Earnings Call Transcript - IHG Q2 2024

Operator, Operator

We now begin the Q&A session. Our first question for today comes from Vicki Stern of Barclays.

Vicki Stern, Analyst

First one was just on unit growth. So, I think if we strip back NOVUM from this year, it looks like you'll be sort of around 3.5% range in terms of net unit growth. Is that the right underlying rate to have in mind for you going forward? Or can you see that accelerating without any sort of larger deal signings like NOVUM? And related to that, I noticed that exits were just a nudge higher than your 1.5% in the first half, just checking that 1.5% is still the right level of exits that you've got in mind going forward. Second one is on incentive management fees in China. So we saw H1 IMFs were down a few million to $19 million in the first half. Can you just talk about your expectations there for the full year? Obviously, one of your competitors has been flagging the weakness there. And then just more broadly, your outlook for China as you see it over the next 6 to 12 months? And then just finally, on the credit card opportunity, that was helpful color from Heather in the prerecorded presentation. Just curious when you think you might be in a position to give any clearer guidance on the quantum of that material revenue upside that was mentioned there. Obviously, any indications today on how we should be framing that materiality would be great.

Elie Maalouf, CEO

Hello, Vicki, how are you? Thank you, everyone, for being on the call today. I was meant to give an introduction, but it seems we are diving straight into questions, which is perfectly fine. Regarding your question about expectations for net system size growth and NOVUM, we are exactly where we said we would be during the first quarter when we announced the NOVUM deal. At that time, we expressed our comfort with system size expectations, which was a consensus of 4, including NOVUM. We also noted that NOVUM boosted our confidence in achieving these system size expectations this year and beyond. Currently, the consensus has increased to 4.2, and we are still comfortable and confident in that, with NOVUM still included. We can anticipate over 7,000 rooms opening this year, having already opened 1,000, with a similar or slightly larger number expected to open next year and possibly some into 2026. This isn't a one-time situation but rather a multi-year process. Therefore, your expectations should align closer with what was outlined for this year. We continue to do organic conversion deals, sometimes anticipated and other times not. This specific deal is significant but consists of individual licenses rather than a partnership or acquisition; it's a fee-paying arrangement that adds to our value. We will have additional conversions this year that we haven’t highlighted yet and more in the years to come. We are comfortable with the current consensus and have good visibility moving forward. We also expect to maintain a similar growth trajectory next year, driven not only by current conversions but also by the overflow of NOVUM rooms in addition to an increase in our pipeline. Our global signings for new builds and conversions have risen significantly, even without NOVUM, showing healthy growth in the first half of the year, which provides us with momentum for the future. That answers your first question. Michael, would you like to add anything?

Michael Glover, CFO

Do you want to grab the exits first and then we'll...

Elie Maalouf, CEO

Yes, let's discuss exits. We are comfortable with the 1.5% in the first half of the year. Historically, we tend to have more exits in the first half compared to the second half. Generally, if you look at our track record, the first quarter tends to have more exits, with a slight increase in the second quarter, followed by fewer in the second half. Thus, we remain confident in our 1.5% long-term goal and have been consistently around that figure. Regarding IMFs in China, I'll pass it on to Michael, as I believe there's a good story there as well.

Michael Glover, CFO

Yes. Vicki, we typically do not provide guidance or specify our position on IMF, so I can only share limited information about the full year. However, overall, regarding IMFs, it starts with the RevPAR narrative. Specifically in China, for the first half of the year, we generated $19 million in incentive management fees compared to $23 million last year, resulting in $46 million for the full year in 2023. The narrative in China shows a considerable increase in outbound travel as the market has reopened. Last year, most travel was domestic, occurring primarily within China. The Tier 4 resort cities performed well, but now we've seen movement outside of China along with increases in airlift and reductions in visa restrictions. Our Asia Pacific region grew by 15.4% in key markets, with Vietnam witnessing a 30% increase in RevPAR for the half, Korea up 20%, Indonesia up 18%, and Thailand up 25%. It's important to note that we earn incentive management fees for hotels in this region. In the EMEAA region, we've achieved $55 million in incentive management fees compared to $43 million last year. Furthermore, we've completely recovered our incentive management fees to levels seen in 2019 for EMEAA, indicating robust growth. While we didn't generate as many incentive management fees in China, EMEAA is capturing much of the demand, leading to an increase in incentive management fees there. This isn't a direct one-to-one correlation, but it illustrates the trend.

Elie Maalouf, CEO

And I think it speaks to more broadly the strength of our globally diversified business model, which intentionally places us in 100 countries and many of the most attractive ones around the world, to where we know that not every market, every quarter is going to be at full speed. But enough of them will keep growing, and we capture outbound business when domestic business is strong. So there’s a method to our strategy, which continues to deliver as we saw in the first half, even when not all markets are at full speed. Okay. To the China outlook that you were asking about. We can talk about the midterm and then a little bit about the long term. In the midterm, Michael covered the fact that yes, there was less domestic travel, but then a lot of it went into Asia Pacific, and we benefit from that, as a group anyway. Number two, we saw – we were comping against a very strong second quarter last year when the restrictions were lifted. We did say that the comps do get tougher in Q3, when we were up 9% last year over 2019, but then they get easier in Q4, when the comps last year, we were at zero compared to 2019. So it goes up in toughness, comes down in toughness. That’s sort of the near-term outlook. But fundamentally, if you look midterm to long term, we’re still very confident in China. You see our owners are very confident. Our signings are up nearly 40.5%. Our openings are up nearly 50%. Our total rooms revenue actually grew 10.5% because of system growth, and ultimately, that is one of the key measures of our growth and success. And nothing’s really changed in the fundamentals there. The middle class is still projected to grow 80 million households over the next 10 years. The rooms penetration is still only 1/7. We have said, and I remember – if you remember in February, I’ll repeat, this industry, even in our major markets, mix highs and lows. It’s not just straight highs, but it makes higher highs and higher lows and the trend line for China is upwards in travel. It’s still going to become one of the largest travel markets in the world. It’s quickly regaining its place as the largest outbound market in the world, and being strong in China is important for being strong in the rest of the world, as we saw in Asia Pacific. Okay. Question number four. I never thought you’d ask about the credit card. On the credit card, as Heather took you through in her excellent presentation, we are already making very good progress organically with the credit card, with new accounts, with growing spend with great satisfaction, with the new cards that we've launched on the back of a very strong IHG One rewards, on the back of our strong Luxury & Lifestyle portfolio. So all that is working. And then, we do know and we’ve talked about that, there could be an optimization of the partnership. That is under review right now. So please be patient with us, as we cannot discuss it in any detail. But as we’ve said, and we repeat, we’re very confident in the growth trajectory of our credit card, and what it can contribute to IHG’s P&L, that it will grow significantly. It is growing already, that it will be multiples of what it is today over time. And that, the partnership review is one aspect of it, but I’ve said and I repeat, the organic growth and the strategy we’re deploying for the credit card is the underlying power behind it. We will, in – at the right time in the right order, bring more information and share more details for you, when we conclude some of this review. I think that covers your questions, Vicki, Who’s next?

Operator, Operator

Thank you, our next question comes from Jamie Rollo of Morgan Stanley.

Jamie Rollo, Analyst

Three questions as well, please. Just on the U.S. data, your U.S. listed peers are pretty well all flagged. The sort of slowdown in July, talking about weak domestic leisure demand, trimming guidance. What sort of view on what's sort of happening in the domestic leisure market? And also to hit full year consensus group RevPAR growth of around 3%. You need a pretty similar second half performance to the first half, and that looks, perhaps optimistic given the July data in the U.S. and indeed in China. Secondly, on central revenues, they look like they were up about $11 million, which looks pretty equal to sort of half the annual $25 million loyalty points fee revenues. It looks like the underlying central revenues didn't go anywhere at all, despite your positive comments on your existed credit card growth, just wondering what's happening, sort of underlying ancillaries? And then finally, also sort of slight modeling question in EMEAA, your fee business operating costs fell by about 7%, which drove a lot of that margin growth. Any sort of phasing or one-offs were you to be aware of there, please?

Elie Maalouf, CEO

Thank you, Jamie. I will address your first, second, and fourth questions, and then pass the central revenue discussion to Michael. Regarding U.S. data, we have been attentive to industry headlines and are observing the latest U.S. economic data. However, we aren't seeing any negative trends in our numbers at this time. We didn't notice any issues in Q2 and, in fact, experienced an acceleration. As we look into July, we see a consistent pattern, with three consecutive months of growth in Q2, which appears to be continuing into early August. When it comes to others in the industry lowering their guidance, it's vital to consider their starting points. Since we do not provide guidance and operate based on consensus, I can't speak to their initial positions. But presently, we have no concerns. It's important to remember that our booking window is short, as is common in the industry, so our outlook can only extend so far. For the remainder of the year, we achieved 3% growth in the first half, despite the U.S. being down 1.9% in Q1, which is a significant portion of our business. We do not expect that decline to repeat in the second half, which may provide us with a tailwind. Additionally, our comparables in the Americas will become slightly easier. In China, conditions will be more challenging in Q3 but should improve in Q4, while EMEAA appears to be stable and performing well. This overall scenario positions us comfortably with the current consensus for RevPAR. As for your third question, I believe I have already touched on the second. I’ll return to central revenue for Michael. Regarding margin growth in EMEAA, there are no one-off items impacting that; it's a rapid recovery from several of our Asian markets that were still recovering during the first half of last year. There has been significant outbound travel from China to Southeast Asia, where our Asia Pacific segment surged by 15%. So, if there are challenges in China, we see opportunities elsewhere, positively affecting our bottom line with the 700 basis point margin improvement. I believe that covers everything. Michael, I'll hand it over to you regarding Central.

Michael Glover, CFO

Yes. Regarding central revenue, there are many factors at play. We are seeing new consumer points being added, and there are other elements that fluctuate with RevPAR, such as technology fees, especially in China. Additionally, we have made some adjustments to improve services on behalf of the owners, which have also caused changes. Overall, things are moving well. We are confident about our future, especially with the growth of credit card usage and point of sale systems in the long term.

Elie Maalouf, CEO

Yes. We just want to go back also to sort of your general sense on the economy in the U.S. I know we’re going to get a lot of questions, so let me just head it off on that is, we’re watching the data. We’re listening to the commentators, as everybody is obviously. We’re also not going to come to immediate conclusions from a few days or 1 month of data. Yes, the unemployment ticked up to 4.3%. At the same time, if you look underneath it, the actual total people employed still increased in July from June, there were more people coming into the labor force, which raised the unemployment rate. So what we really focused on are people employed, the economy is not losing jobs yet. And I think that we would all agree that if unemployment settled in the low 4s, and so, there was some slack in the labor market, if interest rates, especially long-term rates come down and stay down as they have in the last couple of weeks, if inflation stays subdued, that’s actually a favorable environment for GDP growth next year, for the development aspect of our industry, especially, it’s kind of what everybody has been waiting for, for the Fed to take the foot off the pedal. So we don’t know if this is the beginning of a trend, but if things settle down where they are today, that would not be a bad outcome actually. So with that, next questions.

Operator, Operator

Our next question comes from Richard Clarke of Bernstein.

Richard Clarke, Analyst

I have three questions. First, Booking Holdings mentioned on Thursday that they are experiencing some trading down behavior in the U.S. markets. Three of your brands in the Americas reported negative ADRs, which seem to be the most U.S.-focused brands. Can you provide insight into what is happening with U.S. ADRs and your outlook for the latter half of the year? Are you observing any trading down? Second, while your overall signings appear to be strong, it seems like U.S. signings are down. Excluding Garner, they are declining quite rapidly; for example, Holiday Inn Express signings are down 36% year-on-year in the first half. What is the outlook for this? What factors are contributing to the slowdown in signings? Lastly, could you clarify how your overall signing growth is flowing through? Please remind us what constitutes a signing. Is it simply the contract being signed, or does it mean that financing is in place? How quickly are signings turning into construction starts and openings? Is this process accelerating at all?

Elie Maalouf, CEO

Okay. I will ensure I have all your questions noted. So, we observed an increase in RevPAR across all our brands in the U.S. in the second quarter compared to the first quarter, with the exception of Kimpton, which, although a great brand, is not our largest. All other brands experienced an improvement in RevPAR during this period. We haven't noticed any evident trend of either trading down or trading up at this moment. I'll have Michael provide further details shortly. However, many sectors have mentioned downward trends, and we aren't seeing that at this point, nor are we observing any noticeable trading up.

Michael Glover, CFO

To add to that, the three brands you mentioned are relatively small. Kimpton is one of those 50 hotels, Avid Hotels has 56, and EVEN Hotels has 19. The geographic revenue per available room growth for these smaller brands is influenced by their specific markets. In contrast, Holiday Inn Express, which has a widespread presence across the U.S., saw a rate increase of 1.7%. Holiday Inn itself, with an additional 560 hotels, experienced a growth rate of 1.5%. Overall, we observe strong growth across the entire U.S. However, the smaller brands are more susceptible to the dynamics of their local markets. Overall, we feel quite confident about the rate growth in the Americas for the quarter, which stood at 1.8%.

Elie Maalouf, CEO

Yes. We had some upscale brands like Intercontinental where the rate increased. Currently, we're not seeing a consistent pattern across our larger brands in the U.S. Regarding U.S. signings, overall, we've signed a similar number of deals year-over-year, but there has been a shift to smaller key counts in the first half. Last year, we had a few notably large deals signed in the first half, which could happen again in the second half. There's a lot of activity going on, and the number of deals was roughly similar, although the key count mix differed. We are quite comfortable with the market share of signings for Holiday Inn Express. If you compare it to its direct competitors among the other two largest brands, Holiday Inn Express was ahead. We feel secure about Holiday Inn Express's share of signings. Industry signings can fluctuate from one quarter to another, but when we look at total industry signings and how our main brands perform against direct competitors, we are quite confident. We currently have nearly 1,000 hotels in the pipeline in the Americas, and our grand base has significantly increased compared to last year, which was also up from the previous year. We expect that this trend will continue to support our system size growth. As for the definition of a signing at IHG, it refers to a signed contract, which may involve commitments such as guarantees or required payments for the property control, whether we own the property or have an exercisable right to control it. We are comfortable with this process. Financing may or may not be in place, and it's standard in the industry not to always require financing to sign deals. There are cases where we may require financing, but generally in the industry, financing is not a prerequisite for signings. Unlike others, we don't discuss approvals or other matters that aren't related to a fully completed and executed funded contract. In response to your last question regarding the conversion from signing to opening, has anything changed? Michael can provide more insight on that.

Michael Glover, CFO

Yes. Richard, if you look at our kind of construction link length. It continues to improve. If you look at the 12 – trailing 12 months average for new development and conversion projects, we’re approximately 21 months for new development and 7 months for conversions. That’s actually a 1-month improvement over where we were in 2023 at the full year. So obviously, a lot goes in there. There’s a lot of variability based on brand, and where the kind of – in terms of conversions, how good the property currently is, and what needs to be done. But that’s on average where it sits. So it’s improving a bit.

Operator, Operator

Our next question comes from Jaina Mistry of Jefferies.

Jaina Mistry, Analyst

Three questions if I may. The first, we've discussed the U.S. macro environment, but another segment mentioned by some of your peers is the European consumer group. Have you noticed any signs of additional weakness or resistance to pricing from European consumers? My second question is about business rates. I noticed on your slide that your revenue in the Americas was flat in the first half. Does that provide any insight into the U.S. corporate environment? Also, do you have any early insights on the business rate renegotiations for 2025? Lastly, Ms. Heather's presentation was very informative regarding the $100 million System Funds surplus you plan to utilize this year. Are there specific areas, such as segments or regions, where you aim to focus your reinvestment efforts this year?

Elie Maalouf, CEO

Thank you, Jaina. I will address your first two questions and direct the third one to Michael. Regarding the European consumer pricing situation, we haven't observed any issues so far. As I mentioned earlier, we remain attentive to new information, data, and trends. The summer has started positively here in Europe. While there are varying markets, we are not seeing any concerning signs in June or July. However, different groups have different starting points, and they may already be in a unique position regarding their pricing in different industries. We are closely monitoring this, but currently, there are no indications of concern. On U.S. business room revenue, you may be referring to a decline in room nights in our business segment compared to the previous year. However, this drop was slight, and it's worth noting that group bookings have increased significantly. This includes both business transient and business group travel, which can fluctuate. There is no clear trend in these changes. Our corporate rate negotiations were quite successful at the end of the last year, and we are seeing the benefits carry over into this year. While overall rates were up for the first half and business room nights decreased slightly, group nights increased more significantly, and group rates were also up. This means that group revenue has more than compensated for the downturn in room nights. It appears that corporations are arranging more group gatherings in the first half of this year, which is all part of the business travel growth we are pleased to see. Now, regarding your last question about the priorities for System Fund spending this year, I will pass it over to Heather.

Heather Balsley, CRO

Yes. So I mean, our focus and priorities really remain consistent first in maintaining our marketing investment to drive revenue for hotels. That continues and continues to grow year-over-year. And then, there’s other strategic investments in some of the platforms that we talked about in the presentation, whether that’s the continued investment in optimizing our channels and the mobile app, or the launch of our new revenue management platform, and the continued investment in the loyalty program. And so I’d say those were some of the big investments that continue as we go into 2024.

Operator, Operator

Our next question comes from Estelle Weingrod of JPMorgan.

Estelle Weingrod, Analyst

I have two questions. First, regarding RevPAR, you mentioned a 3.2% increase in Q2. Could you share how this trend developed from April to June? Second, I'm looking to understand the potential for fee margin growth in the second half of the year, given that margins performed well in the latter part of last year. Additionally, regarding EBIT growth, I believe it was 9% when excluding the accounting change, while the full-year guidance is closer to 10%. With continued normalization, particularly at the RevPAR level, is there potential for H2 EBIT to exceed a 10% growth rate?

Elie Maalouf, CEO

Thank you for your questions. I'll take the first one and pass the second one to Michael. We’re not providing monthly RevPAR since the pandemic, as it was a unique situation where fluctuations occurred weekly and daily rather than monthly. We mentioned that in the U.S., we experienced positive RevPAR for all three months, and we've seen that trend continue into July and, as far as we can observe, into August as well. This is encouraging, even though the booking window is short. It gives us confidence for the remainder of the year. There was nothing in the monthly changes of our U.S. RevPAR in Q2 that raised any particular concerns. We noted in Q1 that some Easter business shifted from March to April, which we observed in April, but the upward trend persisted in May and June. Now, I'll hand it over to you, Michael, to discuss H2 margins.

Michael Glover, CFO

Well, as you know, we don’t give guidance, but we’ve done $535 million here in the first half with EBIT up 12%, as you correctly point out. There was a 130 basis points. If you back out the System Fund changes or the points from consumers, there was – it was 130 basis points of margin. We’ve said all along, we’ll deliver between 100 and 150 basis points. We’re very confident that we’ll continue to do that with the point sales on top of that. If you look at EBIT and where consensus is, is at 10% on the full year, and earnings per share at around 15% growth, we’re very comfortable with where that sits.

Operator, Operator

Our next question comes from Muneeba Kayani of Bank of America.

Muneeba Kayani, Analyst

On the U.S. market, I’m not sure if this was discussed earlier, but a competitor mentioned some weakness related to the U.S. elections in November. Are you experiencing that as well? Also, referring back to your earlier comments, Elie, about net system growth for the upcoming year, you noted that new build is improving. If that is the case and conversions are still a significant factor, why not expect growth above 4%, especially with the increase in pipeline? Lastly, Heather, on Slide 48, you presented the effects of the master brand strategy over the past couple of years. Looking ahead, where do you foresee additional benefits from the master brand? Is it likely to continue expanding, or are there other factors to consider?

Elie Maalouf, CEO

Okay. I want to address the first two questions regarding U.S. RevPAR for groups, particularly mentioning November. We need to consider that our property distribution and mix may differ from others in the U.S. While we do have some group business and large hotels, we lack the massive hotels with 4,000 to 5,000 or even 2,000 rooms. Our largest property in the U.S. is not even 1,000 keys. Although we have a reasonable urban presence, it's not as substantial as some others, who host large conferences and significant events. Sometimes, during presidential election years, events in key cities like Washington, D.C. may decrease as potential attendees are uncertain by January and choose to postpone meetings until February, resulting in a slower business season and notably lower group bookings in big markets like Washington, D.C. Some of our competitors are heavily involved in that market, whereas our representation is decent but much smaller with different group distribution across the country. Thus, what applies to others might not be relevant for us. We have reviewed our forward bookings into November, which is still some time away. Given the booking timeline, we've looked into our group booking window, which typically extends further ahead, and we do not currently see any disruption related to the election or anything else. Regarding system size growth, we believe that although we're not yet at pre-pandemic levels for new builds, signings, groundbreaking, and openings, improvements are gradually taking place. New build signings, openings, and groundbreaking have all seen increases, and we hope this trend holds as lower interest rates may favor future growth. We are pleased to see our net system size grow. Our current mix has greatly shifted towards conversions, and we aim for both new builds and conversions without targeting a specific percentage for either. We are satisfied with our net system size consensus this year and hope for continued progress. If performance surpasses expectations, we welcome that as well, but we want to see this evolution carry on.

Michael Glover, CFO

Yes. And if you look at 2025 consensus as it sits today, it's at 4.2%. As we look forward, obviously, that's a long ways away, and there's a lot of water that needs to go under the bridge to that point, but we don't look at that and say that, that's off. So certainly, with NOVUM and as Elie mentioned earlier, the rooms that it's going to provide next year in terms of openings that really underpins our system growth for next year. So we feel comfortable with where we sit.

Elie Maalouf, CEO

The acceleration in signings we've experienced in the first half, excluding NOVUM, is up 23% year-to-date, which is encouraging. I want to confirm that I understood your third question correctly. Are you asking if there are additional aspects of the master brand that we can monetize?

Muneeba Kayani, Analyst

Are there additional aspects of it that you can monetize? Is there more to it? Or are you satisfied with what you've accomplished so far?

Elie Maalouf, CEO

Well, let me just start off on that question and then turn it over to Heather for the real answer, actually. I mean our principal objective of the master brand is to make IHG a household name and have it everywhere, which then powers each individual brand. So before ancillaries, we want IHG hotels and resorts to be a household name. So there's an affiliation with all of our brands, so that there's strength in the loyalty program, which powers room nights, but also powers owner returns, and just drives the whole enterprise. And then it helps ancillaries too, of course, it helps credit card. It helps point sales. But I just want to establish a premise that master brand powers the hotel brands first. Over to you, Heather.

Heather Balsley, CRO

Yes. Just to build on that, Elie. And I think you may have been referring to the page in the presentation that calls out just some of the leading indicators of master brand awareness, engagement, social review scores from our customers. I characterize those as leading indicators that suggest we are making progress. But to Elie's point, the investment in the master brand is about powering the revenue for the system. And as we continue to monitor that investment, we'll also be looking at some of the revenue metrics, whether it's revenue for our hotels and how that compares to the competition, but also some of those loyalty metrics around paying more relative to nonmembers, increasing return rates and other indicators that, that master brand investment, together with the loyalty investment really powers the enterprise engine.

Elie Maalouf, CEO

I mean it does underpin. IHG One rewards, which then drives point sales, which then also drives credit card. But you got to be strong at the master brand first, which is what we’ve been making very good progress on, and the rest flows from there. Thank you, Muneeba.

Operator, Operator

Our next question comes from Jarrod Castle of UBS.

Jarrod Castle, Analyst

Thank you, and good morning, everyone. Just coming back to obviously, you entered your slide deck where things were in 2017 versus a very strong delivery on the conversions into. I mean if you think about the medium term, do you think the convert momentum will remain very high over the medium term, as the new build momentum grows will that get you to, I guess, a higher rate of net new. And then slightly related to, I mean, when a conversions are I guess, an RFP. Is the signing process, do you think more competitive versus a new build or it's pretty much the same? Then secondly, also just linked to pipeline. Anything further on potential part of deals like obviously NOVUM...

Elie Maalouf, CEO

The line hasn't been great and has been getting worse. I think I got your first two questions. But I'm sorry, I just don't want to misunderstand your questions, but it's been breaking up quite a bit. I apologize for that. Maybe you can come back later with a clearer line for the third question. Let me try to address your first question, if I understood it, which is conversions versus new-builds. We've made a lot of progress in conversions. How does that underpin and support our growth going forward? I think, there have been a few things happening in conversions, as we said in our presentations. First, we've actually built the brands that are more conversion-friendly, like Voco, Vignette collection, Avid. Second, we've accelerated and improved our capabilities the converted hotels more quickly have them ramp up more quickly, which has seen the rest of our brands to increase their conversions even Holiday Inn, Grand Plaza, Kimpton, Holiday Inn Express and so forth. So we've built brands that are conversion-driven. We've built capabilities that are conversion-driven. And as our enterprise, which what Heather was talked about as IHG One Rewards gets stronger, as our master brand gets stronger, as our revenue systems get stronger, it is attracting more owners with existing hotels that are branded or independent into our system. We hope and are confident that we'll continue. We're confident that the new build environment will continue to gradually and un-gradually improve. All that should sustain our system growth going forward. I'm not saying it won't be more in the future. I'm saying that we're comfortable with where it is today. We're going to work hard to make it more. Yes, in I think 2019, we, as a group, did 4.8% before we had all these brands, before we had conversion brands, but it was also a time where interest rates were much lower. And there wasn't a pandemic in between, which changed a few areas of momentum, which are gradually recovering. So we're comfortable with where things are today. We think we have the ability to go further, but we're gradually getting there. On your questions about RFPs and is it making it more competitive. I think there have always been RFPs. Not every conversion goes through an RFP, I'll tell you, we do a lot of our conversions, especially the smaller ones, smaller being individual hotels or 2 to 3 at a time, that are off market, that are owners that we have relationships with, or that are introduced by others to our system and that we negotiate with and reach an agreement. It is overall a very competitive industry and very transparent, and we've always been in a competitive industry, but not every deal gets completed, whether new build or convergent, because of our track record and our reputation. I think the last question that you're getting to have something to do about our composition of our pipeline...

Michael Glover, CFO

For other deals kind of like Iberostar or NOVUM.

Elie Maalouf, CEO

Yes. The first thing I want to articulate is that they are – they’re different deals. They’re both organic deals. They’re both asset-light deals. But Iberostar is a commercial partnership that is full fee paying, unlike others, the full fee paying commercial partnership. But those hotels are not converting to our brands. We actually have a license for the Iberostar brand versus them licensing our brand. So it is different in that way. NOVUM deal is a straight franchise deal like any Holiday Inn Express or Holiday Inn out there. It just happened to be 119 of them at once, but they’re all converting to IHG brands, whether it’s Holiday Inn, whether it’s Garner or whether it’s Candlewood Suites, and they’re on straight franchise, full fee paying. So, do we see more of those? We are in conversations always for multiple portfolios or different ideas. Those are pretty big ones. They’re not – all things like that won’t come along every quarter and sometimes not every year. But it’s pleasing to see that even without those, our individual signings increased 23% year over 1.5 years. So we’ve got good momentum, even with that portfolio deals. I hope we got your question. Sorry for the imperfect line.

Operator, Operator

Our next question comes from Jaafar Mestari of BNP Paribas.

Jaafar Mestari, Analyst

I've got a couple if that's okay. Just firstly, are you able to quantify what you described as a lower free cash flow conversion you expect this year? How much lower than 100%. It looks like the system fund working capital is about $100 million key money was about $20 million higher than just in H1. So is it 15% lower 85%? Is it a bit worse, a bit better? And then on total fee revenue growth, based on your comments just now on RevPAR and on net openings, it can probably be around 7% for the full year, 3 plus 4. Your medium-term guidance is high single digits. Is there a potential to actually reach 8% or 9%? And what would be the levers to get there, please?

Michael Glover, CFO

Key money has indeed increased. At the start of the year, our traditional guidance was around $150 million annually. We've raised that expectation to $200 million as we focus more on the Luxury & Lifestyle sector. We anticipate being at the top of that range going forward. Additionally, regarding EBIT conversion, this is based on net earnings after tax and interest. We've seen an increase in our tax rate recently, mainly due to a $9 million tax credit from a Middle Eastern country, resulting in a tax rate of 27%. At the end of 2023, it was 28%, and we expect the full year to average 27%. For interest growth, we're at about 36% at the mid-year point but we're maintaining our guidance for the full year, expecting it to remain in the $160 million to $170 million range, which will reflect a slightly lower rate of 26% for the entire year.

Elie Maalouf, CEO

I would just add – on the key money point too is, as key money is higher, but that is by design as two things are occurring. One, we are signing and opening more premium and Luxury & Lifestyle hotels, in both categories. Premium and Luxury & Lifestyle usually require a level of key money. However, within that, our key money per hotel and key money per room is roughly the same as it’s been over time. So it’s not becoming more intensive per hotel, per room, we’re just doing more of it. So it’s a mixed thing. Second is, as we do more conversions, we open up the hotel sooner. Of course, Michael said earlier, on average, a conversion hotels opening in 7 months versus a new build and 2.1 years. But when we open, it’s when we pay the key money. So yes, the opening and the fees move up in time, but the key money moves up in time, which is a good thing. But – so that’s why we moved up our guidance from 150 to 200, we’re going to be close to the top end this year.

Operator, Operator

Our next question comes from Alex Brignall of Redburn Lantech.

Alex Brignall, Analyst

Just on the RevPAR evolution through the year. I'm trying to just work out the growth numbers that you're doing in the context of year-on-year and versus 2019. Because for China, you're attributing the slowdown to the 2019 comp, but when we asked about 2019 comes at Q1, you said that we are quite a long way past 2019 and not to think about it. But if I think about H2 versus H1, the comp versus 2019 is about 440 basis points harder, which is kind of 550 in Europe, slightly less in China and 900 in the side of the U.S. and 900 in China. So I guess my question is, is the comp 2019? Why would we not see a slowdown in RevPAR growth in H2 versus H1 if the comp versus 2019 is dramatically harder. And you just flagged that as the reason why China got weaker. And then I guess that ties into the trading question. There's obviously been a lot of questions on this topic, but it seems like the fast inclusion on the trading is that you simply haven't seen it yet. Because your booking window is very short. The OTA is working flat, but I guess that booking window is more like 2 to 3 months. So is it just that somebody with a booking window might have seen weakening or slowdown or whatever word they're using before you have? And then my third question is on China. So there's been lots of people asking about China and the consequence of weaker RevPAR on net unit growth. And for the most part, your peers have been saying you don't think it will have an impact on net unit growth in China, if RevPAR is lower. It seems unusual that if RevPAR really just stayed lower, that there wouldn't be any impact at all on openings. But could you just talk about the lag impact that there is between RevPAR being weaker and how that might then manifest in any kind of new development opportunities in China, but obviously, it wouldn't happen yet. But when we might see that if RevPAR continues to be weak?

Elie Maalouf, CEO

Yes. I mean, the reason that we’re looking at comps in China versus 2019 is, because it didn’t really reopen until 2022, and you had some anomalously large and volatile numbers in 2023 and still in the first part of 2024. So that’s our consideration. But the U.S. was fully recovered in 2022. So were most of our EMEAA markets, and that’s why the relevant comps for the most of our business, which is U.S. and the Americas is really 2023. And looking into the rest of the year, those comps do not get harder for the U.S. and for the Americas, and the rest of the year. And we started the year with the first quarter. We were negative in the U.S., 1.9%. We covered in Q2. Right now, we’re not seeing a negative RevPAR for the rest of the year. And so that would be a tailwind for the rest of the year. So overall, when we take all of our 100 countries and look at the trends, we’re comfortable with the consensus RevPAR for the year. I would not take 2019 as the relevant point of start for 2024 in the U.S. China was in a different recovery situation. On your trading window, look, I mean, yes, on your booking window for trading, all we can talk about is the data that we have, the information that we have, not just for the 3 months of Q2, but also July and looking into August and then looking into our group bookings well beyond that. Our group bookings are significantly up year-over-year, and those consume over ‘24, ‘25 and beyond. We’re not seeing a deceleration in group bookings. We’re not saying that something couldn’t happen, to create a deceleration. What we’re telling you is our data that we published today and that we’re seeing in our forward bookings, whether it’s leisure, business or group, aren’t indicating that today. Now every business starts from a different starting point. So what they may be seeing may be actually correct, too, but because they have a different starting point, it’s a deceleration from a different starting point versus we don’t have guidance. And so – and we don’t give guidance. And so therefore, our view is based on much more current information than some projection given last year by somebody else. On your lag effect in China, I think that if you’re not incorrect, I would say, theoretically, that if there is a persistent decline, frankly, in any industry demand, then supply at some point does react. Right? I don’t care whether you’re making shoes or room nights. But that is not our hypothesis or our experience in nearly 50 years in China, that our experience has been that there are highs and lows. There are ebbs and flows, but the trend line is actually upwards in China and that – right now, the softness that we’ve seen in RevPAR, a lot of it attributable to outbound travel, although we’re not saying it’s all of it. We have no way of measuring it. But definitely, some of it attributable to outbound travel that is not a persistent structural thing. The middle class keeps growing. Travel is significantly underpenetrated. Rooms per capita are significantly under penetrated. Every projection, every projection of where the global travel market is shows that China and then, of course, India on its heels, are going to be among the largest, if not the largest travel markets going forward. So we don’t think there’s something structural. And I think what’s happening is, smart investors in China are looking at the same information, and are investing in this sector. I don’t know that our openings and signings will continue to grow at 50% and 40%, respectively. But I do know that the long-term fundamentals of that market are strong, and that demand will continue to grow and supply will continue to grow, and we’re going to get a pretty good share of it.

Operator, Operator

Our next question comes from Andre Juillard of Deutsche Bank.

Andre Juillard, Analyst

Two main questions, if I may. First one about Middle East. Regarding the actual situation and tensions that we can see. Do you have any comment on the operating trend and potential fears we could have in the region? Second question is about capital allocation. So you clearly said that you were ready to continue to return the excess cash to shareholders. But regarding your 19 brands and the creation of Garner last year, do you see any opportunity to continue to create brands or to buy some small ones to repeat what you've been doing with Kimpton or other brands in the past, and to continue to develop your portfolio and better address the market like that? And same question in terms of capital allocation. Do you see any new opportunity in terms of geographies?

Elie Maalouf, CEO

All right. Thank you for your questions. First, on the Middle East, of course, we’re following all the events. Right now, just to give you the facts, and I can give you sort of some color. Right now, in the area of conflict, that’s broadening a little bit, Israel and Lebanon, we have 10 hotels. They’re obviously – we’ve seen cancellations and lower occupancy, and that’s natural. It’s a very small part of our business, but we’ve seen it. I’ll tell you personally, I’ve been to Lebanese. I was going to travel there in October with my mother, we’re probably not going right now, under the circumstances. I’m not sure you could get there, if you wanted to. But if you – where our main businesses in the Middle East, which is in the Gulf United Arab Emirates, KSA, Qatar, the rest of that region. At this moment, we actually been checking. I have not seen any change in booking pattern. Doesn’t mean something won’t happen. If the situation further expands and escalates, it’s clearly out of our control. But nothing’s happened yet. And we actually didn’t see that over the last year, almost 1 year now into the conflict in Gaza, and we have not seen an impact to our Gulf business. Probably what I’ll tell you is being from that region. The conflicts have been going on for 60 years, and right or wrong, people just to – become accustomed to it. Sad but true. Sad but true. So we hope that there’s an end of the hostilities, but at this moment, in a material part of our business, which is the goal, we’re not seeing anything. In terms of capital allocation, new brands, whether launched or acquired, we’re clear, and I’ll repeat our capital allocation policy, which is first invest in the business, which would be this. Second, maintain and increase our ordinary dividend, which we just did today again at 10%. And third, return surplus capital to shareholders, which we’re doing this year at a higher level than last year. We will create or acquire new brands if and when we see a strong consumer demand and owner demand to invest in a space of scale, where we’re not participating. If we’re participating already, we don’t need to add to it. If we’re not, and it’s a strong segment of demand and owner interest for capital investment, we will participate. That’s why we’ve added 9 brands in the last 9 years or so. Not planfully one per year, but because we found opportunities. And that may happen again. I would say our balance sheet is in a strong place. Our cash flow generation is a strong place. We do not need to change our capital allocation annually to do organic launches like Garner or before like Avid, Curio, Voco, Vignette. And sometimes even if there is a bolt-on acquisition, if there are larger ones, that would require rethinking it in the short term, how we handle that, but all in the interest of the first priority of capital allocation, which is to invest in the business for higher returns to our shareholders. We feel today, we have a very strong portfolio to address all customer needs and a strong loyalty plan to address it. But consumer tastes do evolve and we’re always on the lookout for something. In terms of geographies, we talked – at the February strategy update about expanding our geographies. We highlighted Japan, India, Germany, Kingdom of Saudi Arabia. And I’d tell you, 6 months later, we made very significant progress in each one of those markets, we have increased signings significantly. In KSA, our pipeline is more than double, our open hotels and is likely to be our strongest or second strongest signings market this year after Germany, because of NOVUM deal. In Germany, we’ve made a persistent approach to grow in that very hard to penetrate market. We’ve definitely broken through now doubling our presence in Japan. Our pipeline is increasing rapidly. India, I was there in April, and our pipeline there now does double our 50 open hotels and we’re making great strides in that market. So expanding the map, it’s not requiring a lot of capital at this point. If certain opportunities come up, we’ll address them in that order, but we’re able to expand organically through – while maintaining good cost control. Remember, a lot of our spending is on the System Fund, not on the P&L, whether it’s marketing or operation support people. Now if it’s development, that’s going to be on the P&L, but we’re able to fund that organically so far. Excellent. Thank you for your questions, and we can go to the next caller.

Operator, Operator

Thank you. At this time, I would hand the call back to Elie Maalouf for any further remarks.

Elie Maalouf, CEO

Okay. Well, thank you for joining us today on this call. Let me just sum up where I was going to start, which I didn’t get a chance to. We’re pleased with the performance and trajectory in the first half. Our RevPAR grew 3%, accelerating in Q2. We delivered gross system growth of 4.9% and net system growth of 3.2% and are confident in delivering full year growth expectations. We secured record breaking signings of over 57,000 rooms, up 67% year-over-year, and our pipeline grew 15%. And as we mentioned, it was 23% even excluding the NOVUM deal on signings. We expanded our fee margin by 180 basis points, supporting operating profit growth and EPS growth of 12% each. Cash generation is funding growth investments, and we expect to return over $1 billion to our shareholders in 2024, representing over 7% of our market cap at the start of the year. And as you heard from Heather and Michael and myself in the recorded sessions, we’re making excellent progress on all of our strategic priorities, we’re confident in the strength of our enterprise system, an attractive long-term growth outlook. Thank you, everyone. It’s been great to connect with you today, to update you on our 2024 Half Year Results. We’re very pleased with the first half, and our teams have done an excellent job that positions us for a successful year. Our next market communication will be our third quarter trading update on Tuesday, 22nd of October. Thanks for your time and interest in IHG and look forward to catching up with you all soon.