May 8, 2015
Executives
David Kellett - Head of IR Richard Solomons - CEO Paul Edgecliffe-Johnson - CFO
Analysts
Christoper Agnew - MKM Partners Steven Kent - Goldman Sachs
Operator
Good afternoon ladies and gentlemen, and welcome to the InterContinental Hotels Group Q1 Conference Call. For the duration of the call, you’ll be on listen-only.
However, at the end you will have opportunity to ask questions. I will now hand over to our host David Kellett to begin.
Thank you.
David Kellett
Thank you, Cray and good morning, everyone. This is David Kellett, Head of Investor Relations of InterContinental Hotels Group.
I’m joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer. Before I hand over to Paul for the discussion of our interim management statement, I need to remind you that in the following discussion, the company may make certain forward-looking statements as defined under U.S.
law. Please check this morning’s press release and the Company’s SEC filings for factors that could lead actual results to differ materially from any such forward-looking statements.
I’ll now turn the call over to Paul.
Paul Edgecliffe-Johnson
Thanks David and good morning everyone. Thank you for joining us today for our first quarter trading statement conference call.
I’ll beginning with some of the key highlights in the period before covering each of our regions in term and now open the call up to questions. We did have the strong performance in the quarter across all of our regions and brands highlight in the continued momentum behind the business.
We continue to execute our winning strategy and now focus on delivering preferred brand in scale markets driven global RevPAR up 5.9% on a constant currency basis. This reduce is to 1.5% on an actual currency basis, due to the continuing strength of U.S.
dollar. For the rest of this call, I will focus on our constant currency results of a best demonstrate our underlying performance.
We delivered net system size growth of 4.9% year-on-year, following the completion of the Kimpton acquisition in January. With our strongest third quarter for opening in five years adding 57 hotels and our strongest third quarter for signing in seven years to carrying more than 1 hotel a day.
The Holiday Inn brand family already the largest brand in the industry by factor of two remains our engine for growth. Its accounted for nearly three quarters of our opening and over 9,000 room signing, which is the best performance to the brand in the first quarter since 2008.
We also continue to develop the footprint of our industry leading boutique business. Hotel Indigo opened two markets Finland and Thailand and it’s now present in 14 countries.
I mean already please to the progress we’ve made with expanding Kimpton since close in the acquisition in January. Opening three hotels and finding a further poll including two in Washington DC taking its combined open and pipeline hotels to 81.
Maintaining a high quality of state remains one of our key areas of focus and we removed 6,000 rooms during the quarter. Around half of this with from the Holiday Inn brand family in the Americas.
On the vast majority we initiated to improve the performance and attractiveness of our brands. We continue to see this focused delivering results with guest satisfactions score up more than 2% year-over-year in our Americas mainstream brands.
Consistent with last year, we anticipate the run rate for exits to decrease from the quarter one level, and for the full year, we are expecting a removal rate of 2% to 3% of our opening room count. To support future growth, we continue to make significant progress in developing industry-leading technology which is a key enable of our commercial plan.
Last week, we announced that together with Amadeus we will develop our next generation Guest Reservation System or GRS. Amadeus will build a new cloud-based community model set to first and similar to the model they develop for the global airline industry.
This decision following to work, we’re being doing over the past year on a major joint engineering study to detail out how such a GRS would work. As the launch partner of the new platform, we will be in prime position to use it to deliver further technological innovations to our guests.
Particularly increasing the level of personalization, we can offer them in next day choices. To ensure we leverage the opportunity this new platform present to its full potential, we will be investing additional capital to evolve our own bespoke technology systems.
Our growth CapEx guidance for the full year remains unchanged up to $350 million, but within that the system funded capital component is now expected to increase from approximately $60 million in 2014 to around $100 million in 2015. Our GRS solution is due to be rolled out in 2017 but in the meantime, we continue to make excellent progress developing innovative digital solutions within half our guest experience before during and after their day.
The rollout of our mobile checking program is progressing well and booking through our mobile app are now generating over $100 million a month. We are also making a significant change to IHG Reward Clubs, with a new top tier membership being introduced in July, developing lifetime relationships is a key pillar of our commercial strategy and this new offering will allow us to provide more recognition and relevance to our most loyal customers.
I’ll now move on to talk about the quarterly trading performance in each of our regions. Starting with the Americas, where RevPAR is up 6.2%.
In the U.S., this supply demand dynamic remain very favorable for replay RevPAR growth. Across the industry, we’ve now seen record levels of demand for the last 49 months and have achieved all time record levels of occupancy for each month since December.
Given the already high absolute occupancy levels our brands are experiencing, the majority of the RevPAR growth we are seeing at this point in the cycle this from rate. And we were pleased to both InterContinental and the Holiday Inn brand family grew rate ahead of the energy segments on a total state basis.
With the last having maintained a $6 ADR premium. Our strongest RevPAR growth came from our boutique brand with Kimpton Hotel Indigo up $7.1 and $9.4 respectively.
Boutique has been the fastest growing segment in the industry over recent years and is the leading global boutique business we are well positioned to benefit from continued future growth. On a geographical market basis, we saw stronger trading in the West of the U.S., particularly in major city such as San Francisco, where our strong brand presence continue to benefit from low level to new supply, wile RevPAR New York was softer.
Primarily that result of slightly high levels in new supply in recent years but also the one-off impact in receivable and poor weather. Although with any 2% our room there, that has not had a significant impacts on our performance.
The oil price is impacting some markets in the U.S. and we’ve seen RevPAR decline in Houston where oil production is high.
However as U.S. travel is approximately 85% domestic and our business is largely drive to, any such headwinds are likely to be offset by an uplift in demand from due from leisure guests, due to the cheap cost of transport particularly in the summer months.
Outside of the U.S., we delivered RevPAR growth of almost 9% in Mexico which is partially offset by small RevPAR decline in Canada. Moving on now to Europe, where we had a strong quarter with the rate growth of 3.9% driving RevPAR up 5.8%.
The UK performed particularly well with occupancy levels now back in the prior peak. We have actively managed our business mix to maximize prices which has driven strong rate growth in both London and provinces and our totaled UK RevPAR increase of 7.7%.
In Germany, our second largest market in the region, solid RevPAR growth was driven equally by both rate and occupancy. Holiday Inn and Holiday Inn Express are both the focus here with strong growth in each brand, partially offset by reduced trade fair activity impacting InterContinental hotels in key cities.
Trading remains challenging in France, particularly in Paris where luxury and upper upscale industry RevPAR declined by 8%. As previously advised, the sale of InterContinental Paris Le Grand will complete in the first half having recently passed through EU antitrust clearance.
We will make further announcement when the deal finally closes. Outside in Europe there are positives signs in market such as Spain which experienced double digit growth, the RevPAR decline across much of Eastern Europe with Russia down 8% due to the continuing political and economic situation.
We continue to believe in our long time opportunity there but the trading is likely to remain challenging in the near term. Performance in Asia, Middle East and Africa was driven by strong occupancy increases which led RevPAR up 6.2% in the quarter.
Japan is benefitting from an improving economy and record levels of inbound tourism following a liberalization of its regional visa policies which aim to attract 20 million visitors by 2020 and across our Japanese hotels, RevPAR was up 10% with near doubling in Chinese visit. This highlights the increasing relevance of the China outbound opportunity and how our leading position in that market is driving business into our hotels al around the world.
The Middle East also had a strong quarter driven by 8% RevPAR growth in Saudi Arabia where we delivered industry outperformance through increased corporate and government business following the passing of the king. RevPAR in Australia continues to grow steadily as a slowdown in mining with more than offset by the benefit for the weaker currency and number of one off sporting events which we were able to benefit from due to our weighting to Sydney, Melbourne and Adelaide.
Finally, in Southeast Asia we outperformed in the industry and our priority market of Indonesia and our largest market Thailand. The latter had double digit had RevPAR growth as Bangkok recovered strongly following the political disruption last year.
Moving on now to Greater China, where we expect the macroeconomic environment to remain challenging in the near term as government’s austerity measures and transition to a more consumption that economy continue to have an impact on demand. We remain focused on delivering operational excellence to drive market leading performance and we continue to have more than any of our global competitors.
Our long experience in China and upscale that continues to give competitive edge and in the quarter we outperformed the industry by 5 percentage points to deliver an occupancy led RevPAR growth of 2.4%. An example of how we’ve been agile about strategy is the approach we have taken up with our food and beverage business, this contributes around 40% of revenue in the region and it has had to adopted significantly given the changes to government policy.
With the slowdown in government and corporate entertaining, we’ve been very focused on attracting replacement personal dinning business and have invested significant efforts in developing tools to increase revenue from our local market utilizing promotions and events. As a result, our food and beverage business has performed strongly throughout the quarter driving 70% of our hotel revenue growth.
This is supported by our strong focus on driving business from local companies, leveraging our markets scale to deliver corporate business which contributed to a 6.3% RevPAR improvement in mainland China. We saw robust performance in tier 1 cities particularly Shanghai where RevPAR was up over 11% and a solid performance in tier 2 and tier 3 cities.
The strong performance in Mainland China was somewhat offset by difficult trading conditions in both Macau and Hong Kong. Macau is still being heavily impacted by the Chinese government for security measures while last year it occupied central protests are still having an impact on Chinese travel to Hong Kong.
In addition, our own Intercontinental continues to be impacted by the surrounding construction works. So, to summaries, trading was strong across all of our regions in the first quarter with particularly good growth in our industry leading business and continued outperformance in Greater China.
We have strong momentum behind our brands and we remain confident that our wining strategy will continue to deliver sustainable, high quality growth. And with that, I’ll open up the call for questions.
Operator
[Operator instructions] And our first question is from the line of Christoper Agnew of MKM Partners. Please go ahead.
Christoper Agnew
Thanks very much. Good morning.
First of all wanted to touch on something you mentioned about potential uplift in demand from leaser gas in the summer, I just wonder how much visibility in summer booking trends you have at this point in the U.S. Thanks.
Paul Edgecliffe-Johnson
Hi Chris. Last year we saw a really strong summer with all leaser business and I think that’s an increase in the amount that people felt they had to spend and our midscale business tend to benefit from that and when we look at the dynamics such as cheaper fuel prices, history would tell us that we’re going to see the strong summer again, we can’t really see it in the booking trends yet but tend to book relatively late but is based on projections rather than looking at business on the books.
Christoper Agnew
Got it. And what’s your visibility like in Europe, any difference, any more visibility particularly maybe Southern Europe.
And any comments or thoughts about strength and inbound travel this year, I’m thinking about particularly strength in the dollar or maybe even the weakness of euro against sterling. Thanks.
Paul Edgecliffe-Johnson
Sure. So Southern Europe isn’t the big part of our business.
Most of our European businesses in the UK and Germany and there’s a mix in the booking windows there. Some of it’s in Germany with our InterContinental for example is from the big trade fairs and so we have a reasonable amount of visibility and some of that is a bit cyclical because the big trade fairs may only happen every two years.
Other than that, the booking windows are still pretty short in Europe. In terms of what might happen with currency and we’re quite strong for example, we’re quite well penetrated into the upper upscale and luxury segment, which has been weak in the first quarter, but we may see some U.S.
business coming in given that the dollar has strengthened significantly against the euro, but a bit early to call that at the moment, but we’ll keep our eye on it.
Christoper Agnew
And then last question around the IT investment with Amadeus. I note that Wyndham and Choice also have cloud-based GRS systems, so how much of the investment is defensive and that this is something that you have to have versus offensive?
And if it’s offensive, why do you think so? And I don’t know if you can comment or talk to their systems, but I mean I’d be interested in like the differences on how investors should think about maybe the advantages of the investments you’re making?
Thanks.
Paul Edgecliffe-Johnson
So I mean we’ve been working with Amadeus on that for a long time now. I think it is perhaps a little different to what some others have done in the sector.
Amadeus is building out a platform that others can then put their front-end systems on which would be still personalized for each business, but it’s we’re not having to build our own back-end, that’s built and paid for by Amadeus. So what we’re building is the spoke system that we’ll put on top of that, so which I think is a differentiator for us.
And I would expect that overtime we may see some of the other industry participants coming on to that as well, so there would be a common back-end, but we think this is the best way to do it. That bespoke front-end will allow us to offer more personalization and it will allow us to cross-sell better when we get that in, so we think that we’ll drive RevPARs but it’s a little while out before that will be delivered.
In 2017 is when we’re going to have that new front-end system.
Operator
Okay. Thank you.
Our next question is from the line of Steven Kent from Goldman Sachs. Please go ahead.
Steven Kent
Got a couple questions for you. First, just on RevPAR, it looks like you modestly underperformed some of the industry data and some of your peers.
Can you just talk to a little bit of why that's the case? Is it that Holiday Inn recovered and Holiday Inn Express recovered earlier?
Is there some resistance to pricing, given the very high occupancies you're getting? And then look there's obviously lots of discussion about mergers and consolidation and opportunities, can you just give us how IHG thinks about these kinds of opportunities at the Management and at the Board level?
Paul Edgecliffe-Johnson
Hey Steve, thanks for the questions. So in terms of our U.S.
RevPAR performance, we’re pleased with it and 6.6% growth mainly rate led. And if you look at what the other major peers did, there’s a slight outperformance to help and pretty much in line with where Marriott were.
If you look at the industry as a whole, I think that it is averaged up a little bit more, but that’s really coming from some of the last-fill brands benefiting at this point in the cycle from the fact that the first choice brands are full. So if you look at what’s happening with independents and with some of the brands that are operating in a much lower price point and much lower occupancy than us, then they do benefit at this point in the cycle with all-time high occupancies.
So I think you got to look behind some of the averaging in the industry and see what’s really happening there. So then in terms of your questions around and how we think about mergers, acquisitions, opportunities et cetera, over the last 11 years we’ve got a good track record of creating value through focusing on our brands, expanding those out organically, launching new brand, taking our brand into new markets, putting some capital behind that where we think it’s appropriate.
We did that with Staybridge, we did that with EVEN, we’re building out some hotels and then recycling that capital and that’s also the preferred business model. We always do a buy versus build analysis when we see a new customer segment and taking that as an opportunity for us to deliver to guest in that segment and so we did that and that’s what helped us identify Kimpton as a business that we really wanted to acquire last year.
We thought it wasn’t practical for us to get into that through just building that out and so we’re delighted that we managed to buy Kimpton and bring that into our table of brands and frankly there’s another opportunity exactly like Kimpton and we’re looking on another business like that because it’s got such high guest preference and it’s got such great position for its hotels that we think that’s a real asset to us, so that’s how we think about it. If we can, we’ll build out a business a sales road where there’s an opportunity to get something that has got really attractive then and if the value works then we’ll go after that.
And in terms of anything that’s going on in the industry more broadly I know where your question is going around that, but we can’t really comment on any specific situations as I’m sure you’d expect.
Operator
Thank you ladies and gentlemen. [Operator Instructions] And our next question is from the line of Shaun Kelley from Merrill Lynch.
Please go ahead.
Shaun Kelley
Maybe just to follow up on that last question a little bit. You talked at length about the sort of buy versus build and I think it's an interesting way to kind of think about the opportunities in lodging.
So I was curious, could you just elaborate a little bit further for us in terms of how you think about that? Is it really how long or how much ownerinvested capital would be necessary to build out like a luxury or a full service or in Kimpton's case I guess a boutique type of brand?
Is that what you're kind of thinking about when you say the build versus buy or just help us think about that a little bit more?
Paul Edgecliffe-Johnson
So if you think about how long Kimpton’s been going and the locations that they’ve got for their hotels. I mean they got fabulous locations in some cities, it’s really hard to get your hotels in these days.
So if you wanted to go out and replicate what Kimpton’s got, it would extremely difficult to do so even if you had you want to use out unlimited amounts of key money. The hotels aren’t necessary, it’s going to take you a long time to build that up.
And then of course you got to build the customer preference and Kimpton is a brand which is really recognized by the guests who love that brand. So we were delighted to get that one and it would take a very long time to try and recreate that, so when we evaluate it what was the best to be in that boutique segment, we’ve done it with Indigo which we launched back in 2003 and over the last 12 years, we’ve taken that up to be in the largest brand of its type in the boutique segment and now in 14 countries, but that’s taken us 12 years so far.
Kimpton was a great opportunity to get in and leverage what their previous management had managed to achieve over 20 years plus and so we brought it into the stable of brands.
Operator
Thank you. [Operator Instructions] We have no further questions coming through.
Richard Solomons
I will say thank you and thank you everybody for joining us today and of course if anybody does have any questions, please don’t hesitate to reach out to us, we’re always delighted to talk to you and look forward to catching up soon. Bye for now.
Operator
Thank you for joining today’s call. You may now place your handset.