Earnings Call Transcript - IHG Q1 2023

Operator, Operator

Ladies and gentlemen, hello, and welcome to the IHG First Quarter Trading Update to March 31, 2023. My name is Maxine, and I'll be coordinating today's call. I will now hand you over to Stuart Ford, VP and Head of Investor Relations, to begin. Stuart, please go ahead when you're ready.

Stuart Ford, VP and Head of Investor Relations

Thanks, Maxine. So good morning, everyone, and welcome to IHG's call for the first quarter of 2023 trading update. So, I'm Stuart Ford, Head of Investor Relations at IHG. And I'm joined this morning by Keith Barr, our Group Chief Executive; and Michael Glover, our Chief Financial Officer. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements as defined under U.S. law. Please do refer to this morning's announcement and the company's SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. For those analysts or institutional investors who are listening via our website, can I remind you that in order to ask questions, you will need to dial in using the details on Page 2 of today's RNS release. The release, together with the usual supplementary data pack, can be downloaded from the Results and Presentation section under the Investors tab on ihgplc.com. I'll now hand over the call to Keith.

Keith Barr, Group Chief Executive

Thank you, Stuart, and good morning, everyone. Before turning to the trading update, I just want to acknowledge the other announcement we have made this morning regarding my stepping down as CEO and the appointment of Elie Maalouf as my successor. It has been an incredible privilege to spend more than 30 years at IHG and be part of the many achievements and successes that the business has had so far. IHG is a very special company, and to have spent the last six years as CEO has been an honor, as has working alongside our talented colleagues and in partnership with our hotel owners, who all share our passion for hospitality. When I look at the business today, it is set for a very bright future with the breadth of our portfolio, our scale and the strength of our enterprise platform and a clear strategy ahead to grow the business. On a personal level, it's been a very difficult decision to make. But after nearly 20 years away from the U.S. working in different countries, now is the right time for me and my family to return to the U.S., given my daughters will be studying there. I'm delighted that Elie will be succeeding me. I will be here in an advisory capacity until the end of 2023, but from July, Elie will take over as Group CEO and be based here in the U.K. Many of you already know Elie, who has led the Americas region for the last eight years. Under Elie's leadership, he's grown the Americas system by almost 700 hotels or 20%, launched new brands and formats, strengthened how we drive value for hotel owners and delivered record profit levels. Elie and I have worked incredibly closely together, including on key investments and on successfully delivering our strategic priorities. I know IHG will be in great hands and ready to continue a strong track record of growth and value creation. With that, let me turn to the subject matter of the call, our first quarter trading update, and it's great to be updating you on another strong quarter of trading. I'm here with Michael Glover, who, as you know, stepped up to Group CFO in March. Michael has been with IHG for some 19 years, most recently as CFO of the Americas region. He has previously served as IHG's Group Financial Controller and CFO for Greater China. Many of you had the opportunity to meet him in person for the first time when we were out on the road together following the release of our 2022 financial results a couple of months back. I'll pass over to Michael in just a moment for him to review each of the regions for you in more detail. But before that, I want to summarize the group's performance. You will have seen that we are still providing monthly RevPAR data in our release, as well as giving you both the year-on-year movements and the performance relative to 2019 given the impact that COVID was still having, particularly during the first quarter of 2022. On a group-wide basis, RevPAR was up 33% on last year and up 6.8% on 2019. You'll recall that Q4 2022 was up 4.1% on 2019. But had we reverted back to the pre-COVID definition of comparable hotels, Q4 growth would have been around 2% higher. We have now reverted back, which aligns with the definition used by U.S. peers. Even taking that into account, Q1 growth of 6.8% still shows another quarter of sequential improvement. In terms of the component parts of global RevPAR for the quarter, rate was up 11% versus last year and up 10% on 2019. Occupancy of 62% was 10 percentage points better than last year and is now recovered to be within 2 percentage points of 2019 occupancy levels. In terms of the split on stay occasions between leisure, business and groups, we generated 30% more leisure-driven rooms revenue in total than the same quarter last year. While this was particularly driven by the continued strong rates seen across the industry, it also reflects the strength of our brands as they continue to grow in the Luxury & Lifestyle segment as well in resort locations. Lapping last year's COVID impacted comps meant that business and groups' revenue was up by more than 30% on a year-on-year basis, which reflects further normalization of global working habits and the return of more meetings, conferences and events. When comparing to 2019, leisure revenue is up by around 25%, business revenue is now broadly flat, and group is down around 12%. We've talked before about groups being the last of the three demand drivers to be fully restored, and we're confident that it will be. Turning now to group net system size. Over 8,000 rooms were opened in the quarter, 25% more than the same quarter last year. This represents the strongest Q1 openings performance since the onset of the pandemic. This led to net system size growth of 4.2% year-on-year, adjusted for the impact of the removal of our Russian business in Q2 of 2022. It is worth noting that we generally experience seasonality in our system growth with relatively fewer openings and more removals in the first quarter of each calendar year. Year-to-date net system size growth was therefore 0.4%, very similar to the 0.5% at this stage last year, and we expect the rate to accelerate through the rest of 2023. That said, there are economic uncertainties and clearly some financing challenges for the wider commercial real estate industry. These are holding back hotel development and opening activity from fully returning to normal, though improvements are anticipated as the year progresses. Turning to signings. We added more than 16,000 rooms into our pipeline in the quarter, matching the same quarter last year, which had been the strongest over the last three years. This takes the total pipeline to 287,000 rooms, which is an increase of 3.3% year-on-year. You can see the strength and competitiveness of our brands across chain scales in that performance, with signing spread broadly across regions and segments. One area to call out is Luxury & Lifestyle, which is currently 13% of our system, but represented 33% of all signings in the latest quarter. Our ability to increasingly capture conversion opportunities was also highlighted, representing over a third of both openings and signings in Q1. Interestingly, the 39 conversion signings in the latest quarter represented, in absolute terms, the third highest for any quarter across the last decade. I'll now hand over to Michael to provide more detail at a regional level.

Michael Glover, Chief Financial Officer

Thank you, Keith. Let me step through each region to give you some more color. Starting with the Americas. RevPAR was up 18% year-on-year and was up 11% versus 2019. For the U.S., RevPAR grew 15% year-on-year and was up 10% on 2019 levels. As Keith touched on, this quarter we reverted back to our pre-COVID methodology of calculating RevPAR comparability. Back at Q4, we said this would have resulted in our quarterly U.S. RevPAR being approximately 200 basis points better than the 8% growth, which we reported. So this latest Q1 RevPAR performance, up 10% in the U.S. and 11% for the Americas, represents a continuation of last year's strong Q4 exit rate. Occupancy of 64.3% was 0.5 percentage points above 2019, marking the first quarter in which the region has exceeded pre-COVID occupancy levels. Pricing power remains robust, with average daily rate exceeding 2019 by 10%. Leisure revenue in total was up 11% year-on-year, driven in part by another strong spring break vacation period. The pricing power of our hotels was already strong in this segment a year ago, and it continues to be so. Business revenue has shown an even more marked improvement, up 20% year-on-year, while group demand, which had been the slowest driver to recover, has accelerated to see Q1 up nearly 30% on 2022. If you look at this performance on a versus 2019 basis, group revenue still lags behind by 10%, but business revenue was flat and leisure revenue is ahead by more than 20%. In terms of system size, nearly 2,000 rooms were opened in Q1. This included the first Vignette Collection property in the U.S., the Yours Truly DC, which is an excellent representation for the brand right in the heart of the nation's capital. We signed over 5,000 rooms across the Americas despite the uncertainty created by the financing environment during the quarter. Mexico and Canada represented over 20% of hotel signings in the quarter compared to around 10% last year, demonstrating our growing appeal beyond the core U.S. market. Also notable was our first Regent signing for the Americas, which is a spectacular property on Santa Monica Beach that will be the flagship for the brand both in the region and globally. Meanwhile, the signing of fantastic Six Senses properties in Napa Valley and the Yucatan Peninsula marks a clear signal of the momentum and excitement behind the brand. Signings also included 21 hotels across the Holiday Inn brand family and a further 18 across our extended stay brands. Moving on now to our Europe, Middle East, Asia and Africa region, where RevPAR exceeded the Omicron-impacted first quarter of 2022 by 64%. Compared to 2019, RevPAR was up 9.7%. With this, we've now seen the scale of RevPAR progress in EMEAA broadly match that of the Americas for the past two quarters. The dispersion of RevPAR performance across EMEAA has narrowed with the opening of borders and the increasing return of international travel. Q1 RevPAR versus 2019 ranged from up 21% in the Middle East to up 12% in the U.K., up 11% in Australia, and up 7% in Continental Europe. In Japan, where restrictions on international travel were lifted only partway through the previous quarter, RevPAR sharply improved to be down just 9% versus 2019 levels. The increasing return of business travel in group demand has been notable in Europe, as has the return of major events and expos in other markets such as Japan, Australia, and India. Other destinations such as Thailand marked those that have only recently seen the benefit of international travel resume. Over 5,000 rooms were opened in EMEAA during the quarter, half of which came from the Iberostar Beachfront Resort properties in Southern Europe. For all of the 43 properties which Iberostar owns outright, we have now successfully completed the initial phase of integration onto the IHG system. You will recall there's a commercial agreement for up to 70 properties. The pace of adding the remaining 27 of those will be slower from here as these are third-party-owned properties, and so they each require a separate process of third-party approvals. While traditionally, the first quarter of a calendar year is seasonally quiet, it was pleasing to see that EMEAA achieved a record number of signings and looking back over all first quarters historically on an organic basis. Conversions were almost half of all signings in the regions, and almost two-thirds of the signings were in the Luxury & Lifestyle segment. There were three Vignette Collection and six voco signings in locations, including the U.K., Germany, and Japan, which also underscores the ongoing opportunities for our newer brands and core markets. Finally, moving on to Greater China, where the lifting of COVID restrictions at the end of '22 has already resulted in a significant improvement in trading. RevPAR was down only 9% versus 2019, having been behind by more than 40% in Q4 2022. Rate improved to 94% of 2019 levels, while occupancy recovered to be less than 2 percentage points down on 2019. We saw the strongest performance in Tier 4 locations, which were up 18% on 2019, driven by leisure demand, particularly in resort locations such as Sanya and other destinations. It's worth noting, whilst a very impressive sequential improvement is clear, going down from 42% in Q4 to down just 9% in Q1, further improvement from here becomes much more dependent on the return of international travel into China, given how this particularly drives demand into the highest RevPAR Tier 1 cities. We remain confident this will fully return as more international airlift comes back as we've seen in other regions, but it will take some time for these areas of demand to fully normalize. Whilst trading performance has rapidly improved in 2023, development activity in the region will likely take longer to get back to full speed. Despite this, 1,000 rooms opened during the quarter was still an improvement on the same period in 2022. We expect this to accelerate through the year. Signings in Greater China were nearly 6,000 rooms, broadly in line with the levels over the last three years for the first quarter. These included the first Vignette Collection property for the region alongside a Crowne Plaza signing, both of which are at Shanghai's Snow World, a major tourist destination that includes the world's biggest indoor ski park. There were six signings in total and another strong quarter for Crowne Plaza and 13 more for Holiday Inn Express. Additional signings for Intercontinental, Hotel Indigo and voco also highlight IHG's growing Luxury & Lifestyle presence and the opportunity for conversions in the region. Finally, just to update you on the share buyback, we are currently 32% of the way through the $750 million program announced in February. To date, this has reduced our shares by 2.0%. Now, back to you, Keith.

Keith Barr, Group Chief Executive

Thank you, Michael. So, to summarize the first quarter. Strong trading has seen continued improvement in our group-wide RevPAR performance, with China demonstrating our remarkable recovery since the lifting of restrictions in December 2022, and both the Americas and the EMEAA regions showing no signs of weakening. Net system size growth was 4.2% year-on-year on an adjusted basis. Luxury & Lifestyle continues to accelerate as a proportion of our pipeline with a third of the 16,000 rooms signed being within that segment. And while development and hotel opening conditions for the industry continue to have macro challenges, we remain on track to deliver on our growth ambitions this year. Taken together, we are therefore expecting 2023 to be another year of successful progressing on our strategic priorities and achieving the core components of how we create value for our shareholders. Growing our fees through the combination of both RevPAR and system size expansion, which will in turn drive further margin accretion, and with our typical strong cash conversion, this allows IHG to both reinvest in the business and return surplus capital to shareholders. With that, I'll now pass back to the operator to open up the call for questions.

Operator, Operator

Thank you. Our first question today comes from Vicki Stern from Barclays. Please go ahead, Vicki. Your line is now open.

Vicki Stern, Analyst

Yeah, good morning. Just firstly, I wanted to start with the unit growth. You previously signaled around 4% would be a sensible level to have in mind for net unit growth this year. Just keen to understand sort of the impact you've seen really since SVB's failure and obviously what's played out since then for the regional banks. I think you mentioned there in the prepared remarks that you are expecting improving activity as the year progresses. I guess you've got a blend of things going on with markets like China obviously ramping up and the U.S. on the other side. So yeah, if you could just sort of give a bit more color to what you're seeing in the different regions and particularly how things have changed perhaps since SVB? Secondly, just where that would then leave you in terms of that unit growth outlook for the medium term? You obviously don't give specific targets for the medium term. But given what's going on today, do you think you could accelerate from the current 4% as we're looking into the next couple of years? And then just finally, separately on the share buyback, can you think about the path from here? It does look, given the better RevPAR performance, like you're going to be getting upgrades coming through today. So that's going to possibly leave you with even more headroom to your leverage target by the year-end. How should we be thinking about the potential for further share buyback announcements later in the year?

Keith Barr, Group Chief Executive

Thank you, Vicki, it’s great to connect with you. Let me address that and have Michael provide some additional insights. We are quite optimistic about net unit growth being around 4% for this year, and we anticipate that this will accelerate in the upcoming years due to the strength of our brand portfolio and the expansions we’ve made. You may have noticed in the prepared remarks that a significant number of our signings in the Luxury & Lifestyle segment are conversions, with one-third falling into this category, which are distributed across various regions. We mentioned Santa Monica and Yours Truly in Washington, D.C., and we also see a notable number of conversions in EMEAA and Greater China. This gives us confidence in maintaining about 4% net unit growth this year and further growth in future years. Regarding financing, the broader commercial real estate sector has felt the effects of regional banks tightening their lending, which impacts all types of real estate. Fortunately, hotel assets continue to perform well, and owners are still signing and planning to develop hotels, particularly after a strong quarter where we added 16,500 rooms, matching last year’s solid performance. Though lending criteria have become stricter and the process slower, we are increasing our support in the Americas. We are engaging with regional banks and owners to communicate the value of the IHG enterprise and our brands to facilitate financing. We expect financing conditions to improve as the year progresses and the banking situation stabilizes in the U.S. In Greater China, lending had contracted during the property challenges associated with COVID, but we anticipate an uptick in lending since property growth is crucial for GDP growth, which is a key priority for the Chinese government. Moreover, state-owned enterprises are becoming more active again in China, and they typically have better access to capital. Overall, we remain confident in achieving around 4% growth this year and accelerating in subsequent years, supported by our brand strength and our recent expansion, which allows for more conversions. As for the share buyback, we are on track for the $750 million share buyback this year. Our capital allocation strategy consists of three priorities: investing in the business, increasing dividends, and returning surplus to shareholders. This approach will remain consistent, and the Board will continuously assess our performance and these criteria regarding investments, dividend growth, and surplus returns.

Vicki Stern, Analyst

Okay. Thanks very much, and Keith, best of luck with the move back to the U.S.

Keith Barr, Group Chief Executive

Thanks, Vicki. Miss chatting with you.

Operator, Operator

Thank you. The next question comes from Jamie Rollo from Morgan Stanley. Please go ahead. Your line is now open.

Jamie Rollo, Analyst

Thanks. Good morning, everyone. And Keith, congratulations on your move back home. I have three questions. First, regarding the financing market, you mentioned more resources to facilitate financing. Are you referring to just having people on the ground, or is there potential for any equity or debt support? Also, could you remind us of the percentage of the U.S. pipeline that is currently under construction or funded, if that information is available? Secondly, are you noticing any signs of weakness? We've observed some lower chain scale data, particularly in the resort sector in the U.S., with several corporates reducing their spending. Have you experienced similar trends? Lastly, do you believe that this year in China and EMEAA, you can return to the incentive management fee levels seen in 2019? Thank you.

Keith Barr, Group Chief Executive

Thanks, Jamie. Since Michael has been the Group CFO in the Americas and is closely involved in our development there, I’ll let him answer the first question. Then I’ll discuss the weakness in demand that we’re observing, and afterwards, I’ll let Michael address the IMF.

Michael Glover, Chief Financial Officer

Yes, sure. Basically, for the U.S., in the financing market, we are impacted and most of the lending comes through the regional banks. But a lot of what you have to do, especially with new brands, is get out there and actually sell your brands to the bankers so they know what they're lending against. And so, when we're talking about resources and adding financing resources into the Americas, we're actually talking about people going and working directly with the banks. We would also look at any opportunities to drive incentives, to drive ground breaks, and within our capital guidance that we've already given. And so we're looking at those kinds of things to kind of unlock the pipeline and move those ground breaks along. Of course, we're always looking for other ways to help owners drive and get financing. So we'll be looking at all those different things. But those are the primarily three ways we're doing that. I'll hand it back over to Keith.

Keith Barr, Group Chief Executive

Yeah. In terms of weakness in the consumer demand, Jamie, we're not seeing any. And I think one of the interesting things that people haven't quite picked up on the U.S. has been the amount of government stimulus that has been created with the CHIPS Act, the Inflation Reduction Act, and so forth, trillions of dollars. So, we're actually seeing an increase in government spending, which is a significant segment within IHG's portfolio of our mainstream brands and underpinning the strong business from SMEs and corporates as well, too. So we really have seen again leisure still being quite strong, government growing, SMEs being very strong. So, we're not really seeing any cracks of weakness. We think we're going to have a very, very strong summer, but we do have a short booking window. Overall, nothing I can tell you that has us being concerned right now overall. And I'll let Michael pick up on the incentive management fees.

Michael Glover, Chief Financial Officer

Yeah. First of all, you also asked a question about under construction pipeline. For the group globally, we have about 40% of our pipeline under construction. In 2022, we had a little over $100 million in incentive management fees. In 2019, they were $151 million. I think in 2023, potentially, we could get back to 2019 levels.

Jamie Rollo, Analyst

Great. Thanks so much for that.

Keith Barr, Group Chief Executive

Thanks, Jamie.

Operator, Operator

Thank you. The next question comes from Richard Clarke from Bernstein. Please go ahead. Your line is now open.

Richard Clarke, Analyst

Hi, good morning, and congratulations, Keith, on the move. Three questions, if I may. Maybe just starting with the C-suite move. Keith, when you took over, it was sort of the person coming from China, you're involved in loyalty, you're involved in sort of branding and marketing, and that was going to be the focus. Is there anything we should read into the fact that you've now moved the entire Americas C-suite into the group C-suite? Is this Americas coming back into focus? This is where you need to focus the business, on improving the Americas performance? And anything you can say on what happens to Americas management now you've taken the C-suite out of there? Second question, just coming back to the sort of favorite topic of Holiday Inn and Crowne Plaza. It looks like you've lost about 2,000 rooms quarter-on-quarter. Obviously, the messaging has been that, that process was done. So, is this just very much the tail end of those closures? What are those 2,000 rooms? How should we feel about those brands going on? And then the last question, just on Mr & Mrs Smith. It was included in some of your literature around the loyalty launch. Now it looks like it's going to be acquired by Hyatt. Maybe how important was that to the loyalty program relaunch? Do you need to replace that with something else? Or can you kind of make up for those hotels internally?

Keith Barr, Group Chief Executive

Thank you, Richard, for the great question. The Board takes succession planning very seriously, and I believe my journey to becoming Chief Executive is a testament to that process, having gained experience in the Americas, Greater China, and central operations. This background has equipped me to enhance our brand portfolio, foster loyalty, and advance our technology while building a robust enterprise platform with the executive team. Elie has served on the Board for six years and has led the Americas for eight, bringing valuable global experience. Similarly, Michael was my CFO in Greater China and has also served as the Group Controller in the U.K. Their promotions reflect their extensive knowledge of our business and key strategic initiatives. Elie will take on the role of Group Chief Executive for the U.K., and we will ensure key leadership positions are filled in the Americas, which remains a priority due to the size of our operations. We are lucky to have leaders with diverse experiences, and I am pleased with Elie’s appointment and having Michael by my side. Regarding Holiday Inn and Crowne Plaza, we have completed the majority of the removals, but we will always have some ongoing removals. It’s important to note that Holiday Inn and Crowne Plaza will never reach a point of zero removals. We also have some removals planned for 2023, and I’ll let Michael provide additional details.

Michael Glover, Chief Financial Officer

Yeah. And I think, Richard, as you look at our overall removal rate, yes, we still have a few Holiday Inn and Crowne Plaza coming through. We would still expect our removal rate to be around 1.5%, as we've kind of indicated going forward. So, I would really look at that for our full year and as you think about us longer term.

Keith Barr, Group Chief Executive

And Mr & Mrs Smith, we were very happy with the partnership. Truthfully, we launched it right before the pandemic hit. So it never really had a chance to ramp up completely. And very, very small part of our loyalty earn and burn came to Mr & Mrs Smith. It's really on the margin right now. It's a great company. Our loyalty member today is 115 million members. We've added another 4 million members in the first quarter. Almost all the redemptions happened in our hotel. Mr & Mrs Smith was a nice add-on. And we're going to evaluate our position on that. We're not saying today that we're exiting the platform, even though it's being acquired by Hyatt. We have to understand what their plan is and how that's going to run, then we'll make a decision going forward. But our loyalty program goes from strength to strength. We're seeing redemptions go up, contribution go up, membership go up based on all the changes we've had. So I'm really pleased with what's happening there.

Richard Clarke, Analyst

Thanks for the color.

Operator, Operator

Thank you. The next question comes from Jaina Mistry from Jefferies. Please go ahead. Your line is now open.

Jaina Mistry, Analyst

Hi. It's Jaina Mistry from Jefferies. I've got three questions. The first question is around the supply conditions, particularly in the U.S. How do you think about the interplay of sequential supply pressure coming from the financing conditions in the U.S. and pricing as well? Do you think pricing could offset potential supply pressure in the medium term? And the second question is around margins. Do you think this year that margins could get back to 2018 levels in EMEAA and China? Obviously, the Americas margins have already surpassed 2019 levels already. And then my third question is around financing conditions. We've spoken about the impact in the U.S. Are you seeing any tightening in Europe or Asia as well?

Keith Barr, Group Chief Executive

Thank you very much for the excellent questions. I appreciate the first one as it aligns with our internal discussions about the strength of IHG's model and how we leverage it to boost group revenues on both the supply and RevPAR sides. Historically, when supply growth slows, RevPAR tends to rise, which leads to high single-digit revenue growth— a core component of our strategy that impacts margins and capital allocation. This gives us confidence in achieving around 4% net unit growth this year and more in future years, along with strong revenue growth that enhances pricing power in many markets due to constrained supply and growing demand. Over the decades, this is how our model has functioned, and we are currently at our most efficient in being asset-light. I am optimistic about our ability to manage a moderate supply side while benefiting from RevPAR upside. Eventually, supply will return, RevPAR will stabilize, and we will continue to gain advantages from both aspects. I'll pass it over to Michael to discuss margins.

Michael Glover, Chief Financial Officer

Great. I believe when discussing margin, the first point to note is that I expect us to deliver between 100 and 150 basis points of margin for 2023 as well. Looking at the individual regions, considering the returning growth, we can approach levels similar to 2019 in both EMEAA and China. The Americas seem to have peaked a bit, so further growth there may be limited and likely remain within that range.

Keith Barr, Group Chief Executive

Yes, thank you. We are very confident in our ability to maintain margins in this business, having demonstrated this repeatedly. Regarding financing conditions, especially in the U.S., we are allocating resources and providing incentives to assist owners in securing financing and accelerating project starts, which will yield returns over time. We are also investing in other markets focused on our hotel development and growth teams to aid owners in opening hotels as quickly as possible. Financing conditions differ globally, with some markets experiencing no financing issues at all. For instance, in Saudi Arabia, we see significant growth and a strong pipeline without financing challenges, largely due to state-backed tourism. In China, there is a desire to restore lending, and regulations on banks and property have been relaxed, which should improve the situation. Overall, financing issues vary in different regions, but our ability to grow through conversions will help mitigate any slowdowns we may encounter in new builds. Financing will eventually return as we observe the resurgence in revenues driven by robust tourism and travel demand, leading to favorable returns for owners.

Jaina Mistry, Analyst

Sorry, just specifically in Europe, has there been an impact on financing in Europe?

Keith Barr, Group Chief Executive

Definitely, there's been some financing, but we're not hearing about it nearly as much as we were hearing about kind of in the regional commercial banks in the U.S. But again, it hasn't been a major topic I'm hearing from the owners overall.

Jaina Mistry, Analyst

Okay. Thank you.

Operator, Operator

Thank you. The next question comes from Leo Carrington from Citi. Please go ahead. Your line is now open.

Leo Carrington, Analyst

Thank you. Good morning. I have two questions, please. First, I'd like to follow up on the financing and construction cost environment in the U.S. Your comments on the trends are clear, but I would like to know the tangible implications on your pipeline. Are you seeing developers delay groundbreakings due to construction costs, or are owners changing their development plans from new builds to seeking existing properties as a result? In terms of financing conditions, is this causing projects to sit in the pipeline for longer? Any additional insights on these implications would be helpful. Secondly, regarding Iberostar, for the hotels you have had in your system since December, do you have any observations about the relationship so far? Have there been any significant changes to the distribution mix of these hotels? Any early observations would be appreciated. Thank you.

Keith Barr, Group Chief Executive

Great. Well, on the financing and impact on the pipeline, so the pipeline grew, I think, 3.3% year-over-year, 280,000 rooms under development too and 16,000 rooms, 500 in the quarter. So owners are still signing hotels. They want to develop hotels. Industry-wide, when you look at lodging econometrics, you will see that ground breaks have slowed in the U.S. from the previous highs. And that's from a number of factors. That was input cost on the supply side, construction cost, the availability of labor and financing costs. Now in some instances, we're seeing a couple of things get much better, right? So the input cost of building and equipment has come down. So that's a great part of the equation. Labor availability has actually increased in construction in the U.S. because of the slowdown in residential pivoting over to commercial. So that's another good positive impact factor. The headwind would be financing. And again, we're putting resources against the two. So ground breaks have slowed for the industry. They have slowed a bit for IHG, but we're also now putting incentives in place to help owners do more ground breaks, which we talked about at the full year. Also putting resources into we expect it to come back to normalize over time. But it will take a bit of time, depending upon what happens in the U.S. banking area for the entire industry. But we can make up for it in conversions and also the strength of our growth internationally as well. Iberostar, relationship is great. I mean, integrations are complicated, but these are amazing hotels in incredible locations. We've done the first phase of integration, which was a light touch. We're seeing our customers begin to book into those hotels. The more deeper technical integration happens later this year and into next year, where we then see real big segmentation shift, which is why we signaled most of the profit growth happening in the later years, kind of '25, '26 and '27 given as they re-segment the hotels. But very, very positive. Our teams talk on a daily, if not weekly basis, and really looking forward to hopefully doing more partnerships like this in the future with the success of this model.

Leo Carrington, Analyst

Okay. Thanks, Keith, and good luck with the move back home.

Keith Barr, Group Chief Executive

Thank you very much.

Operator, Operator

Thank you. The next question comes from Tim Barrett from Numis. Please go ahead, Tim. Your line is now open.

Tim Barrett, Analyst

Hi, and congratulations both of you. I had a couple of things left, please. Firstly, can you talk about the seasonality of rooms dropping out to the pipeline? Does that tend to show any pattern? Or should we broadly annualize the, I think it's 10,000 or 11,000 from Q1? And then secondly, a similar question on Iberostar. I know you were very excited when you launched it, that it could set a precedent. Have you got any look-alike deals that you expect to come through this year? Thanks a lot.

Keith Barr, Group Chief Executive

Let me discuss our growth and partnership strategy, after which Michael will address the seasonality of our pipeline. I am very enthusiastic about the Iberostar deal and the overall idea of forming strategic partnerships, as it demonstrates the strength of IHG's enterprise platform. The reaction to this deal was unexpected for many, as Iberostar did not need to partner with a major player, yet they recognized the value in doing so. This has opened the door to numerous discussions. While we cannot disclose specific partnerships or mergers and acquisitions at this moment, I believe we will see that the strongest enterprise platforms in our industry, like IHG, will continue to attract partnerships and related opportunities that wish to join our travel ecosystem due to the value we can create together. Therefore, I do not anticipate this being the last deal, given our ongoing investments in our loyalty program and technology. Although I can't share any announcements today, we will do so as soon as possible. Now, I'll turn it over to Michael to address the seasonality of the pipeline.

Michael Glover, Chief Financial Officer

Thanks for the question. Regarding the pipeline and any terminations, we haven't noticed a significant number of terminations. However, we do observe some seasonality in removals within our system size and the openings that come through the system. So, while there is some seasonality in certain aspects, we don't see any specific seasonal trends in how things terminate from the pipeline.

Keith Barr, Group Chief Executive

Removals tend to be larger at the beginning of the year. We usually speed up openings as the year goes on. Terminations from the pipeline don't show much seasonality. There will be fluctuations along the way, but that's how you might consider it.

Tim Barrett, Analyst

Okay. Understood. Thanks a lot.

Operator, Operator

Thank you. Our next question comes from Alex Brignall from Redburn. Please go ahead, Alex. Your line is now open.

Alex Brignall, Analyst

Good morning. Thank you, both. And enjoy the move back home, Keith.

Keith Barr, Group Chief Executive

Thank you.

Alex Brignall, Analyst

I have two questions regarding hotels and alternative accommodation. Several of your competitors have embraced long stays and either launched or are planning to launch new brands in that area. Could you share your thoughts on your upcoming brands and the interest you're receiving from your development partners regarding potential locations for expansion? Additionally, I noticed that last night, Expedia mentioned a shift in demand from alternative accommodations, like Vrbo and Airbnb-style properties, back to hotels as they observed a trend returning to urban areas and a general normalization to pre-COVID patterns. I would appreciate your insights on this. Thank you.

Keith Barr, Group Chief Executive

Thank you, Alex. We are fortunate to have three excellent suite brands already: Staybridge, Candlewood, and the newly launched Atwell Suites. We've developed new prototypes for Staybridge and Candlewood, which are more cost-efficient to build and operate with contemporary designs. Atwell Suites has also been launched. These three brands represent significant opportunities in the extended stay sector, offering high returns for owners and contributing to our growth strategy. We feel well positioned with these brands. Regarding Expedia's comments about a shift in demand, we haven't closely examined it yet and I don't have the same insights that Peter at Expedia might have. However, we do see business demand returning to our hotels, alongside strong leisure demand and ongoing groups, meetings, and events. The strength from government and small and medium enterprises may be redirecting business away from alternative accommodations to our hotels. While I know who our customers are, I can't specify their origins, but they are choosing to stay with IHG brands, and we are performing exceptionally well.

Operator, Operator

Thank you. That concludes our Q&A session for today. So, I'll hand back over to Keith Barr for any closing remarks.

Keith Barr, Group Chief Executive

Many thanks to all of you who joined the call. And also thanks to many of you who I've had the privilege to work with closely over the years and have some fantastic conversations and some great debates, it's been a very real pleasure. I want to remind you that our second quarter update and financial results for the first half of the year will be announced on the 8th of August. I'm sure you look forward to spending time with Elie and Michael then. But again, I wish you all well, and I'll be again advising IHG on the sidelines for the remainder of the year and continuing to go from strength to strength. So thanks, everyone. Take care, and be well.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.