Feb 19, 2013
Executives
Patrick Cescau Richard Solomons - Chief Executive Officer, Executive Director, Member of Executive Committee and Member of Corporate Responsibility Committee Thomas D. Singer - Chief Financial Officer, Director and Member of Executive Committee
Analysts
Tim Ramskill - Crédit Suisse AG, Research Division James Ainley - Citigroup Inc, Research Division Vicki Lee - Barclays Capital, Research Division Jamie Rollo - Morgan Stanley, Research Division Timothy Barrett - Nomura Securities Co. Ltd., Research Division Simon Larkin - BofA Merrill Lynch, Research Division
Patrick Cescau
Good morning, everyone, and thank you for joining us. Welcome to our 2012 Full Year Presentation.
My name is Patrick Cescau, and I've been the Chairman of IHG since the beginning of the year. I have to say I feel very good, very privileged about joining a great team.
This company has an impressive track record of delivering both strong financial results, and also, as you know, excellent return to shareholders. And 2012, as you would have seen, is no exception.
So in my first couple of weeks with the business, I've been trying to get to know the business a bit better. I've been visiting operation.
I've been talking to shareholders, to owners, to guests, to colleagues, and I've been impressed by what I've seen. And there are few things have impressed me particularly.
IHG is a company with a very clear strategy and a consistent record of implementation, as you know. But what was impressive for me is there's a real focus across the whole organization of creating preferred brands with our people and our guests at the heart.
And there's a deep, really deep, commitment to winning whilst ensuring the business is running in a responsible manner across a whole set of values. So I see a huge potential to further leverage our leading position in many markets across the world, and I'm, of course, delighted to have the opportunity to help guide IHG to do this, build on what I believe is a very strong platform and continue to deliver high-quality growth in the future.
And I look forward to meeting many of you in due time. But now I'd like to pass over the Richard Solomons who will start the result presentation.
Thank you.
Richard Solomons
Thanks, Patrick, and good morning, everyone. So in a moment, Tom will take you through the financial results in detail.
But first, let me just cover some of the highlights. 2012 was another very strong year for IHG with our preferred brands driving RevPAR up 5.2%.
So together with 2.7% net rooms growth, which is fueled increasingly by our expansion in developing markets, this drove up fees almost 7%. So we see significant opportunities to add to our already strong position in many parts of the world.
We're making great progress developing our existing brands, and we extended our portfolio in the year by adding the innovative HUALUXE Hotels & Resorts and EVEN Hotels brand. At the same time, we continually look to be efficient, and our cost management, combined with our success in leveraging our scale, has allowed us to reinvest in the business and simultaneously grow our margins over a number of years.
We've once again demonstrated the ability of this business to drive powerful cash flows, providing us the flexibility to invest in growth opportunities, and at the same time, it's being able to generate significant and consistent shareholder returns. The $1 billion return on capital we announced in August, combined with a 16% growth in the 2012 total dividend announced today, demonstrates our commitment to this long-standing strategy.
So I'll now hand over to Tom who'll talk in more detail about the financial progress IHG's achieved in 2012. And I'll come back later to look a little into the future and to discuss our strategy and business development.
Thomas D. Singer
So thank you, Richard, and good morning, everybody. It's nice to see so many familiar faces in the audience.
Let me start by highlighting the key financial headlines where we're pleased to be able to report another good year of growth. Revenue and operating profits were up 4% and 10%, respectively.
And on an underlying basis, operating profits were up by 13%. This is a constant currency and excludes the impact of $16 million of significant liquidated damages received in 2011 and $3 million in 2012.
The interest charge at $54 million was less than the previous year, primarily due to lower average net debt levels. The effective tax rate increased by 3 percentage points to 27%, in line with our guidance and still expect it to rise to the low 30s from 2013, reflecting the geographic mix of our business.
Profits after tax grew 8% to $407 million and adjusted earnings per share were up 9% to $0.1415, helped in part by slightly lower average share count. And we had another good year of cash generation with free cash flow of $463 million, up 10% on last year, and I'll go into more detail on this later on.
One of the most important metrics for an asset-light, cash-generative business is growth in fee revenues. I'm going to spend some time today, talking about the key drivers of this.
RevPAR, room growth and royalty rates and how the relationship between these is changing. Strong RevPAR growth, combined with net rooms growth, drove up our fee revenues by 6.8% this year.
This was led by Greater China, up 16% year-on-year to $92 million, almost 3x the level we reported in 2009 and demonstrates the benefits we're now seeing from the ramp-up of the 23,000 rooms we've opened in the region over the past 4 years. Before I move on to talk about RevPAR and rooms growth in more detail, let me first just mention the third driver, royalty rates.
As a longer-term driver of growth, we don't expect to see movements in royalty rate year-on-year. It is influenced by a number of factors and reflects the strength of our brands and the returns that they deliver for our owners.
So let me just turn back to the other 2 drivers in more detail, starting with RevPAR. Reported good growth across all regions with gains in both occupancy and rates in the Americas, RevPAR grew by 6.1%, including the U.S., up 6.3%, where trading stayed strong in the fourth quarter despite uncertainty around the presidential elections and the fiscal cliff.
And demand in the U.S. has remained at record highs, which, combined with the continued to low supply growth, drove absolute occupancy in the second half, back up to previous peak levels.
In Europe, solid fourth quarter RevPAR growth of 1.2% rounded off a consistently robust performance for the year, up 1.7%, overall. And we outperformed the industry on a total RevPAR basis in our key markets of the U.K., Germany and France.
In AMEA, RevPAR growth of 4.9% shows a strong performance in Southeast Asia and Japan, partly offset by tougher conditions in some parts of the Middle East. Greater China RevPAR grew 5.4%, significantly outperforming the industry.
We had an excellent start to the year with strength in the north and east of the country. But in the second half, the once-in-a-decade change in political leadership impacted the whole industry and growth levels pulled back.
As a result of leadership change and the shift in timing of Chinese New Year, short-term visibility in this region is particularly limited. And this will probably remain the case until at least March when the changeover completes.
However, the long-term drivers in Greater China remain highly compelling and our market-leading position leaves us extremely well placed. Looking more closely at our performance in the U.S., you can see that we've outperformed the industry on total RevPAR, which is on the same basis as the Smith Travel Research data.
Taking each of our brands in turn, they're all starting from different points but all have shown good growth in the last year. InterContinental had a great year, outperforming not only the upper upscale peer set shown here but also the luxury segments, clearly benefiting from its strong brand positioning in key city locations.
Crowne Plaza continues to benefit from the work we're doing with the repositioning program, which Rich will talk about a little bit later on. Hotel Indigo is a fantastic story for IHG and we continue to see this brand gain share as a result of the work that we've done to refine the proposition in the U.S.
And Holiday Inn and Holiday Inn Express both outperformed the market, reflecting the ongoing benefits of the relaunch, which continues to drive outstanding results. And let me just drill down on these last 2 brands in a little bit more detail.
We know that there's an important link between guest satisfaction and RevPAR, and the chart on the left-hand side shows the significant increase in RevPAR premium driven by the Holiday Inn relaunch, making the Holiday Inn brand family one of the most highly rated midscale brands. And as our owners get improved returns, we're seeing the benefits in new hotel findings, which translates into strong net system growth, especially now that a number of rooms leaving the system is part of the relaunch program that's come down.
Our third driver of profitable fee revenues is net system growth. Net system growth of 2.7% was at the top end of our guidance for the year and a notable step-up compared to the previous 2 years.
We opened 34,000 rooms, up almost 5% on 2011 on an underlying basis, and over 1/3 of these rooms are in our fast-growing AMEA and Greater China regions. As I mentioned, room removals have reduced to a more normal levels, and with our ongoing focus on the quality of rooms, we will continue to expect to exit around 2% to 3% of the system each year.
Signings of 54,000 rooms or almost 1 hotel a day show the demand for our brands despite the difficult financial environment, which still exists in many markets. Our pipeline continues to be at the highest quality, with 40% under construction maintained through disciplined signings and active pipeline management.
And we have a 12% share of the global active hotel pipeline, and I'm confident that the vast majority of this will convert into opened rooms. So that's what's driving our fee revenue today.
And I now want to spend a few minutes talking about the shape of our fee growth going forward and the impact we're seeing as a result of our strong growth in developing countries, such as China, India, Indonesia and Thailand. The geographic mix of our business is changing, reflecting faster demand growth and our fantastic reach into these markets.
By their nature, developing markets have strong future demand drivers, with expanding economies, increased travel and growing awareness in preference for branded experiences and products. Almost 30% of our openings in 2012 were in developing markets, taking the proportion of our system there to 19%.
And looking forward, this trend is expected to continue. As shown by the shape of our pipeline, half of which is located in these locations.
However, our strong growth in developing markets means that our hotels often opening at the same time as the sources of demand for rooms are being developed, and this means that they are generally achieving lower absolute RevPARs particularly in the early years. So the best way to think about this when modeling is that these hotels will have RevPARs around 30% of the level of an average mature hotel in that region.
Turning now to our financial performance in the year by business model. Our franchise business continues to achieve high absolute margin levels.
It's the most scalable of our 3 models and is dominated by our hotels in the U.S. Our managed business reports good top line growth, converting into strong growth in operating profits as we leverage our leading position in markets such as China.
The proportion of managed hotels now earning incentive fees has risen 2 percentage points to 59%, with the highest levels at over 80% in Greater China and AMEA. Our owned and leased estate has performed very well, with strong RevPAR progression, driven by 5.3% rate growth.
And this, in conjunction with careful cost management, has led to a 20% increase in underlying EBIT. By the way, I would like just to draw your attention to the fact that in 2013, there will be a $6 million year-on-year benefit to the owned and leased EBIT as we'll no longer be charging depreciation on the InterContinental Park Lane now that it's being held for sale.
Increased scale, RevPAR growth and the focus on costs have allowed us to drive up margins, converting top line growth into double-digit-profit growth. Our fee-based margin expansion was better than expected in 2012, up 2 percentage points to 42.6%, helped in part by some one-off items that are individually small but collectively added around 50 basis points to the margin.
As we deliver top line growth, our increasing scale allows us to drive efficiencies and create capacity to reinvest in the business while still improving margins. Areas of reinvestment to support long-term growth include brand innovation, such as the launch of EVEN and HUALUXE and ongoing IT developments.
And these investments has been partly funded by savings made by offshoring certain support roles and a company-wide discipline on costs. We've reported strong margin progression over the last few years, particularly in China.
And sustainable margin growth over time remains a key focus. However, in 2013, we are increasing the level of reinvestment, particularly in fast-developing markets, as well as supporting our brands to drive continued outperformance.
Furthermore, you will remember that in January, we announced 8 focal hotels will be leaving our system and these generated about $9 million of fees in 2012, contributing 50 basis points to our fee-based margins. Therefore, looking at the margin picture in the round, we don't expect underlying 2013 margins to grow at the same rate as in recent years.
Looking now to cash flow. EBITDA was up 8% to $780 million, translating into strong free cash flow, up 10% to $463 million.
Capital expenditure was in line with our revised guidance given the Q3 and I'll talk more about that in a moment. The triennial review of the pension scheme has now been finalized, with a deficit of GBP 132 million.
We paid an additional GBP 45 million contribution in the fourth quarter, as previously indicated, and have an agreed schedule of further additional payments comprising GBP 30 million in 2013 and GBP 15 million in 2014. Net debt of just over $1 billion includes $612 million of capital returns, as we paid out the special dividend and commenced the share buyback program in the fourth quarter.
We also took the opportunity at the end of last year to extend our debt maturity and diversify our debt profile in strong markets, issuing a GBP 400 million, 10-year fixed rate bond in November. And I'm glad to say we managed to get a great deal at the time with a low long-term interest rate of just under 4%.
This slide, which I know is familiar to you, summarizes how we use our capital to drive growth and maximize value for shareholders, which I'll now talk about in a little bit more detail. The first of our 3 uses of cash is investing in the business.
And we continue to see significant opportunities to use recycled capital selectively to accelerate our growth. We'll spend around $100 million to $200 million on growth CapEx each year into the medium term, with around half of this in 2013 spent on getting the EVEN brand up and running.
Other plans for 2013 include $30 million behind halo Crowne Plaza assets and $30 million in joint venture investments. We will, of course, continue to apply strict, strategic and financial criteria to all CapEx projects, and we look to recycle our investments after a few years.
2012 was actually a modest year for capital recycling, releasing $8 million from disposals, including our interests in the Holiday Inn Madrid. We invested $20 million of growth capital, with $5 million in joint venture investments, including a Hotel Indigo hotel in Manhattan.
And as I said before, growth CapEx is, by its nature, lumpy as we're often investing alongside third parties. Over the medium term, we expect maintenance CapEx to be around $150 million per annum, with $113 million spent in 2012.
And around 2/3 of our maintenance CapEx in 2013 will be invested in our global infrastructure, including IT and around 1/3 on our owned assets. As Richard mentioned, we have a strong record of returning funds to shareholders, both through our ordinary dividend, which grew by 16% in 2012 and through additional capital returns.
And we returned just over $600 million of the $1 billion we announced at interim results last year. And this reflects our ongoing commitments to an efficient balance sheet whilst maintaining an investment grade credit rating.
I'm sure you've all seen the change to our quarterly reporting disclosure that we announced in our release this morning. Having consulted with many different stakeholders, we'll no longer be producing full quarterly financial statements for Q1 and Q3 results as of Q1 this year.
We would instead provide a trading update supported by our usual supplementary data for RevPAR and system size. So you'll still be able to track our quarterly performance and we'll still continue to hold a conference call with time for questions at the end.
I think this move will help us focus attention more on the longer term picture and brings us more into line with standard U.K. practice.
I'll hand back to Richard in a moment but first, some comments on current trading and outlook. Our preferred brands, high-quality pipeline and resilient business model position as well as we start the current year.
Although we can only look out around 1 month with any certainty, forward indicators of lead times and travel intentions are encouraging. Supply in developed markets remains historically low whilst global demand continues to be at record levels.
In the U.S., the range of third-party U.S. industry forecasts for 2013 has converged to around 6%.
Let me now look at January RevPAR, remembering that this is only 1 small month for hotel revenues, so it's important not to infer too much from this data. Group RevPAR grew 6.6% in January, driven by both rates, up 2.1%, and occupancy, up 2.3 percentage points.
RevPAR growth of 7% in the Americas reflects improved business confidence and includes the U.S., up 7.4%. In Greater China, RevPAR increased by 21%, a strong improvement year-on-year, principally due to the shift in timing of Chinese New Year, which was in January last year whilst in February this year.
And we would, therefore, expect to see some reversal of this in the February data. AMEA was up 6% in the month, an improvement on Q4 trends but also helped by the timing of Chinese New Year.
And last but not the least, in Europe, RevPAR held steady in challenging economic markets. So with that, let me hand back to Richard.
Richard Solomons
Thank you, Tom. So in April of this year, IHG will celebrate its 10th anniversary as a stand-alone company.
And looking back over that time I think it's fair to say that we have consistently delivered against the clearly defined strategy. So our focus is on high-quality growth.
And that drive has led us to remove over 260,000 rooms, which, alone, represent the ninth largest hotel company in the world today. And we have in that same 10-year time frame opened a remarkable 425,000 rooms, giving us one of the highest quality, freshest portfolio of hotels in the business.
So our share of the hotel -- of the global room supply is currently around 5%, and as Tom told you, our share of the active hotel pipeline is 12%, which means that we will continue to grow our share of total hotel room supply. Now we've created this advantaged position through the great work that we've been doing to strengthen our existing brands and create new ones, as well as the unique partnership that we enjoy with our owners and especially through the IHG Owners Association.
We've all but completed our move to an asset-light business model, disposing of 190 hotels for some $5.7 billion in proceeds. In more recent years, we demonstrated the resilience of our business through the recession, successfully relaunching Holiday Inn and maintaining our dividend whilst continuing to invest in growth.
And in the process, we proved that IHG has one of the highest quality income streams in the industry. We, of course, remain committed to continuing to reduce the capital intensity of IHG and committed to our asset-light strategy, which has helped us drive our return on capital employed from 7% in 2003 to some 44% last year.
We've delivered significant value to shareholders over that time, returning around $9 billion, almost twice the market cap of the group when we listed as a stand-alone company. We've grown the ordinary dividend by 11% compound since 2003, and all of this has resulted in total shareholder returns in the last 10 years, higher than any of our major competitors.
And we're very proud of that. So the question on your minds and definitely on ours is how we continue this track record for the next 10 years and beyond.
And the answer is more of the same. Looking at what's driven our success, we call this our virtuous circle for high-quality growth and it describes the way in which our business operates based around 5 levers.
We delivered preferred experiences for guests through our highly targeted brand propositions, consistently delivered by talented people across the organization. We establish and build on scale positions in specific markets and leverage these to create revenue and cost synergies.
We have a strong portfolio of brands and an industry-leading royalty program, which allows us to maximize cross-selling opportunities and capture a greater share of our guest wallet. Having an effective strategy, which optimizes our delivery channels based on our guests and our brands is a key way in which we deliver profitable revenue into hotels, and of course, provides a superior proposition for our owners, which is vital, and I'll come back to that later.
The output of this great model for IHG is growing cash flow and a high return on investment, so that's the theory and it works. But we have to ensure we operationalize it by making it into something that colleagues at every level of the organization can buy into and understand their role in.
So I've talked on several occasions about generating steady sustainable growth and market share through driving RevPAR, adding the right hotels and right locations with the right owners. And we're making this happen through our very 3 clearly stated priorities of brands, people and delivery, underpinned by responsible business practices.
So taking each of these in turn and giving your progress update on where we are today, let's start with our brands. We've been putting in place a new way of managing our brands, which we call brand leadership marketing.
It makes sure that every one involved in managing our brands is clear on their role and it's helped us accelerate the work that we're doing and engage the whole business in our brand's journey. This is important as preferred brands are at the center of our success and they drive everything we do.
Now this work's been led by Larry Light, our Chief Brands Officer who's worked with us since I took over as Chief Executive, and it'll be enhanced when Keith Barr takes up his role as Chief Commercial Officer later this year. Keith is one of our most experienced operators and leaders and he will really help us deliver -- define guest experiences more effectively at the front line.
Our brands already deliver superior and consistent experiences, which drive RevPAR premiums and deliver better return on investment for us and for our owners, but we can never stand still, and we, therefore, talk about always wanted to make our brands bigger, better and stronger. Size matters.
There is a competitive advantage to being big through the economies of scale we can drive. It also gives us the power to try new things and develop areas of specialties and expertise.
For example, with South East Asia, it's an important leisure destination. We've situated our global resource team in Bangkok to further develop our resource strategy.
We have a culture of continuous improvement in IHG and it's no different with our brands. So we're always looking at what we can do better at delivering the intended guest experience consistently and addressing guest complaints and understanding their needs.
We never stop refining the brands and driving operational improvements. We want our brands to always be first choice for guests, owners and employees.
And strong brands have a huge advantage. As preference goes up price sensitivity goes down.
Brand enthusiasts pay a premium for their first choice brand and they're more loyal. So in order to make our brands bigger, better and stronger, we have to keep them contemporary and relevant and meet changing guest needs.
We recently enhanced our understanding of our guests through an industry-leading piece of research. The hotel industry is relatively unsophisticated in this area and continues to focus on industry classification price points which mean absolutely nothing to our guests.
Definitions such as upper upscale or midscale are categories that guests just don't buy or think about. I've never gone home and said to my wife, "Darling, let's go away for the weekend to a midscale hotel, even better, it's a limited service midscale hotel."
It's just not how consumers think or behave. Guests' needs vary enormously.
Do they have family with them? Are they on a business trip?
Are they on a short stopover or a longer break? IHG is at the forefront of understanding its guest, and our recent work in this area has helped us improve our knowledge.
Our research has allowed us to identify the choices guest make as a function of who they are, the occasion they're traveling for and the need when traveling. And this detailed segmentation analysis we produced is now integral to all of our brand management processes, including the proposition for our 2 new brands and it's been fundamental to our plans for Crowne Plaza.
I'll share some of the details on Crowne Plaza now and we'll be providing more insight on the work we've been doing on our other brands. As an analyst and investor educational event, we've planned and would like to invite you to for Q4 of this year.
So I've talked at some length before about the work we're doing to reposition Crowne Plaza. Crowne Plaza is a well-established brand and it's been a big success for us.
It has a very solid foundation for future growth, with almost 400 hotels opened around the world and nearly 100 in the pipeline, and it contributes almost 20% of IHG's gross revenues. There is a significant opportunity for us to close the performance gap that exists between the brand in the Americas and the rest of the world and we've got a plan to achieve this.
We've made good progress against Phase 1 of this plan, improving the overall quality of the estate. We've exited 18 substandard hotels, with around another 22 to leave over the next couple of years.
All quality action plans are scheduled to be completed in the Americas by the end of quarter 2 and we rolled out our 1 step ahead guest service training program into all regions. This will ensure that all hotel colleagues fully understand the brand and deliver consistent service experience, which is right for Crowne Plaza and its target guests.
As Tom mentioned we'll use IHG's capital, if necessary, to make sure we add and retain representative Crowne Plaza Hotel in the right location to build brand awareness and showcase the brand properly. And we're on track to complete the rollout of the new brand Hallmarks by the end of 2015.
In developing these new Hallmarks, we've leveraged our guest segmentation work to help us better meet the needs of our target guests. For Crowne Plaza's target guest, business productivity is their primary need.
They never fully relax. They're very demanding and they see productivity and business success is defining them, and that probably characterizes most of you in this room today.
So as a result, we've designed Hallmarks that would enhance 4 key areas of the guest experience, arrival, food and beverage, guest room and fitness and recreation. The team has done a great job.
The Hallmarks are being tested and piloted now and we'll start to roll them out later in the year. And we'll talk about them in more detail once we've communicated with our owners and the rollout has commenced.
So moving now into Holiday Inn. Tom has already told you about the continued strong results of relaunches drive in both for us and for owners.
Our market segmentation work has helped us clarify the positioning for each of the 4 brands within the global Holiday Inn brand family. This recognizes that whilst they share the same DNA, each one is distinctive and appeals to different guest needs on different travel locations, providing greater clarity within these brands will enable us to continue to strengthen and grow them into the future.
Our effort to drive awareness for this Brand Family continue to pay off, with Holiday Inn being named the J.D. Power Award winner for Best Guest Satisfaction in the midscale full-service hotel chains category end.
Holiday Inn has enjoyed a fantastic 2012, celebrating its 60th anniversary and being official hotel provider for the London Olympics. Looking forward into 2013, we won't be standing still as we'll be launching a new advertising campaign for Holiday and across several media channels.
As you know, the Holiday Inn brand family is core to the success and profitability of IHG, and is testament to its power and longevity. We can report that according to Smith Travel, it was the fastest-growing brand in this segment in the world last year with more rooms added than any other brand family.
That's pretty impressive for a brand. This origins are now 60 years old and evidence of the quality of the work we've done to relaunch the brand and keep it relevant to today's guests and hotel owners.
Hotel Indigo demonstrates the success we've had in tailoring a brand to specific guest needs. We've refined the brand proposition along the way.
And in recent years have deliberately managed development in the U.S. we're getting distribution in optimal top-tier markets.
This managed development can take a little longer as we turn a lot of opportunities down, but it will ensure that the brand has a sustainable long-term future. We celebrated the brand's 50th opened hotel during the year, with a further 47 hotels in the pipeline, the largest of any branded boutique in the world.
Its distribution is set to double over the next 3 to 5 years to around 100 hotels. Hotel Indigo is getting phased.
It was the fastest-growing brand and boutique in the world last year. And in Europe, we've now opened 10 hotels since we launched here in 2009.
And our hotels continues to win accolades such as Hotel Indigo on the Bund being named the best boutique hotel in Asia Pacific. Our 2 new brands tap into the growing global demand for hotel rooms and the rising consumer trend for greater segmentation and differentiation.
We signed 15 HUALUXE hotels in Greater China in the year and have a further 15 letters of intent in place, a great result for a brand that's not even a year old. And we're also making good progress with our EVEN Hotels brand in the U.S.
with one in the pipeline and several most close to signing. So moving on to our second priority, our people.
People play an absolutely key role in our business by delivering our brand experiences to guests. Over the years, we've proven a strong correlation between employee engagement, guest satisfaction, and hence, RevPAR.
Every 5-point increase in engagement adds on average about $0.70 to RevPAR, which is a material difference. So employee engagement is an essential area of focus for us.
And we improved this measure by 3 percentage points in 2012. We've now rolled the engagement survey out to our franchisees, who is starting to see the benefits already.
And the efforts we've made to drive the winning culture at IHG continued to be recognized externally with awards in several countries, including the U.K., India and China. Ensuring our people deliver consistent brand experiences to our guest, irrespective of ownership model, requires significant effort and innovation and engagement of our third-party hotel owners.
Our unique suite of people tool helps our owner to hire, train, involve and recognize the right employees for their brands. In 2012, we launched hotel solutions, an access point for all the tools IHG provides, which is also a forum for collaboration and sharing of best practices.
We'll be creating some 90,000 jobs over the next few years as we expand our system of hotels around the world. This means it's vital that we can further boost recruitment and retention, and one way we'll do this is through our global network of academy programs, which I'll come on to talk about a bit later.
With our shared people scale, we're turning the work we're doing in this area into a differentiator for IHG and a tremendous competitive advantage, which brings me to the third and final priority for delivering high quality growth. We continue to leverage our global scale and the power of our systems to drive a greater share of industry demand into our hotels.
We do this by ensuring our distribution channels or aligning with the needs of our guests, while driving the most profitable revenues for our owners. In 2012, 69% of total rooms revenue was booked through IHG's channels and direct to our hotels by our Priority Club Rewards members.
Our system includes our global sales programs online in consumer marketing strategies, reservations, reservation channels, revenue management tools, and of course, the loyalty program. And we deploy these systems and platforms in a coordinated way around 4 fundamental strategies: creating, converting, yielding and retaining demand.
So taking each of these in turn. We need to ensure that our brands are top of mind when potential guest search for a hotel.
We do this through mass marketing campaign, such as those run for our InterContinental and Crowne Plaza brands in Greater China last year. These drove great results helping us to more than double brand awareness and preference scores in the space of the year.
More than 80% of guests start their hotels search on the web, making online marketing a key way of reaching and steering guest to our brands. In 2012, we generated $1.4 billion of revenue through these activities, purchasing or managing more than 8 million keywords, another example of what we can do due to our scale.
We also drive a significant share of non-paid traffic to our sites through our powerful search engine optimization strategy. Our targeted marketing activities ensure we take a bigger share of wallet from our existing customers.
We're now able to directly reach significant number of guests. In 2012 alone, we had 51 million unique guest stays, and not just Priority card members.
Last year, we ran over 1,300 cost-effective targeted campaigns that's generated significant incremental revenues. Social media is becoming an increasingly important way for us to connect with guests.
And in 2012, our brands generated over 1 billion impressions within social space. Now like many companies, we're still experimenting with how we best create value from this, but early signs are very encouraging.
We also have powerful tools that allow our hotels to collect comments and reviews of their properties from all social channels and websites, a very valuable form of feedback. In the area of sales, IHG leads the way for innovation, with our focus remaining on growing our overall share of corporate business through our successful dynamic pricing initiative.
We now have 43% of our centrally negotiated rates on the system, and we're seeing significant success. In 2012, these accounts achieved nearly double the growth in revenue of our traditional accounts, and hence, meaningful share gain.
Consumers are comparing and shopping like never before. So we have clear strategies to convert more browsers into buyers.
In 2012, our websites experienced more than 250,000 million visits and generated $3.4 billion of revenue, which would put IHG among the top 10 Internet retailers in the U.S. We've underscored the value of our brand websites with the launch of our own guest ratings and review.
In many cases, these can be more powerful than third-party review sites due to the knowledgeable brand loyal guests who tend to comment. Our mobile strategy is at the forefront of the industry.
We were the first to have apps across all major platforms. And in just 3 years, we've grown bookings made for our mobile websites and apps from $3 million to $330 million.
We are not consumer study would some in person, they can speak to highly trained reservation agents at 1 of our 10 global call centers. Last year, we answered around 23 million inbound contacts, generating almost $2 billion in revenue.
We continue to innovate, to maximize bookings through our direct channels, the cheapest and most effective way. Not only do we have our powerful Best Price Guarantee, but also a founding member of Roomkey.com, the first industry-owned hotel search engine launched last year.
Another industry for us is our collaboration with Chinese biggest e-commerce platform, Taobao Travel, which will enable us to reach many more Chinese guests. Effective pricing is essential to maximize owner returns.
Our industry-leading price optimization tool supports hotels to make the best pricing decisions based on sophisticated algorithms that consider a combination of historic demand, pricing and economic indicators. The system is in place in over 3,000 hotels and delivers an average RevPAR uplift to 4.3%.
Now, all told only as good as the people who use them. So we provide a variety of training options to ensure hotel employees get the most out of our revenue management systems.
And for hotels that don't have on-site higher revenue management capability, we provide this facility remotely. This is a very popular service, especially for us smaller hotels, and generates a meaningful RevPAR uplift.
Our Priority Club Rewards program cultivates our guests into loyal repeat customers and advocates of our brands. We offer members a vast array of point redemption and recognition opportunities.
This great customer value proposition means we now have 71 million members around the world, who deliver 41% of revenues to our hotels. PCR members are amongst our most valuable guests.
They generate more revenue per stay than the average guest as they are loyal to our brands. They generally stay more with us, and they also cost less if they're more likely to book to lower-cost channels and they're easy to target.
And Priority Club Rewards continues to be heralded as best by industry advocates, winning several prestigious awards. We'll continue to innovate this powerful tool to maximize the revenues we can generate from the whole IHG brand portfolio.
I strongly believe that every business has to play its part in the communities in which it operates and to behave responsibly. So I'll share with you today 2 initiatives, which are core to IHG's approach to corporate responsibility.
Green Engage is our industry-leading online sustainability management program. It enables our hotels to manage their environmental impacts through every stage in their life, from advice on choosing lighting to daily monitoring of energy, waste and water consumption.
This can lead to energy savings of up to 25%, which is significant given that this is the second largest cost on a hotel P&L. As importantly, being able to demonstrate green credentials helps attract guests and corporate accounts that require a greener hotel stay.
Nearly half of our hotels use Green Engage today, and we're targeting many more to sign up in the year to come. IHG Academies, our partnerships between our hotels and local educational community organizations that provide real-world hospitality work training to local people.
We already have over 150 IHG Academies in place across some 37 countries with a further 117 in the pipeline. And over 10,000 students have participated to date, creating a pipeline of potential employees and increasing the reputation of our hotels in their communities.
So what have I gone into what might have seemed like a lot of operational detail today? I wanted to make it clear how we've driven growth and outperformed over the past 10 years and to explain how we believe we continue to drive the growth of IHG in the years to come.
We built a strong business over the past decade, established a leading position and good momentum in a global industry that has compelling, long-term future demand drivers. However, it's also a very competitive industry, which makes it vital to have a clearly defined strategy that will deliver results not just for us, but very importantly for our hotel owners, too.
I referred earlier to our virtuous circle for high-quality growth, within which superior owner proposition is a key lever. At the heart of this is our brands, which are some of the biggest and best in the world.
Through our industry-leading consumer insight work, we're making our portfolio even stronger, refining propositions for our existing brands, as well as launching new ones to capture the growing demand for hotels around the world. We're also leveraging the scale of our systems, along with the expertise of our people to drive a greater share of demand into hotels in the most cost-effective way.
Continued innovation and investment in this area is vital in order to ensure we deliver value to our owners and build on our competitive advantage. And remember, the sheer scale and expertise that we have here is a considerable barrier to entry, too.
So we're taking a lot of actions to ensure we deliver high-quality growth into the future. And this requires investment in our brands, infrastructure, people and technology.
Developing market is a key area of focus. This is especially so in China, where we need to further build our infrastructure to support our 187 open hotels and the 160 hotels we will open and manage there, effectively doubling the size of that business over the next few years.
As Tom touched upon, our fee-based margin growth will revert to more normal levels in 2013, as we strike the right balance between current profits and investing for the longer-term future. We do, however, continue to remain very focused on driving long-term sustainable growth in margins.
The wider economy continues to be uncertain in many parts of the world as you all know, but we remain confident in our outlook. We have an excellent record of driving superior returns through investors, and we're focused on continuing to do so into the future.
So thank you. With that, Tom and I will now be happy to take your questions.
And for those of you listening on the webcast, you also have the opportunities to send your questions in online. Let me sit down, take a drink.
Okay. Tim, why don't you -- first?
Tim Ramskill - Crédit Suisse AG, Research Division
Tim Ramskill from Credit Suisse. Two questions, firstly, on the kind of the China comments and the emerging markets comments you were making today.
Can you just give us a sense of the incremental dollar value investment that you're planning to make? And is that kind of a one-off, is it one-off in nature?
Is that sustained level of raised investment? And what's, therefore, your expectation of an improvement in terms of future growth having made that extra investment?
Second one on the comments about the maturity profile, the 30% as a year 1 starting point. How does that phase through the period of up to full maturity, and maybe you can make a comparison between the developed market dynamics there?
And then the final third question is the $30 million investment into Crowne Plaza, given you don't own Crowne Plaza hotel, how do you realize the benefits of that? Is it direct, as well as the indirect benefits of the improvement wider?
Richard Solomons
Let me take out the Crowne Plaza point, and then Tom, maybe you can just talk a bit about the investments margin. I think our model is, as you know, asset light, but on occasions we own hotels, also on occasion, we invest in hotels, whether that's through sliver equity or whatever it might be.
So the investment we're talking about putting behind Crowne Plaza is unlikely to be owning one outright. But it certainly will be supporting hotels that maybe currently exist.
We think a great representations of the brand all bring in new ones into the systems. So nothing out of the ordinary from the sort of investment that we would do and normally behind our brands.
But as we relaunched new brand like Crowne, it's important that we do make sure we've got the right hotels, and owners sometimes -- it says a lot to owners when you're changing a brand, when you're evolving your brand that you're prepared to put some money behind it. And you've seen us do it before with Holiday Inn, you've seen us do it with InterContinental, so very much continuing along with the same, along the same lines.
I think Tom, you just want to pick up the other point?
Thomas D. Singer
Sure. I mean in terms of your question about investments in emerging markets, I think the key phrase here is it's striking the right balance between investment today with the view to driving growth in the future.
And if you think about our business in Greater China, we've got 160 hotels in our pipeline that we need to open over the coming 2 to 3 years. It's almost doubling in the size of the China estate.
We've got the HUALUXE brand where we've got 15 deals signed into the pipeline, which will start to open in 2014 and beyond. And just to give you a sense of the scale of what we need to do in China, we need to recruit something like 30,000 people to staff up those managed hotels.
So there's a need to invest in the platform there. And then maybe that for a year, the margin doesn't progress at the same rate that it's progressed historically.
But that's always a judgment that we've made with a view to ensuring that we take full advantage of the significant growth opportunities that we see ahead of us. In terms of the comment about how long does it take for a new hotel to mature in these markets, I mean what we've tried to give you is a steer as to the value of which you should bring on these new hotels.
They open in emerging markets, 30% of the average absolute RevPAR for that region. In terms of how long does it take to ramp up well, there's no precise rule of thumb I can give you.
It depends very much on how the demand drives us to mature in that particular locality over time. It'll probably be 2 to 4 years before you see that hotel achieving full RevPAR contribution in that particular location.
Richard Solomons
Thanks, Tom. James?
James Ainley - Citigroup Inc, Research Division
James Ainley from Citi. Two questions, please.
There's been some comments from your peers about the improvement in the financing environment in the U.S. Can you talk about that, and what you think that means for net rooms' growth both this year the year ahead?
Can we expect net rooms' growth to improve from 2012 levels? And then secondly, some comments in the press about banqueting activity in China.
Obviously, we don't see that coming through the RevPAR line, so could you talk about what that's doing to your business in China?
Richard Solomons
Yes, look, I think on the financing, we said margin improvement that the stronger brands, such as ours, have always had better access to capital than the weaker brands. So I think it really is marginal at this point.
And of course, even the smallest hotel is several years in planning and zoning and opening. So I think it's going to have no impact on room supply.
I think the sort of -- I don't see it having an impact in terms of kicking that up in the short term. So we'll have to see how it evolves.
On banqueting, yes, I think the -- in China, we've obviously seen the impact of the change in leadership. And we talked about it last year, and there isn't going to be a full control taken by the new leadership until March this year, as Tom mentioned in his words.
So some of our banqueting is being banquet. Government is inextricably linked to business in China, so there's been a bit of a slow down there, so you think about it similar to some of the RevPAR slowdown that we've seen.
But obviously, a lot of our business is more broadly based in that, and we think post the new government coming in that things will get back to some more semblance of normality there. That's how business is done in China.
Okay, Vicki?
Vicki Lee - Barclays Capital, Research Division
Vicki Lee from Barclays Just 2 questions. Firstly, just on FelCor, just following the loss of the rooms to Wyndham.
Just curious to see if there's sort of more broadly, any concern about competitors just, otherwise getting a bit more competitive when it comes to rates or guarantees that they're offering. Just any color around the U.S.
market and that backdrop? And then just secondly, on gearing, how should we be thinking -- is 2x to 2.5x still the level that you're indicating?
And if I look out a year and allowing for the CapEx that you talked about today, I think that drops to about 1.4x the use. How should we be thinking about that potential for future cash returns to shareholders?
Richard Solomons
Okay. I'll take the first one, and Tom [indiscernible].
Yes, I think the FelCor situation was a one-off sort of situation. I mean there's always going to be people looking, trying to grow their business, maybe buying their business, and that's what happened in that situation.
It was an incredibly generous offer from Wyndham to take over those hotels, which were quite old portfolio of hotels in our system. But it just wasn't economically viable to match it, but clearly, they've got different objectives in terms of growing their brands, whereas I mentioned Holiday Inn is the fastest-growing brand in its segment in the world, so we have a different dynamic.
But these things happen. We took 3 Hampton Inns in the U.K.
and convert them to Holiday Inn Expresses because of the system delivery that we can deliver without any financial investment. So I think that the strong brands are going to continue to grow and going to continue to gain share because of what they can deliver.
And some of the weaker brands are always going to take the opportunity to come along and buy a little bit of business to get a headline and whatever it might be. But I think if you see the scale of what we're doing in terms of signing hotels.
We signed nearly one a day throughout 2012. We opened 226 hotels, which we opened 1 every 39 hours.
So we've got an awful lot of activity within our brands and our share of supply. Our share of supply is -- 12% is significant.
So I think we're in a very good shape in terms of actually delivering value to owners, so we're then prepared to pay for that.
Vicki Lee - Barclays Capital, Research Division
Just on the signing point, there's sort of no change then in any of the fee structure that you're seeing?
Richard Solomons
No, there really isn't, and I think that's something that's important. It does come back to value, so owners look for return on investment.
And they can always go out and get a cheap brand. I mean there's always people out there and some of the companies who want to get into market, they'll basically give business away.
But if they're not generating the revenues and they're generating the returns to owners, then they're always going to pick up a certain type of owner whereas the sort of -- we're building a long-term sustainable business here. And we recently, for example, lengthened our contracts in the U.S.
from 10 years in the franchise agreements to 20, which is really about creating these longer-term partnerships with serious owners who are prepared to invest behind the brand. Tom?
Thomas D. Singer
To your second question, Vicki, I mean you're quite right. The guidance we gave last year, we're committed to maintaining the investment grade credit rating of the group and to help you with the modeling we gave you to 2x to 2.5x net debt to EBITDA as a sort of benchmark as to the range of leverage that we would be comfortable with.
And that still remains the medium-term commitment. I mean we are still in the process of returning the billion dollars.
We still have about $400 million to go on the buyback program. And I'm sure we will complete that in due course.
And in terms of additional capital that we have available in the group, as you know, our 3 calls on capital are firstly to invest in the business to grow growth, to drive growth; secondly, to pay a progressive dividend; and thirdly, if the risk capital to be returned, then we'll do so. And I'd like to think that given our track record of returning $9 billion since we became an independent company, we have a little bit of trust from the investment community that we'll do the right thing.
Jamie Rollo - Morgan Stanley, Research Division
Jamie Rollo from Morgan Stanley. First question, actually Tim asked it.
What's the guidance for net system growth? I don't know if it's going to be similar to last year, why isn't it getting better as we're putting all the extra cost and capital in?
Secondly, the 69% of revenue delivered by U.S. I think it was similar to last year.
Why is not -- why has that stopped getting better? And then thirdly, where are you on the sort of asset disposal process of the 2 that are formally for sale and thoughts on Paris and Hong Kong?
Richard Solomons
Okay. In terms of net system size growth, I think we've talked about around sort of 2% to 3% level with this level of economic activity and debt available.
And I don't see that broadly moving. And why hasn't it got better with investment?
Well, we've been investing consistently over the years obviously, and the investment that we're talking about this year is just making sure that we absolutely can open hotels that we've currently got in the pipeline. As we talk about the numbers, I think 160 in China, 47 in India and some of the other markets.
So it's what it takes to actually drive this business forward in these markets. And don't forget, Tim, we were still talking about margin growth, so we're growing the business quite fast in a lot of different markets.
It does require some investment. On the capital side of things, we really -- it's not really going to effect the system size directly because you're talking about a handful of hotels.
So with EVEN, it might end up being 3, 4, 5 hotels depending on how we spread it. That doesn't affect system size.
What it does do is enable us to make a statement about the brand as we evolve the brand and make sure that it delivers to consumers and then enable us to sell it to third-party owners where we didn't need capital. On the 69%, the 69% or the percentage of system delivery is a very good measure of the scale and strength of your delivery channels.
It's not an absolute number that you're targeting to move every single year. It's an amalgam of things.
So at that level, that's a good level. I wouldn't mind it going up, I wouldn't necessarily mind if it was down a little bit.
The real point is, how sticky is your business in terms of what you're driving to owners? How much do your brands drive, and can you drive through the most profitable channels for owners and that's really an equation, which is not all about systems delivery.
So it has been flat, probably for the last couple of years actually give or take, but it's still obviously very, very high relative to pretty much anybody else. And what it is doing is driving, say, the most profitable channels for owners.
We've seen the fastest growth in Web, which their margin perspective is the highest, so it's still a very impressive number.
Thomas D. Singer
Yes, I think there was a question about the back end of our asset sales. We continue to market the Barclay in New York.
And as we said at the interims last year, we're also now looking to market the Barclay and that process has actually started this year. There is no update in terms of where we got to -- we've got in this processes, but I can tell you that both hotels continue to trade well.
And ultimately, we're not going to be rushing to doing a deal, because our focus is getting the best deal for shareholders. And that might take a little bit more time.
In terms of Paris and Hong Kong, those are currently on the market. We have talked in the past about particular reasons around those assets as to why we wouldn't want to sell them at this point in time.
As you know, Hong Kong is -- in the parts of Hong Kong, there were -- there's a massive amounts of open regeneration and development. We want to really see that come through before thinking about possibly disposing the best asset.
But on the Barclay and Park Lane, that's where we are at this point.
Timothy Barrett - Nomura Securities Co. Ltd., Research Division
Tim Barrett from Nomura. A couple of questions on cost, please.
And I think you said some of the additional cost investments would go through the COGS line. What bearing does it have on the $13 million to 1 RevPAR profit guidance?
And secondly, the small restructuring exception of $60 million, what kind of payback time would you expect on that?
Richard Solomons
Sure. In terms of our investments in costs, I mean some of that will flow to the regional central cost lines and some of it will go through cost of sales.
And your question, specifically, on the sensitivity. I mean that sensitivity that we gave you of 1 point of RevPAR equating to $13 million of EBIT, but it's really designed to help you just flex the RevPAR number and work out with the implications of EBIT would be, all other things, held constant.
What it's not designed to do is to pick up the additional cost that we need to invest in the business in order to further our business plans and deliver the growth that we've talked about. So you have to factor that in over and above the EBIT sensitivity.
In terms of the exceptional restructuring charges, again, those relate to a number of different situations. The principal amount is in relation to moving some of our back-office functions from the U.K.
and the States into India. And typically, we'd expect a payback on those costs in around 12 to 18 months.
Timothy Barrett - Nomura Securities Co. Ltd., Research Division
Is there any other reason to change the $13 million guidance, anything to do with incentive payments?
Thomas D. Singer
No, there's no reason to change that guidance. That's the best guidance that we have available right now in terms of flexing your RevPAR assumption.
Richard Solomons
Okay. Simon?
Simon Larkin - BofA Merrill Lynch, Research Division
It's Simon Larkin from Bank of America Merrill Lynch. Two questions for me, please, around China.
Just to be clear, do you expect fee-based margins in China to go backwards 2013 over '12 given your investment plans? Secondly, could you give the time for you to -- obviously, doubling in the size of the system open rooms in China?
Can you talk a little bit generally about the business as a whole to the timeframe of opening rooms? I think within these 3 year, 4 years ago, it's 3 years, then you moved it to 5?
Is it still 5 or moving in or moving further out? Next question is on your 30% of opened rooms RevPAR delta.
Is that to do with ramp-up, or is that to do with the moving to more tertiary and secondary cities because you've been going double-digit in China for a while. I just wondered, what's changing to make it more relevant to this morning's discussion?
And finally, on operating cost in China, for the managed and franchise business, currently they're running at sort of $40 million to $50 million, quite a lot lower than in Europe, quite a lot lower than AMEA, and obviously, North America. When you do double this China business, what will that cost base kind of look like trajectory wise, does that get to sort of $60 million, $70 million, is that what kind of you're saying here?
Richard Solomons
That's a lot of questions. I think on the fee-based margin will go back slightly in 2013.
I think in terms of the timeframe, we talked about 3 to 5 years, and 5 years comes about because these are very large buildings, 300, 400, 500, 1,000 rooms. We're talking averages here, often part of mixed-use developments, maybe even the same building or multiple building.
So they just take a long time to develop until you've been out there, you've seen these massive developments would go on. So it's no longer than any other places just literally the physical reality of building these hotels.
So that does take time. Do you want to talk about -- pick up the other two Tom?
Thomas D. Singer
Yes, sure. It is true to say that an increasing part of our growth China is coming out of secondary and tertiary cities, and they typically have lower RevPARs than you've seen using primary cities.
SO that mix effect has to be taken into account in the that you model, the valuable, the incremental rooms that we have to our system size in China. In terms of the 30% statistic, that is simply just to help you think about how quickly to factor in the value of those additional rooms over time.
And again, we've talked about that in terms of phasing that's in -- as the value of those rooms increases over a number of years. In terms of operating costs, I mean, undoubtedly, our cost base in China will grow as a function of our growing system size there and the fact that we see significant growth opportunities ahead of us.
But the important point I think is not to get too preoccupied on margin growth in 1 particular year or costs in a particular year, but rather just stand back and look at the way that we're growing the business over time and the balance, we tried to strike between investments to fuel that growth and delivering that growth over the medium to longer term.
Richard Solomons
Couple of things just to add, Tom, clearly as we grow in the developing markets, proportionately, it's become a high level of growth. And as you've had lower growth relatively in Europe and the U.S.
because of the economic situation as we've grown that business, it's become a bigger proportion. So these dynamics of the way RevPAR goes and the speed of opening and so on, is a good thing because of the proportion of business that we have in these developing markets.
So I think -- we wanted to highlight how that will work. I think as you look at China, and it's true in some other markets as well, but particularly China, the hotels are getting built at the same time as the demand drivers.
So it's one of the reasons why the ramp up is what it is. You've got a lot of new supply coming in at the same time, but a lot of our developments here are in effectively new cities or very, very highly developed cities were being developed extensively.
So you've got the offices and the scores on the hospitals and the train stations and airports all being built at the same time. So it's inevitable that it's going to just take much longer to build up, but you want to be there early.
I mean, as you know, we're the leading international company, hotel company in China by a mile, so we're always invited in early. And you want to be there, and you want to get the best location.
So it's just an inevitable consequence of the way the country is developing. It's not a bad thing, but it's just the way it is.
And I think you've seen that the way we've grown our fees in those markets -- so again, that's I think, the way to look at it, sort of drives our bottom line. So in China, we grew our fees by 16% in 2012, obviously, much lower RevPAR growth, which is the new rooms coming through.
Unknown Analyst
Just to follow-up on all these questions on costs and these new rooms. Maybe you can help us -- you can give us a -- just what the absolute cost base is going to go up year-on-year?
You used to give us that guidance. And maybe on the net rooms, what is 1% system growth to the group in million dollars like the RevPAR sensitivity?
Richard Solomons
I think it's just the wrong way to look at it. I think when managing a diverse business across the world, our focus is on margin growth.
And we talked about that for some period of time. Absolute costs are going to -- if you think -- managing absolute cost is really not what we're focused on.
What we're focused on is driving margin, and we do think a lot about cost. Some just talked about the exceptional items.
So even the finance organization that we've done moved a lot of show. We've driven a lot of centralization, so that's very much a focus of the business, all those things you'd expect us to do.
But the real thing is in context of the very fast-growing business in parts of the world, we have to manage our cost. And driving margin seems to be the best way to do it because that's actually showing efficiency and showing scale benefit.
So that's how we talk about margin as opposed to absolute costs. And in a dynamic world, that's what you've got to manage.
Okay. Great well, thank you very much.
I appreciate your time and look forward to catching up with you all in the coming minutes or days.