still realistic to expect a further acceleration given the current signings pace and obviously construction start headwinds you're seeing? And then just finally, on the signings outlook. I guess what will it take to see the business back above 20,000 a quarter and in the sort of nearer term? Just what's the outlook you're seeing there? I guess you have the sort of lead on the pipeline. I'm referencing, obviously, the 14,000 base in Q2. How do you see that evolving as we go into the second half?

Paul Edgecliffe-Johnson, CFO

Thank you, Vicki. It's clear that these are very important indicators for us. I am aiming for our net growth to reach 4%. Given that we achieved 3% in the first half, this will be challenging. I'm pleased with the openings we've seen at 4.8% and the progress on removals. As I mentioned before regarding the Holiday Inn and Crowne Plaza removals program from last year, we plan to reduce our removals by an average of 1.5% per year, totaling about 2%. To reach 4%, we need to achieve 5.5% gross growth, which requires us to open more hotels in the second half than we did in the first half. The first half was somewhat limited by China, where certain hotels would have opened if not for the lockdown. We're inquiring how many of those, along with others that may be delayed, will come through the system. We're pushing hard on this. Additionally, we're exploring several portfolios. With our 17 brands and strengthened platform generating revenue, owners are expressing interest in bringing all their hotels into IHG, which could contribute positively to our growth. We've already seen this happen in Vietnam and Europe earlier this year, and there are others we're working with. Overall, I’m optimistic about reaching 4%, but it’s not guaranteed. Looking ahead, I believe our business can exceed 4% net growth; it’s about getting the hotels signed and our owners eager to open quickly. China typically experiences double-digit growth, EMEAA is around 6% or more, and the Americas also contributes significantly. We need to boost the Americas figure while balancing it with EMEAA and China. Regarding the signings outlook, many owners want to sign hotels with us across our various brands. We have leading propositions in all operational categories, so it’s essential to expedite these processes and transition them to open hotels.

Vicki Stern, Analyst

And sorry, just to follow up on that last one. So based on what you can see so far, if we're looking into at least the back half of that 14,000 base that we saw in Q2?

Paul Edgecliffe-Johnson, CFO

Well, I guess we signed 31,000 rooms in the first half and 210 hotels. So with 17 brands, no reason why it can't get up to 80,000 again in due course. I mean, obviously, I can't tell exactly how many of those are going to come through in the second half of the year. But certainly, a lot of demand from owners out there. So we're encouraged for the future.

Vicki Stern, Analyst

Sorry, just one last follow-up. Obviously, conversion activity, particularly important in EMEAA. Any sort of incremental color there on sort of conversion piece?

Paul Edgecliffe-Johnson, CFO

Yes. Commercial, as you say, very important because they get the hotels through the pipeline faster. And we're really pleased with the new conversion brands. Nearly 50% of our openings in EMEAA are from conversion brands and similarly with signings. So a lot of pickup for voco, for Vignette and a lot of other brands that are converting into our system. So again, it's that enterprise platform delivering very strong revenues for owners. And they're saying they want to be part of it. They want to be on the IHG platform. So we've got some great conversion brands, and I think they'll continue to contribute for us. And in the second half, they're going to need to because we need to get as many hotels as possible open. Thanks very much, Vicki.

Operator, Operator

Our next question comes from Jamie Rollo from Morgan Stanley.

Jamie Rollo, Analyst

Three questions, please. First, regarding the 4% net unit growth, I'd like to confirm that this is adjusted for Russia, which was not accounted for when you reached your target. This adjustment includes the 70 basis points, but you’re not accounting for any other factors, correct? Just wanted to clarify that. Secondly, looking at the Americas rooms data, Q2 signings appear particularly weak, running at about half of 2019 levels and half of Q1 levels. Additionally, the number of openings in the Americas has reached a record low. Is there a timing issue at play, or is it something else? Finally, concerning costs and the comments about containing overheads, what kind of inflation should we be projecting for the $600 million fee base overhead going forward?

Paul Edgecliffe-Johnson, CFO

In terms of net unit growth, we are making adjustments for Russia, as we have effectively closed our business there. We have previously discussed this. There are no other adjustments to consider since the removals of Holiday Inn and Crowne Plaza occurred last year, so the data is clean. In the Americas, we experienced a very strong first quarter for signings. Each year, we have a month where we need to resubmit our franchise contracts to local states for reauthorization, which we refer to as a dark period. April was that dark period, preventing effective franchise signings during that month, which somewhat limited signings from entering the system. However, there is significant demand, with many letters of intent signed. Regarding openings, we anticipate that most will occur in the second half of the year for the Americas. Regarding costs, we have secured $75 million in sustainable cost savings that we achieved last year, which continue into this year. Our cost structure is roughly 70% related to personnel, 15% for depreciation and amortization, and the remaining 15% for other expenses. Historically, the people-related costs have been around 3% to 4%, which is tied to wage increases, so applying that percentage to the 70% will lead us to the expected figures.

Jamie Rollo, Analyst

Okay. Plus an FX benefit this year, I guess?

Paul Edgecliffe-Johnson, CFO

Yes.

Jamie Rollo, Analyst

So back to the openings and such. Is there anything going on with Avid? It seems to have the most potential among the new brands, doesn't it? However, it wasn't highlighted much in the presentation. Are you satisfied with its performance?

Paul Edgecliffe-Johnson, CFO

Avid is doing really well. It's getting to the scale that it needs for owners to be familiar with it. And as I think Keith mentioned, we're now seeing a number changing hands and owners making very good returns on their investment, and that's really important both for owners' confidence and also for lenders seeing that there's a strong secondary market for avid. I'm really pleased with the trajectory. And I think that as openings accelerate, then we'll see a lot more avids getting out into the market.

Operator, Operator

Our next question comes from Leo Carrington from Citi.

Leo Carrington, Analyst

I have two questions, please. First, following up on Paul's questions about demand recovery and corporate travel, summer ADRs are clearly strong due to leisure demand. What is your outlook for winter ADRs as this leisure demand decreases with the typical seasonal changes? Also, regarding the occupancy versus RevPAR gap in regions that have experienced RevPAR recovery, is the weak occupancy solely due to business travel, or are there also areas of leisure travel that have yet to recover? Lastly, on a different topic, I wanted to clarify Jamie's question about inflation. When you mentioned being able to find additional efficiencies to offset inflation, does this suggest that we should expect margins in Premier and Greater China to recover somewhat faster than revenues, similar to what we've seen in the Americas?

Keith Barr, CEO

Great. Well, thank you, Leo. I'll take the conversation around demand, and then I'll let Paul talk about inflation and margin growth. I mean as you saw in the presentation, we've had sequential improvement in RevPAR every month as the year has progressed and then with real strength coming in our business. And so if you break it into three different areas, you're looking at leisure travel. So leisure travel demand is up and rates are up versus 2019 levels. So we're seeing that strength of leisure, as you highlighted. We saw sequential improvement in business revenues as the year has progressed. Demand is somewhat behind 2019, but rates are up. So in June, we were just 1% behind in terms of revenue for business. And so you're seeing that trend continue. Groups and events are what are furthest behind; we have the biggest room for still improvement, but rates are still up. So what you're seeing is leisure demand up versus 2019, business demand getting closer to 2019, and groups lagging but still getting sequentially better with rates going up across the board. We are not seeing any signs of demand cooling across any one of the segments right now. And we would expect that to continue on into the remainder of the year. Overall, I think what we've shown as an industry and as a company with the advancements we've made in our revenue management technology, that even as demand was still low, we were able to get pricing up. And I've been very, very focused about leveraging our new technology systems and revenue/demand forecasting to make sure we're well positioned, too. So we're quite confident. The other tailwind we have, which you've highlighted on, is U.S. The Americas is very recovered. Europe is in kind of the middle of that recovery. A lot of Asia is just entering into the recovery as markets begin to open up and travel restrictions; and China clearly has had a lot of volatility. But when you think about our 2023 revenue profile, demand profile, you've got tailwinds because China will reopen. And we've seen China, when restrictions are lifted, demand comes back incredibly quickly to levels very close to 2019 or above. Similar things are going to happen across Asia Pacific. So even if there is a little bit of demand cooling in some of the other markets, we're going to have that tailwind. And again, we still think ADR is going to be a part of the recovery because our pricing actually hasn't kept pace with inflation. So there still is more upside there overall.

Paul Edgecliffe-Johnson, CFO

In terms of the question on costs and how we're going to manage those, Leo, you're absolutely right when you talk about EMEAA and China, that they haven't yet seen the full revenue recovery. So there's further to go on the margin there. The Americas has seen a big increase on the margin we were running in 2019, which is driving the overall group margin up. So there's still further to go on that. But more broadly, just to step back a bit, and I've talked about how we manage inflation: If you go back over the last 20 years, the nature of this business, whereby we grow without having to add significant additional costs into the business, will continue. This is a business that naturally, if you run it well, accretes margin. And over the 20 years, we've added on average about 125 basis points of margin per annum. And that will continue as we open up more hotels into the system around the world and we manage the cost base. So that's what we continue to focus on strategically.

Operator, Operator

Our next question comes from Alex Brignall from Redburn.

Alex Brignall, Analyst

I'll ask three, please. In terms of that long-term growth number, sort of forgetting 2022 and 2023, where obviously things slipping from Q4 to Q1 doesn't really mean anything, but in terms of the rate of signings at the moment and then the growth in the future, what would typically be the gestation time? You've obviously seen a few years of growth that's been lower and you've had some one-offs. But for the sort of outer years, what gives you the confidence of staying at the sort of higher levels that you've talked about given the rate of signings? The second one is on inflation. There's been some very different commentary from different hotels in terms of how to model inflation. I guess, one extreme saying whatever you think is going to happen with inflation at the cost base, just put it through on the ADR and we think it will get passed on, and some saying not that. Do you have a sort of base case? Obviously, it's very difficult. You don't have a crystal ball. But what's your sort of thinking of how that might work? And then in terms of the buyback, it obviously is similar in size to the large special dividends that you did, and that one didn't take you to sort of the top of your typical leverage guidance. This one, similarly, you're sort of not really anywhere near the top of the leverage, but should we sort of imply from that, that there might be more that you would do and that for the time being you're still playing a bit cautiously in terms of what the outlook might be on the recovery?

Keith Barr, CEO

Thanks, Alex. I think I'll let Paul talk about long-term growth, gestation times and so forth, and I'll let him clearly talk about the buyback. And I'll talk a little bit about how we manage owner returns and how we think about cost inflation from the owner perspective. I think Paul has already covered it from an IHG perspective. We're quite confident that inflation is an issue in our cost base, but it's really about how do we drive owner returns. So Paul?

Paul Edgecliffe-Johnson, CFO

Yes. In terms of our long-term growth aspirations, we've previously stated that we aim to be industry leaders. Back in 2019, we were leading on a gross basis, opening more hotels as a percentage than anyone else in the industry. With 17 brands that are category leaders, we believe we will maintain this position. The time it takes to open a hotel after signing varies significantly by brand. In an ideal scenario with access to construction crews and materials, the quickest openings—such as for avid and some Holiday Inn Express locations—might be completed in about two years. However, others, like an Intercontinental, could take up to ten years to finalize planning. Therefore, there is certainly lead time involved in the process. Currently, 40% of our pipeline is already under construction, which contributes significantly to our future growth. We've also mentioned that we expect removals to average around 1.5%, which supports our confidence in achieving industry-leading growth rates. Regarding the buyback, you are correct that by the end of the year, based on our expectations, we won't reach the upper end of the 2.5 to 3x range. However, that figure represents the maximum number of shares we could repurchase in the next six months due to trading volume. We haven't indicated that this will be our final buyback. Historically, we have returned $14 billion in capital to shareholders over the past 20 years, illustrating our clear intention. Now, I will hand it over to Keith.

Keith Barr, CEO

Great. Thanks, Paul. Oh yes, in terms of inflation, I think this industry actually performs quite well in an inflationary environment, as I said earlier, because of our ability to price the product on a daily basis. And our brands are in such high demand as well to both the leisure and to the corporate customers given the range of the brand portfolio, the investments we've made in our loyalty program which make it significantly more compelling to that high-frequency travel or two. So we fundamentally believe we have pricing power in this industry that can continue moving forward because, truthfully, ADR growth hasn't kept pace with inflation. And so we know that we have that ability to do it. We're very, very focused on leveraging low-cost distribution channels, taking cost out for our owners. And I mentioned about the new Holiday Inn breakfast, lowering cost, new prototypes with cost to build being lower and being lower, too. So in its entirety, when we talk about being customer centric, we say we've got guests and we've got owners. The critical thing for owners is to drive returns. So we're constantly talking about internally cost to build, cost to operate, cost to renovate, how can we leverage our scale, things like with Unilever with Dove, taking down costs by 30% for bath amen. So it's a never-ending journey, though, and we have to make sure we're constantly focused on that and not standing still. Our owners are able to, again, sell hotels today at significant premiums to what they were building them for and generate returns on the assets. Our assets are in demand too. I think that it's an inflationary environment, but we're well-positioned for it and make sure we're driving high returns for our owners.

Alex Brignall, Analyst

That's really helpful. I might really come back to Paul on the growth. You've obviously talked a lot about conversions are slightly impacting. I lost track of what the percentage conversions were pre-COVID. And so what I'm trying to solve for is absolute conversions rather than a percentage of signings because obviously the signings number is lower now. So I'm just trying to see what conversions are on an absolute basis pre-COVID to now.

Paul Edgecliffe-Johnson, CFO

Yes. So conversions have moved up from around the 17% level to up to about 25% now. So a significant step-up with our new conversion brands. We always had a good conversion offer with Holiday Inn and Holiday Inn Express because they were the best in those categories. So if you had a good hotel and you were bringing it in from an independent or one of the weaker brands, you wanted those brands. But now having more conversion brands, so more opportunities, it does allow more owners to bring in their product. I think we will see that continue into the future.

Operator, Operator

Our next question comes from Richard Clarke from Bernstein.

Richard Clarke, Analyst

I have three questions. First, regarding the demand outlook, both of you mentioned that you haven't experienced any negative impact on demand. However, some online players in the U.S. noted that demand peaked in May, with a slowdown in June and July, followed by a slight recovery towards the end of July. Are you not seeing that trend at all, and has demand consistently improved? What do you attribute this to? Is it the recovery in business travel that is compensating for any weakness in leisure travel? My second question relates to your preference for new builds. One of your peers mentioned that they prefer new hotels over conversions, suggesting that new properties perform better. Do you see a significant performance difference in new hotels compared to conversions? Lastly, regarding your loyalty program, it seems that loyalty contribution has risen to 50% of room nights. How has this evolved over the past few years? Are we now in a normalized environment? One of your peers indicated that they aim to increase that number to 75% or 80%. Is this goal achievable with the recent launch of IHG One Rewards, and do you expect to reach those contribution levels?

Keith Barr, CEO

Thanks, Richard. I think I'll discuss the loyalty program, and then I'll let Paul talk about new builds and the demand outlook.

Paul Edgecliffe-Johnson, CFO

Thank you, Keith. So, I mean, in terms of the demand outlook and what we're seeing, clearly we have a relatively short window where bookings are on our books. So people do not book many, many months out. But from what we can see and what we observe in industry numbers, we cannot see any slowdown. That's across all the different booking types, so whether leisure or business or group. Clearly, that business and group segment has some way to go back to normalization. Leisure is up. That gives us confidence into the second half of the year. And I remember perhaps we were talking about it in the first quarter; some of the peers have talked about March possibly being the high watermark. We said, well, that's just not what we're seeing in the business, and that proved to be the case. I think there are still good tailwinds for us to drive further demand. In terms of new build versus conversion, I think what you really want is a great customer experience. A new build hotel for, say, an avid, well, it's going to be a new build because they're all new builds. Something like an Intercontinental or Regent; actually some of those locations, the historic hotels are irreplaceable. So then you tend to have more conversions because people are not generally able to get hold of those spaces. If you think about, say, with the Intercontinental, is it Hyde Park corner? It's very, very difficult to get new locations. They're all 48 and Lexington for the Barclay, et cetera. So a mix. A well-renovated hotel is going to offer a fantastic customer experience. So either way, as long as the customer is being well looked after, we are happy.

Keith Barr, CEO

Thank you, Paul. I'm really excited about the transformation of the loyalty program. We've effectively increased the value of our currency and enhanced customers' ability to advance through tiers quickly, providing them with more options for milestone benefits and increased personalization. From a customer viewpoint, the program is now much richer and also helps us protect costs for our owners. We ensure a balance between both aspects. Six or seven weeks into the launch, the program is considerably stronger than it was before. However, the loyalty contribution is a complex matter because it involves not just the program itself, but also the brand portfolio, asset quality, and geographic distribution. We've been addressing all these factors. Paul previously mentioned that we now have 17 brands. Having a comprehensive brand portfolio, ranging from Luxury & Lifestyle brands like Six Senses to Intercontinental and mainstream options, makes our loyalty program more attractive. If there are significant gaps in your portfolio, it's less appealing to certain customer segments. We're working on enhancing the brand portfolio and backing it up with improvements we made in Holiday Inn and Crowne Plaza, along with investments in technology. All these efforts contribute to a better customer experience and a stronger loyalty program. Our contributions have increased year-on-year. In the first several weeks of the program, enrollments are on the rise, and we expect our contributions to continue to grow each year as the program becomes more established and resonates more with customers. Historically, industry leaders have maintained contributions in the mid-50s to high 50s. Some of our brands are already reaching those levels in certain markets, and we aim to sustain this direction. Achieving 75 to 80 is likely a tough goal, as it has never been done before. Still, I do expect us to see increased contributions each year ahead. It will take about 2 to 3 years to observe a significant change as we need to attract people from other programs who will find ours more valuable, aligning everything in the right cycle. I also anticipate continued growth in business travel in the coming years.

Richard Clarke, Analyst

Okay. Hey, can I just ask just a quick follow-up to Jamie's questions about the definition of unit growth this year? You said the only adjustment was Russia. I just noticed in all of your regions, the number of Holiday Inn hotels has come down again quarter-on-quarter. Those now stay in the underlying. Those have nothing to do with the removal program. They will be included in the definition, is that right?

Paul Edgecliffe-Johnson, CFO

Yes. Thanks, Richard. The only adjustment, as we've said, is for Russia because by the end of this year, we will have cycled off the 2021 Holiday Inn and Crowne Plaza program.

Operator, Operator

Our next question comes from Stuart Gordon from Berenberg.

Stuart Gordon, Analyst

A couple of things from me. First one is, given the sort of rapid change in the operational performance, could you give us a flavor for the split in EBITDA or operating profit between the first and second quarters? And the second thing, obviously, you've spoken a lot this morning about the loyalty program. Could you give us a sense of what's happening with the credit cards given the other side; obviously, some of your peers use that very successfully, and whether you're using the loyalty to push that? And if so, have you got any ambitions on where you could get credit card revenues to from the current base?

Paul Edgecliffe-Johnson, CFO

So we don't split the EBITDA, as you know, Stuart. But I think the way to think about it is that the franchise business is broadly linear to revenues, and you've got all the components of that; then you get the incentive management fees coming through as the business recovers. Similarly with owned and leased, which is more operationally good, and the recovery was stronger in the second quarter. So you would then expect that the EBITDA in the second quarter is going to be stronger than the first, but really principally just on those drivers.

Keith Barr, CEO

I'll let Paul discuss the operational changes, and I will touch on loyalty in the credit card segment. We're excited about the new credit card offerings we have launched this year for both individuals and businesses. They provide a much more compelling and higher value proposition. We anticipate that our credit card income will continue to increase. This is closely linked to the strength of the program; as the program grows stronger, so does the appeal of our credit card offer. They complement each other. We expect our program to expand over time. Unlike our competitors, a significant portion of our income is directed to the System Fund to support marketing initiatives, and some also contributes to our P&L. Both streams should continue to grow. The initial feedback on the credit cards has been very positive. The new business card has no fees, which is attracting small business spending that we haven't captured in the past. Therefore, we believe the program will keep growing over time.

Operator, Operator

We currently have no further questions, so I'll now hand you back over to Keith Barr for closing remarks.

Keith Barr, CEO

Great. Well, thanks, everyone. It's been great to connect with you all again, and we are really pleased with how the first half of the year has turned out. Our next market communication will be our third-quarter trading update on the 21st of October. Thanks for your time and interest in IHG, and I look forward to catching up with all of you soon. So take care.