Aug 14, 2017
Executives
Keith Barr - Chief Executive Officer Paul Edgecliffe-Johnson - Chief Financial Officer
Analysts
Jamie Wolle - Morgan Stanley Tim Ramskill - Credit Suisse Richard Star - Bernstein Research Julien Richer - Kepler Cheuvreux Jaafar Mestari - J. P.
Morgan Angus Tweedie - Bank of America Merrill Lynch Stuart Gordon - Berenberg Bank
Keith Barr
Thank you. Good morning, everyone, and thank you for joining us today, and welcome to our 2017 Interim Results Presentation.
I'm Keith Barr, Chief Executive Officer of IHG, and I'm joined by Paul Edgecliffe-Johnson, our Chief Financial Officer. We're once again holding today's results presentation by webcast.
You can find the details on our website and on our stock exchange announcement, so please do log on, as we'll be taking you through a short series of slides over the course of the next half hour or so. It is my first results presentation as CEO I want to take the opportunity to introduce myself to those of you who have not yet had the chance to meet.
I've worked in the hospitality industry for over 25 years and have been with IHG since 2000. During that time, I've hold a variety of roles.
I've led our mainstream brands in North America and headed up our operations in Australia, New Zealand and South Pacific, before taking up the leadership of IHG's Greater China business in 2009. Since 2013 I've been based in the UK leading IHG's combined sales, marketing, distribution [indiscernible] and brand function as Chief Commercial Officer.
As I've said to many of you it is a privilege to be taking over as the CEO of IHG and the results we're announcing today clearly shows the strength of our business, our people and our strategy. Our sector is a dynamic and as fast changing as ever.
I've been part of IHG's Executive Committee for the last six years taking essential role in defining and executing our commercial plan, I'm confident that our strategy takes account of this landscape and puts us in strong position for the future. To recap on the strength of our position we've completed our major hotel asset disposal program to become fully asset like; we've proved the resilience of our business to the financial crises and we've demonstrated IHG as one of the highest quality income stream and cash flows in the industry.
We've leveraged the benefit to scale and combined with our strategic approach to cost management growing our fee business margin by 16 percentage points in 12 years. Since 2011 we've been executing our winning strategy for high quality growth.
We've evolved our existing brands and launched new ones; we've strengthened our loyalty program; invested intelligently in core digital and technology capabilities and enhanced our competitive advantage, and expanded our suite of tools and systems to drive superior owner returns. The success of this strategy has been [owned] out in our results; growing our revenues faster than the industry; delivering double-digit compound annual growth in earnings per share and consistent 10% plus growth in dividend.
Our controlled capital expenditure, commitment to an efficient balance sheet and significant ongoing cash generation means we've returned almost $13 billion to shareholders since 2003. This includes the first special dividend funded wholly through hotel operations announced in February.
We've a portfolio of 12 preferred brands, which hold the commanding share of the industry pipeline that is three times our existing supply share. This is a strong platform to build on, however no business can afford to stand still, particularly as the competitive environment evolves.
I believe there're opportunities to sharpen our focus and drive an acceleration in our growth rate, whilst retaining a high quality sustainable approach. Before Paul goes through the financial results I wanted to share some early perspective on how I plan to lead this next phase of IHG's growth.
As you know I've only been in the role for five weeks, and I spent that time doing what most good senior executives do when they take on a new role. I've been listening to shareholders, owners and our own team in order to get a refreshed view on IHG.
What we do well, where we excel and where we can be better. What became clear to me from those conversations is that my initial focus would be to build on the strengths of our business, challenge us to improve where needed and continue to make us more efficient so we can better capitalize on opportunities to further accelerate growth.
The winning model is proven to drive value creation for IHG and its five elements will remain the same. My focus will be on making the winning model work harder for us.
We will look to grow at a quicker pace, leveraging the IHG enterprise to deliver growth for our business and returns for our owners. We will strengthen our brands, quickly refining our existing portfolio and leveraging our deep consumer insight to launch new brands that fill unmet consumer needs and deliver superior owner returns.
I will talk about our progress on this later, but we're already seeing the global expansion of our upscale brands into gaining momentum, and the early interest in our new US midscale brand which we announced in June is exceeding expectations. We are really excited about the opportunity this brand represents for our guests, for our owners and for IHG.
It plays directly into our strength of building high quality scale position in the mainstream segment. We will invest intelligently in digital, technological and loyalty innovation to enhance our competitive advantage.
Later I'll come back onto the progress we have made with GRS, including encouraging user feedback from early testing. Our model works best where we've build relevant scale in high-value markets.
We will therefore focus our efforts on increasing the resources dedicated behind the highest opportunity markets and segments and finding further efficiencies to create more fuel for growth. Through this and an ongoing disciplined approach to capital allocation, we will aim to deliver high-quality long-term sustainable growth in cash flows and continue our record for maximizing shareholder returns.
I am confident that we have the strong foundation on which we can build and accelerate our growth, and I look forward to sharing more as our plans evolve. Paul will now take you through the detail of our half year results, and I'll return later to share our progress on some of our current strategic initiatives.
Paul Edgecliffe-Johnson
Thank you, Keith, and good morning, everyone. We're pleased to report a good financial performance for the first half.
On a reported basis revenue increased 2% and operating profit increased 8%. I will focus my commentary today on our underlying numbers as this gives the clearest explanation of our financial results.
On that basis we translated 4% revenue growth into 7% operating profit growth by leveraging the scalability of our asset-light business and continuing our focus on disciplined cost management. This has allowed us to increase our fee margin by 150 basis points year-on-year, whilst continuing to invest for growth.
Based on the current outlook, I expect the margin growth for the full year will be broadly in line with our long-term average. Interest charges fell by $1 million, reflecting the benefit of a lower average cost of debt following our recent bond refinancing, offset by higher levels of average net debt.
Our effective tax rate of 33% is consistent with last year's interim results, but we do still expect it to be in the low 30s for the full year. The weighted average number of shares decreased due to the cumulative effect of the share consolidations following the special dividend payments made in May 2016 and May 2017.
In aggregate, this enabled us to increase our underlying earnings per share by 27%. Reflecting this good start to 2017, and our confidence in the future, we have increased our interim dividend by 10%.
Looking now at our levers of growth. We added 23,000 rooms to the system, the highest in 6 years.
At the same time as adding these new high-quality representations of our brands, we remain focused on removing hotels that are not delivering a consistent guest experience, exiting 12,000 rooms. This took net system size growth to 3.7%, which, combined with RevPAR growth of 2.1%, drove total underlying fee revenue up 4%.
We also signed 32,000 rooms into our pipeline, which means that we've now passed the milestone of over 1 million open or pipeline rooms. Turning now to our regional performance.
First, the Americas, where RevPAR growth was predominantly rate driven, up 1.1% in the half. In the U.S., RevPAR declined by 0.4% in the second quarter.
As we highlighted at the first quarter, this is adversely impacted by the shift in the timing of Easter, which we estimate was equivalent to 120 basis points. It's worth noting that third quarter RevPAR in the U.S.
will also be adversely impacted by calendar shift. Looking at the performance of individual brands, InterContinental and Crowne Plaza RevPAR declined 3.7% and 2.7%, respectively, in the second quarter, impacted by their distribution in higher supply growth markets, such as Dallas, and a challenging San Francisco market due to the refurbishment of the Moscone Convention Center.
Holiday Inn RevPAR grew 0.2% in the second quarter, while Holiday Inn Express was flat, both brands being impacted by their higher exposure to oil markets and their weighting to a higher supply growth segment. It is, though, important to remember the absolute strength of these brands, our focus for the brand family continues to be on protecting, and where possible, increasing the rate premium we have built over the rest of the upper mid-scale segment, which now stands at 6%.
Keith will provide more details on how we're doing this through the transformation of public spaces and new room designs and further innovations in our food and beverage offerings. Newly opened and recently renovated hotels now make up nearly 30% of the brand family.
And with over 100 new hotels signed into the brand family in the half, we are well positioned to continue to accelerate the rollout. In the rest of the Americas RevPAR growth of 4.6% was driven by the 150th Anniversary Celebrations in Canada and the weak Mexican peso.
Underlying revenue and profit for the region was up 3%. Underlying franchise profit grew 1% driven by RevPAR in rooms rate which [modern] funded the annualize cost of the additional investment in development resources last year.
Underlying managed profit growth of 7% benefited from RevPAR growth in the wider estates and the ramp-up of InterContinental New York Barclay. We signed 16,000 rooms in the half, including the first Kimpton in Mexico, our fifth Kimpton hotel outside of the U.S.
We also opened 11,000 rooms, including the 900 room InterContinental Los Angeles Downtown. Moving now to Europe, where RevPAR growth was 6.2% for the half.
In the UK, RevPAR growth of 6.7% benefited from resilient business travel, increases in inbound leisure demand and a reduction in outbound travel, triggered by the devaluation of the pound in 2016. RevPar growth in London was 9%, as occupancy rates of over 80% provided more rate yielding opportunity.
Growth in the provinces remained robust at 5.4%, most of which came from rate. In Germany, as expected, RevPAR declined 3.6% in the second quarter, due to the timing of trade fairs, with the half up 2.3% after a strong first quarter.
We expect only modest growth in the second half, again, due to the timing of trade fairs. In France, RevPAR was up 4.5%, driven by almost 12% growth in Paris as leisure demand continued to recover following the terror attacks in 2015 and 2016.
The provinces finished the half marginally down due to strong comparables in euro 2016. So far since the end of the first half, we have not seen any real changes in underlying demand trend across the Europe region.
However it's worth noting that we will hit increasingly stronger comparables through to the end of the year. Underlying revenue for the region was up 11% and underlying profit was up 12%, driven by strong trading in the UK.
In terms of signings, we had a successful first half, signing 3,000 rooms into the pipeline. These included a Hotel Indigo at London's Leicester Square and 10 Holiday Inn and Holiday Inn Express properties in Germany, where we now have 112 open and pipeline hotels.
Looking now at our Asia, Middle East and Africa region. In the Middle East, RevPAR declined 3.7% due to the ongoing impact of low oil prices, political tensions and industry-wide supply growth.
There was some moderation of the decline in the second quarter due to the favorable timing of Ramadan and increased royal family business in Saudi Arabia. We do continue to expect tough trading conditions across the Middle East for the remainder of the year.
Performance in the rest of the region was strong, with RevPAR up 4.2%. India benefited from hotels still ramping up, and easing of Visa restrictions.
Australasia and Southeast Asia saw strong growth in corporate demand and Japan lapped easier comparables after the strengthening of the yen in 2016. Total RevPAR declined almost 2% due to openings in developing markets.
On an underlying basis, revenue was up 1%, impacted by our weighting to Middle East and the renegotiation of a joint venture agreement in Japan. Operating profit increased 11% due to the favorable timing of cost.
Overall, we continue to expect profits in this region to be in line with the levels achieved last year. We will open 7,000 rooms.
These openings included our first Hotel Indigo Resort in Bali our first Staybridge Suites hotel in Saudi Arabia and 3,500 rooms hotel in Makkah, Saudi Arabia. These rooms rates the remaining portion of the 5,000 rooms signing to be announced in 2015, on annualized basis they are expected to generate around $1 million in fees.
Finally, moving to Greater China, where we continue to see the returns from our focused investment over the past 10 years. RevPAR in Mainland China grew 5.1%, benefiting from strong meetings and corporate demand in Tier 1 cities, up 5.4%, and strong meetings business in Tier 2 and Tier 3 cities, up 5.2%.
In Hong Kong RevPAR was flat, as the growth in corporate and challenging demand in the first quarter softened in the second quarter. In Macau RevPAR grew by 2.1% with the ongoing ramp up of one of our new hotels offsetting tough underlying trading conditions.
Total RevPAR declined 0.3%, driven by the mix impact of our strong growth in lower absolute RevPAR secondary and tertiary cities in China. These markets are experiencing rapid increases in supply and demand, and we believe offer the greatest opportunity for future growth.
Encouragingly, in the first half, we began to see some moderation in supply growth outside of Tier 1 cities, which balanced with near double-digit demand growth, allowed RevPAR to grow 5%. Underlying revenues increased 11%, driven principally by RevPAR in rooms growth, and [indiscernible] aided by an increase in other revenues as [indiscernible] with the signing and opening of hotels.
Underlying profit grew 15%, boosted by scale benefits and cost efficiencies. Signings totaled a record 46 hotels, 10,000 rooms, including 24 Holiday Inn Express Franchise Plus hotels.
Openings for the half totaled 16 hotels, again, a record, and included our 300th hotel, the 340-room HUALUXE Zhangjiakou, our 40th Intercontinental hotel and the first two Holiday Inn Express Franchise Plus properties. We've operated in China for over 30 years now and as we pass the 300th hotel milestone I wanted to take the opportunity to reflect on our strong track record relative to the industry and how we're positioned to continue to deliver growth.
Between 2010 and 2016 we opened almost 60,000 new rooms in Greater China increasing our share of industry openings by more than 60%; our share of total market supply by almost 40%, and our share of industry revenues by almost 60%. Over the same period our signings pace was accelerated by 8% per annum so that our pipeline now represents more than 20% of the total industry.
In this context we continue to believe that our prospects for future growth in China remain as compelling as ever and that we've the right strategy to build on our scaled positioned in the market. Moving on now to cash flow.
Our business model continues to generate significant amounts of cash, with underlying free cash flow of $204 million. This is lower than the levels achieved last year, due to the one-off $95 million received in 2016 related to credit card partnership agreements, and the movement in system fund balances.
Our gross CapEx has covered 1.3 times by our underlying operating cash flows which are firmly invested in maintenance, capital and key money covered almost six times. The net cash move into [indiscernible] balance sheet enabled us to pay the $400 million special dividend to shareholders in May.
The capital expenditure needs of the business have not changed. We continue to execute against the approach that we've discussed on previous calls with gross CapEx of $186 million, and net CapEx of $162 million in the half.
Maintenance and key money capital expenditure totaled $44 million. We're still expecting the full year to be broadly in line with our annual guidance of $150 million.
So far this year we have spent $80 million on recyclable investment including $43 million to reduce the leverage in the Intercontinental New York Barclay joint venture in conjunction with the refinancing of our joint venture partner. Gross system funds capital expenditures totaled $62 million, $45 million of which related to GRS.
We expect capital expenditure for this project to be around $95 million in 2017. Our medium term guidance remains unchanged, I talked to $350 million gross per annum and we expect our recyclable investment to even out over the medium term resulting in net CapEx of 150 million per annum, and in the short term this type of expenditure will continue to be lumpy.
As well as using cash to reinvest behind our long-term growth, we continue to generate sufficient funds to support sustainable growth in the ordinary dividend, which we have increased by 10% to $0.33 per share. Looking ahead, we continue to be committed to an efficient balance sheet and an investment grade credit rating.
This equates to a net-debt-to-EBITDA of 2 to 2.5 times, and we are happy to be at the top end of this range in the current economic conditions. We will continue to maintain a disciplined approach to our capital structure going forward with the aim of striking the right balance and investing for growth and returning funds to shareholders.
I'll now hand back to Keith to provide you with more details on how we're driving our strategy.
Keith Barr
Thanks, Paul. Now I'll give you some highlights of how the winning model has continued to guide our focus as a business.
Over time, we've developed our strong and differentiated brand portfolio to fulfill a broad range of stay occasions by evolving our existing brands, creating new ones and buying others to fill white spaces. Our in depth understanding of travel occasions and guest needs helps us to create distinctive brand that deliver a consistent and preferred experience.
Using our insight, we continue to innovate and refresh our brands to ensure they remain relevant to changing guest demands and create value for our owners. I'm going to review in detail how our mainstream brand which are at the core of our business are involving.
But first a quick update on how we continue to strengthen our position in the luxury, boutique and lifestyle segments globally. Starting with Intercontinental the world's largest luxury hotel brand.
We have 188 hotels open globally including wonderful new addition with the opening of the Intercontinental Los Angeles, a 900 room flagship hotel for the brand. A further six are set to open in the second half of the year including a key property in Washington DC.
In total we 63 hotels in the pipeline strengthening our leading position. The acquisition of [indiscernible] sold the white space in our luxury, boutique and lifestyle brand portfolio.
We are enhancing the brands position in the US with a further six hotels expected to open in the second half of the year. We're rolling out the brand internationally with the openings in Grand Cayman and Amsterdam over the past eight months.
We are also in advanced negotiations for more deals, with several letter of intent signed across Europe and Asia. Hotel Indigo is an example of a home grown brand that we have built organically into a scale boutique business today with 79 open and 76 more in our pipeline.
We launched first in the US, Hotel Indigo is now in 17 countries and we also recently opened our first resort location, the Hotel Indigo Bali Seminyak. Crowne Plaza, our business focus brand, now its almost 500 properties open or in the pipeline.
In the U.S. our accelerate program has had extremely positive response from owners with a $190 million in capital committed so far over the last year.
This has included hotel purchases and major refurbishment. It is on top of the capital invested by around 30 other hotel owners who have committed to significant renovation of their hotels to make them a great representation of the future of Crowne Plaza.
While we continue to see great progress in our luxury lifestyle, boutique and upscale brand portfolio IHG's scale is underpinned by our strength in mentioning which we define is the combined mid scale and upper mid scale segments. These other brands have over that years define the segment that they now lead and continue to shape like a great brand looks like in the minds of our owners and guests.
Our mainstream brands, Holiday Inn, Holiday Inn Express in Candlewood Suites, account for 2/3 of our open rooms and pipeline and over half of our revenue. We talked about Holiday Inn transformation across the U.S.
and Europe at our full year result presentation in February. So today I'll just touch on a few highlight.
Our open lobby public areas continue to be rolled out across Europe. 54 hotels have the new concept, which is driving 9% uplift in Guest Love scores, and an impressive 20% uplift in restaurant and bars revenue.
In the U.S., results from the rollout of the new public space design have also been encouraging, with hotels achieving a 5 percentage point Guest Love premium versus other recently renovated hotels. We now have more than 40 hotels committed to rolling out the concept by the end of the year, and open lobby is set to become a brand standard by the end of 2018.
Holiday Express is the world's largest hotel brand, with more than 2,500 hotels. Over 2,000 of these are in the U.S.
alone. So I wanted to spend a few minutes talking about the transformation this brand is undergoing in both the U.S.
and Europe. In both region our public space innovation, guest room design and breakfast solutions continue to encourage owner investment.
In the U.S. the transformation which encompasses both public space and room design is driving real results.
We've quickly scaled us to have almost 900 open or pipeline hotels committed to this renovation program, which is driving a 4-point Guest Love premium versus the rest of the estate and a 4 percentage point RevPAR premium versus the brand average. 2/3 of our U.S.
open and pipeline Holiday Inn Express hotels will have these designs in place by 2020. In Europe the rollout of more contemporary public areas is also gaining traction and it is now in 16 hotels with the further 100 in the pipeline.
And our guest room innovation is driving similar results. We’re building on the success of our guest room solution in that U.S.
with the rollout of our new room design in Europe. The new design provides an optimize room size that focuses on what matters to get.
A better sleep and shower experience and a flexible working environment. The new rooms are on 65 hotels with a further 100 in the pipeline.
These new rooms are delivering a 5 point uplift guest flows and a RevPAR premium that is 5 percentage points higher than the market. We have also developed a new breakfast solution for both the U.S.
and Europe, providing higher quality food options at a better cost that maintains the lean and highly profitable operating model of a Holiday Inn Express. In the U.S., pilot hotels with the new breakfast solution has seen a 4 to 10 point increase in Guest Love scores, and our owners are committed to installing the solution for the entire estate by the end of 2018.
We will be leveraging our procurements scale and our systems to deliver an overnight transformation at every hotel over the next 18 months. In Europe, the new solution is now in over 100 UK hotels, which represents more than 70% of the estate in that market.
We are on track for a full rollout by the end of Q3. So far, results have been extremely positive, delivering a 12 point uplift in breakfast scores.
Turning to Candlewood Suites, this is where you see that we have built a brand to scale at pace. This has been achieved by knowing what our guest will pay more for, and by leveraging our scale to deliver low cost, higher ROI options for owners.
In the last 10 years, we have grown our rooms by 9% per year to almost 35,000 rooms. Guest Love scores for the brand are consistently over 80, which explains why this recently won J.D.
Power's 2017 North American Hotel guest satisfaction study in this segment. The brand is also loved by owners, as a lean operating model, which enables gross operating profit margin of over 50%.
Looking ahead we are seeing opportunity to continue to accelerate the growth of the Candlewood Suites brand we will be investing in improving the guest experience including using our learning's from our Holiday Inn brand family transformation to develop new room in public space design. These investments ensure that we continue to evolve our hotels to meet the needs of our guests and owners.
We continually reviewed our brand portfolio to fill white spaces, where we see unmet consumer needs. And with the success of our current mainstream brands, we see a clear opportunity in the midscale segment.
Our position to mainstream segment is extremely strong. We have significant scale with almost 20% share of all opening pipeline rooms.
We have proven our ability to successfully scale brands having increased our gross revenues by almost 40% in the last 10 years to over $13 billion. Owners continue to sign up to our brand as we leverage the IHG system to deliver leading ROIs.
The continued evolution of our brands that I spoken about today is driving leading preference. In the U.S.
both Holiday Inn and Holiday Inn Express our number one, or number two for brand awareness and both top their respective competitors when it comes to brand preference. The power of the IHG system to deliver revenue in the mainstream segment is clear.
It delivers 50% lower fee contribution, and over 80% enterprise contribution, with almost a third of that coming from our lowest cost digital channels. Owners also benefit from our leading edge revenue tools and productivity system which combined the strong direct revenue deliver drive lower cost to sale.
Due to the success of the Holiday Inn, Holiday Inn Express and Candlewood Suites, there's a clear opportunity to build another mainstream brand of scale for IHG. In the mid-scale segment, priced below Holiday Inn and Holiday Inn Express, we've identified 14 million guests worth $20 billion in annual industry revenues, who are currently underserved by existing brands.
These guests are traveling for both business and leisure, and they're looking for consistency, a clean safe environment and good value. They want the basics done exceptionally well at the right price and don't want to feel they're paying for things they don't need.
Given the significance of this opportunity, and our ability to build scale quickly, we announced in June the launch of a new high-quality mid-scale brand. This will become one of our largest brands in the U.S.
We have a track record of launching brands and building scale positions, and we know we have a strong revenue delivery system that are attractive to franchisees. We also have the purchasing scale and design know-how to balance quality, cost and value.
When it comes to hotel design and fit-out, all of this drives higher ROI for owners. Using our deep consumer insights into the target segment, we have designed a brand that will give guests consistent delivery on the basics, including a best-in-class mattress and noise insulation that focuses on delivering what matters to them with an elimination of what doesn't; for example we'll offer a quality grab-and-go breakfast rather than a full of option.
We will target the brand in a $95 to $105 rate, which is a 10% to 15% discount to Holiday Inn Express. We expect to bring in incremental customers to IHG, who are unhappy with the standards of quality, comfort and cleanliness currently offered by other brands in the market.
Our understanding of what customers want and our strengthened mainstream presents owners with a powerful proposition. They will get a distinctive brand linked to a powerful revenue delivery system with a low-cost operating model and design engineering that will drive a higher return.
At the targeted price point, with an appropriate room size, suitable fixtures and fittings, relevant public areas and the lean extended-stay style operating model, we will deliver cash-on-cash returns equal to Holiday Inn Express; this will justify a royalty rate at 5%. This is an incredibly enticing proposition for around 2,000 existing Holiday Inn Brand Family franchisees, who are ideal owners for this new brand and have been heavily involved in all the areas of its creation.
The demand for this compelling offer was clear at our recent Americas Owners Conference, when we announced the brand, with over 100 written expressions of interest. This launch has been a perfect example of how we can execute at pace to accelerate growth; taking the brand rapidly from consent to construction and procurement ready; we will have more news on the brand later this year.
Turning briefly to the other elements of the winning model; we continue to invest behind IHG Rewards Club; this includes the completion of the global rollout of [indiscernible] by IHG Rewards Club, our preferential member pricing structure and the continuation of our successful multi brand campaign which encourages our loyal guests to stay at our hotels more often. IHG Rewards Club enrollments are up 12% year-on-year, as well as growing our loyalty base.
Our existing members are staying more frequently and spending more with us; loyalty contribution is now 43% having grown 4 points since 2014, delivering high quality low cost revenue to our owners. I have previously shared details about our guest, our new guest reservation system.
We are currently piloting the new system and the feedback cannot be more positive about the enhanced functionality, support features and intuitive user interface. Our roll out remains on track and we expect the system to scale in 2018 and to be in our entire stake by early 2019.
After roll out is complete we will invest in ongoing enhancement to improve functionality and introduce new features. In addition to having an improved user interface the GRS system will provide benefits including anywhere access, enhanced data analytics and an improved revenue management systems interface to name a few.
These benefits will result in operational efficiencies for our hotel. Watching a project of this magnitude go from a concept to being live in a hotel has been great to witness and I look forward to sharing an update on the further progress we have made at our full year results in February.
So in summary, I believe we have a clear strategy, but one that we can make work harder to deliver even better results. We will continue to invest behind improving our existing brands and ensuring they reflect the needs of the guests we serve.
We will keep white spaces in our portfolio under review to explore new avenues for growth, and our loyalty program and digital technology capabilities will continue to benefit from the enhancements that strengthen our competitive advantage. We see an opportunity to become more efficient and increase our resources behind the highest growth opportunities.
This will enable us to continue to generate significant levels of cash, and in turn, allow us to invest for growth and make ongoing returns to shareholders. We operate in an industry with strong demographic tailwinds.
And while we are mindful of the macroeconomic and geopolitical factors outside of our control, the strength of our 12 brands and our scale operations in almost 100 countries, gives us confidence in our outlook for the remainder of the year. Thank you.
With that, Paul and I will be happy to take your questions.
Operator
[Operator Instructions] Our first question is from Jamie Wolle from Morgan Stanley, Jamie please go ahead.
Jamie Wolle
Thanks, good morning everyone. Three questions please.
Keith you talked about throughout the acceleration in growth by increasing resources, if you could just maybe flesh it out a little bit or is there a sort of target for net rooms growth now. Could you get back to the sort of 5-6% growth rate the company's doing 10 years ago.
Secondly in terms of this first half headline numbers 3.6% growth in fee revenue underlying, US pole is 2.1% so looks like the contribution of new space, new rooms etc was around 1.5% which looks quite low even adjusting for those rooms in Saudi, so could you give us a bit about what's causing that and the gap between the rooms growth of 3.6-3.7 and that number. And then finally it looks like the sideings are down quite sharply in the second quarter particularly in North America and you reference in the text how that also caused some lower signing on fees.
Is that the new brand coating that sort of temporary slowdown perhaps in U.S. signings, so could that carry on or was that share loss to true, so if you could just talk a little about that please.
Thank you.
Unidentified Company Representative
Thanks Jamie, I’ll take these along with Paul. I think on the first we’re talking about accelerating growth and resources and where we see the future of opportunities.
One of our key focus Jamie is creating capacity to invest behind growth and the discussion of the launch of the new brand in the America is a key thing to underpin that, so we're going to look to accelerate existing brands, how can we take 10,000 restaurants and scale it up now once its fully integrated, how can we launch new brands like the project horizon in the U.S. and accelerate growth there and also our existing brands by investing behind them, things like extended their stay at Candlewood Suites, how can we accelerate the growth trajectory their overall to.
So when I think about the business is sort of, we got our existing brand portfolio that are well established brands, how we can refresh that is to accelerate them. We got some new brands, how can we accelerate those and then how can we still have the wide space in the brand portfolio to the launching of new brands a develop those organically.
So I think in terms of what our future growth rate, we've talked about seeing that accelerating years to come. And also as we been managing exit, because we have real focus on quality over the years, we're moving a significant number of hotel room and we expect the percentage of exits to come down as we see our pipeline continue to accelerate Jamie, so we do expect the future growth rates of the company at a net rate to accelerate.
In terms of the fee revenue first half, may I will turn it over to Paul to talk about that.
Unidentified Company Representative
So when you look at the translation through from the new space, the RevPAR and how that translates through and you know you will look at the, when the rooms have actually come in and when we will have the available room to start and to generate a revenue and then the mix across the business where we say stronger and RevPAR growth and the impacts of the renegotiation of our joint venture in Asia, Middle East and Africa. So all of this have an impact and that translates through the revenue growth, we've seen enroll.
In terms of this findings and how we performed, which course of the signings comes into is always side marginal and so, actually the signs have been strong, starting in China we're really good, we're continuing to be very pleased with our major signings in the U.S. market which held up extremely well but we’re not raising any impact there from the facts of the launch of the new brands and we did see quite a big siding through the holiday and club vacation brand in 2015 and we're lacking against that.
But broadly, we remain really very happy with pace of signings in the business which is and we're driving a lot of organic growth for us.
Jamie Wolle
So the reference in the results in the release to the lower fees, I guess signing on the fees, is that a sort of the year and could you quantify that profit revenue.
Unidentified Company Representative
It is just the phasing of when the, but when we actually sign up the hotels over 2017, what brings us the signing of the --now you're talking a couple of million dollar about, not a number.
Operator
Our next question is from Jarrod Castle of UBS. Jarrod please go ahead.
Unidentified Analyst
Three as well, if I may. Keith, you mentioned, kind of, areas where you thought you weren't doing things as well as potentially could kind of do then.
Maybe if you could just highlight some areas of where you could do better or improve the organization? I'd be interested, coming back to Jamie's question about growth accelerating, could we potentially see a gross CapEx going up overtime?
And then just lastly I mean I guess again, broadly speaking the same strategy as what it's been for the past few years but interested to get your thoughts A on M&A and B on what you see as the biggest external challenges that IHG faces?
Unidentified Company Representative
A broad range of question, then I think a lot of this up, actually in prelims in February and go in more detail as I can touch on them right now. I think having them with the company for 25 years and worked around the world, I think a broad perspective of what we do well in this company and where we can improved.
And again one of my area is focuses on continue to I think how we can accelerate growth to drive net system side. In the fundamentally that’s one of the key areas we have to be focused on.
And so as looking at how can we think about accelerating growth of launching of new brands and developing new brands and strengthen the performance and return on investment for our owners with our existing brands. And so that’s core part of our model.
Also as we wind down some programs how do we retake the capacities behind those programs and reinvest into other areas for us. So GRS is a transformational program, it's coming into the delivery phase now.
As that rolls out, then how can we then focus on other aspects of our digital gesture in revenue delivery systems to leverage GRS drive performance do so. I'm really looking at all aspects of the business along with Paul figure out where resources are best placed both functionally and geographically to accelerate growth of the company from a net system perspective, and RevPAR perspective.
In terms of growth CapEx I'll turn that over to Paul to give some conversations about that.
Paul Edgecliffe-Johnson
Thanks Jarrod. I guess, a couple of things to say, one is our expectation is on the new brands, we're not really going to have to put any meaningful CapEx in Sanya.
We would if we thought that it would accelerate the development of that brand but as far expectation is we won't have to. If you think about our long term perspective that we have been talking about so about the permanent capital gains in the business $150 million behind for maintenance and key money, we do think that is adequate for the growth that we are expecting and as we model that out over the next few years at least that goes to be around about the right number and frankly if you look back over the last few years, we haven't actually managed to deploy that much.
So there is still a little bit of headroom in that number that we did decide to launch some further brands that did require a little of CapEx.
Unidentified Company Representative
The last question is on M&A, which, of course, is always a interesting topic. We have had a very clear strategy over a number of years being an asset like company growing organically filling white spaces by developing new brands and also looking at existing brands.
We also have headed down the path in M&A and we bought Kimpton Hotels & Restaurants to fill out a white space. And so M&A will always be something that we will consider to fill out a white space, however had to make sure that it is going to be accretive long term performance of the company being a smart transaction.
Intangibly there's not a lot out there right now. There are few opportunities of companies that are freely and easily traded today, given the unique ownership structure that that’s out there and so we will always have our eye with that market place making sure that we understand when opportunities present themselves but we'll always be very thoughtful and disciplined about how we pursue M&A so we're not destroying value in the company.
Operator
Our next question is from Tim Ramskill from Credit Suisse. Tim, please go ahead.
Tim Ramskill
A couple of questions from me please, firstly in terms of the sort of new brand sort of horizon if you look back at previous brand launches, they do take a very long time to have any sort of meaningful impact I'm just interested with your comment around acceleration, how you believe you can deliver brands to market more quickly than in the past, I'm just interested in sort of what the specific failings have been especially if it takes a long time? And then the second question is around the overall sort of performance of the U.S.
industry I know it's difficult question but occupancy levels are at very high levels, supply growth is increasing but it's not enormous and yet overall the sort of growth is pretty muted. I just wonder if you could comment on that, particularly in light of, sort of, Marriott's commentary last night around kind of the outlook for the rest of the year in group business etc.?
Unidentified Company Representative
I'll talk to you about horizon, having just come from the brand world. I think one thing we've really thought about is how can we develop new brand facet, we've a great understanding consumer insight kind of segment needs indications, we've got all that data, we've got that for use, how do we leverage that quickly, we don't have to start from ground zero every single time building new brand and so mapping out it really clear path if we can.
I think also what makes it a little bit different is the level of engagement with our owners. We've had our Owner Advisory Board with us from day one talking about what are the core issues and things that they're concerned about and so we're not just building a product in a silo and then coming out to our owners and saying what works and what doesn't, they're co-creating with us and also Ryan has been linear to development program this is concurrent, so we've things happening in terms of design, procurement simultaneously, so we're really compressing the schedule for how you take a brand from concept into launch and really kind of making that part of our muscle memory as a company which we can leverage going forward.
And I also think that other brands that we launched in the past have been in slightly different segments, when you think about it and that's our inherently slower growing segment taking more time to build the scale and this is playing into the mainstream where we've 1,000s of owners already who've invested in this segment and 100s have expressed interest already around this well too and it's a new build brand. So, all those things factor into a belief that we've, and insight we have about how we can really scale this up quite quickly once we launch it and seeing that growth trajectory take off, so there's a number of factors that go into that, but it just plays to our core strength, mainstream brand in the U.S.
leveraging everything that we do well, and in terms of the U.S. growth.
Unidentified Company Representative
If you look at what we've seen over lots of quarters now demand remains extremely strong; we've seen record levels of demand fall in many-many months; and over the last year or so what we've been doing is driving growth through optimizing the mix in the hotels and that allowed us to continue to drive the growth although it is in rather really muted due to the environment in the U.S. and I think that this stage of the cycle you would expect to be seeing more of the revenue growth coming through new unit which is what we're seeing and as Keith talked about it's still very strong demand from our owners for new product, but with our existing brands, and with new brands that fit in development sweet spot.
That the land that they have to develop in what banks want to lend against, so I think there's still an awful lot of opportunity but unless we see a reacceleration of US GDP growth hard to see that it then starts the real reacceleration of the US RevPAR volume.
Tim Ramskill
Could I first come back on your comments around you know sort of the future growth in the new brand. Jamie asked you specifically whether you'd set a target for the space growth, just to be clear so have you got any particular views on a plant communicate that will target the market maybe at some point in the next six to 12 months.
Unidentified Company Representative
No we don't have any plans at this point to talk about external targets to the market. We're focusing right now again on driving the core business and then launching the new brand and how that will translate into growth and then we'll evaluate other opportunities.
Tim Ramskill
Right, thank you.
Unidentified Company Representative
Thanks Tim.
Operator
Our next question is from Richard Star from Bernstein, Richard please go ahead.
Richard Star
Good morning, three questions from me if I may. You've mentioned a few times on the call already about the wish to fill in some white space in your brand.
I was wondering whether you could comment on where you see that white space being, obviously the midscale space but where else do you see space. Secondly just on the franchise plus in China, just the early learnings you got there.
I noticed from your supplemental information the numbers are in a grade 50% occupancy and the rate below the managed Holiday Inn Expresses there but very-very small sample at this space or anything probably you can add on how that's performing. And then thirdly you said at the top of the call that you're fully asset light but there still seem to be a few hotels that seems to have moved the needle like Holiday Inn Aruba, the InterContinental Barclay New York.
What's the plan currently for the remaining owned hotels, is there a plan to remove those from the portfolio some point over the next few years, thanks very much.
Unidentified Company Representative
Thank you. So in terms of White Spaces we've met both our needs and occasion segmentation and price points for the portfolio and so the way we then prioritize is where do we see the highest value segments that are out there, where we have the ability to leverage our existing infrastructure enterprise to drive performance so launching another mainstream brand in the US plays in that space there's clearly opportunities in luxury as well so sitting above InterContinental we talked about being a space that we could pursue.
There's also couple of spaces in resorts, there're spaces in extended stay, there's also a space that's clearly under kind of the collection brand opportunity and so there are a number of different territories that we’ve mapped out, the way that we have to think about it is how we want to sequence them, in terms of what's the highest value creation the speed to market and making sure we invest in the core business to drive that performance first and foremost, but they have to be scaled. Means that fundamentally going forward we launch brands that has to be able to scale up appropriately for the segment that we're going after.
In terms of franchise plus I think that we have really you know early days, some great success there, we've invested behind the platform, invested behind the development resources in China now they're moving towards franchise and built that out. I think we had 24 signings I believe in the franchise plus program and we were just talking with the China team yesterday and seeing real momentum there overall.
When it gets down into specific performance I haven't seen anything, haven't seen anything flagged there in terms of being a challenge or at least a learning, but again we know franchise quite well from the US. We're -- we've an evolved platform to work in China and we've constantly iterated as time goes on and we learned from it there, but really confident with our scale position over 300 hotels been there since the early 80s, we know the market we know the areas and really sense that there's a strong demand behind it and if there is any other comments on performance.
Unidentified Company Representative
Express works incredibly well in China if you look at the occupancies that we get through expenses expected pretty much the same occupancies that we get in the North America market is a very well proven out around this, Jamie also talked about guests and owners. And the franchise started a new proposition we’re actually signed more than we thought and the once that we got the range is open tough and it will take a lot to run apart and get that full operational metrics but we're actually really enthused by what we've seen.
And then coming on to your last question Richard, around the asset-light, we are effectively asset-light. We will always have a little bit of almost investment working capital but behind the strategic opportunities in the business the most significant to reach is the $150 million we put behind and even which we put in the three hotels in the North America market and those are performing well and we will defiantly look at recycling that capital out of it and putting it perhaps behind another opportunity if there was one to [indiscernible] brand, so we don’t think we need to do that behind a new brands launch, we have some other smaller investments 50% of being to go reside in New York again the hotels forming very well so.
We marked, recycle that one there is a few others, the holding in New York Barclay, I wouldn’t expect us to feel short-term to medium term at least. So we will always evaluate how we best use the capital in the business and recycle it.
But effectively all the big hotels now been sold.
Operator
Our next is from Julien Richer from Kepler. Julien please go ahead.
Julien Richer
Two quick question from me, the first one back on the demand to keep in the U.S. do you see any changing international any demand and how do you expect a fix situation to moving down the [indiscernible] going forward and the second question, I would like to have your opinion on the recent acquisition made on the private hotel segments in the U.S., it seems that there is more and more stress on that hotels.
How is your view at that going forward.
Unidentified Company Representative
Could you state the second quarter again.
Julien Richer
Looking on your recent acquisition we had, I think buying some share in [indiscernible] Collection, [Wyndham] Also, interested in the pilot content segments, I would like to have your view on that.
Unidentified Company Representative
International demand, we seen very limited impact on international inbound demand into to the U.S. and through a largely domestic business going forward.
If you look at our mainstream estate then they are staying principally domestic travel. I'm seeing strong international inbound in many, many markets as well too and then cases where there may be some outbound may have come off, its supposing domestic travel, so things like in the UK where may be people are traveling a bit more metro in UK, strengthening our UK performance there.
So really no red flags from our perspective on international inbound in the U.S. in terms of demand.
Unidentified Company Representative
In terms of the investment the high made behind, all types of accommodation, when we look at this area and we evaluate the opportunity there where it could become scale whether its really work with our revenue delivery platforms and our loyalty excreta and you could probably do something there, but just looking at which is the biggest opportunity for us, and certainly something like our new midscale brand. And then we will look at the other that are out there and think where it fit within the white spaces that Keith talks about it's probably not top of our list not to say that we would never do something there if the right opportunity came up.
But there are some that probably fit better with our revenue channels and getting to that space.
Operator
[Operator Instructions] Our next question is from Jaafar Mestari from J. P.
Morgan. Jaafar please go ahead.
Jaafar Mestari
I have two questions please, and they're both on Project Horizon. Firstly, on the price point, the $95 to $205 is that enough discount to Holiday Inn Express?
And why is the white space not closer to say $85 which is the average mid scale ADR in the U.S. And secondly you said you wanted project horizon to become one of your largest brands in the U.S.
what source of long term essentially here and we are talking about 40000 rooms like Crowne Plaza or is it potentially in the 100,000 rooms like holiday Inn brands in the fullness of time.
Unidentified Company Representative
We are talking about how we approached the overall brand development opportunity, we did a very robust demand based segmentation for the U.S. mid scale market to really understand the consumers are in there, the stay occasions and the price points they were operating at to really understand where does this brand need to be position so it's not cannibalize Holiday Inn Express.
And any time you launch a brand in a segment you are going to have some level of cannibalization. But what we did was focusing very much on the guest experience the room design the price point the innovations happening are in Holiday Inn Express with new breakfast new guest rooms, new public space clearly pulling them apart creating enough distance that in all the analytics that we did showing that an $85 to $95 range had minimal, minimal cannibalization with the Holiday Inn Express brand and especially where it is pulling in new customers to IHG from a huge segment of $20 million of revenue, 14 million customers to today are really decent franchise, unhappy with the existing brand offerings that exists today.
And that’s because many of those brand offerings today are hotels that are in the second or third brand experience of their lifetime. They were sitting maybe in [IHE] one of our competitors we said that they no longer fitted in our brand portfolio because of quality and location they fallen down.
And so huge opportunity for us to launch a brand at this price, but it’s a smaller room is different guest experience at different price point. It’s a different customer staying on different occasion so we are very, very confident with the analytics behind that.
in terms of scale, we have used probably another scale brand for IHG and so you will be thinking more in the Holiday Inn Holiday Inn Express range going forward is the scale this brand should achieve given the scale of that segment of the industry and our ability to access those customers.
Operator
Our next question is from Angus Tweedie of Bank of America Merrill Lynch. Angus please go ahead.
Angus Tweedie
Paul you made a couple of comments about European demand. I was wondering if could elaborate on how you see the shape of that going forward perhaps until 2018.
And then secondly on Chinese RevPAR performance I was wondering if you could give us a bit more color about any sort of, spillover you're seeing between Tier 1, Tier 2, Tier 3, and Tier 4 cities, and how that's been trending as well?
Unidentified Company Representative
So, in across Europe as you're aware we've been very busy with what we've seen, and I suspect we'll see a continuation of that demand in most of the market through the second half of 2017; again as we pointed out in the release we're lapping in the second half slightly a tougher comp so while the demand will be there, won't necessarily translate into supply same level of RevPAR growth but continues to be very encouraging, and really whether you look at the UK or whether you look at from or whether you look at Germany with the trade fairs there similar sort of pictures, so, and we're very pleased with what we're seeing in Europe at the moment. In terms of the Chinese RevPAR performance it's been proving out of what we've been talking about over the long term; there's a lot of demand there and we've seen in the last I guess 2.5 years RevPAR comes through -- RevPAR growth comes through in the Tier 1 cities as demand has stayed strong but supply has fallen back a little bit as there's enough hotels in those cities; in the first quarter we saw better growth in the top end of Tier 2 and we're really starting to see that now spread down a little bit through Tier 2 and some of the Tier 3 cities as demand is very strong and the supply environment is ameliorating a little bit and obviously we still want supply because we're opening a lot of hotels in this market but it is becoming more choosy and I think that's going to be really good for the long term RevPAR potential in those markets.
Operator
Our next question is from Stuart Gordon from Berenberg Bank. Stuart, please go ahead.
Stuart Gordon
Steve have been pretty clear until recently that pace of system losses continue in line with the last few years but -- and pursuing some of this new growth it looks like if you're changing the spent somewhat just looking for some color why are you lowering the huddle for owners staying in the system because you think you're perhaps being too stringent or you expect the lot of the owners to potentially shift to the new brand rather than drop out of this completely?
Unidentified Company Representative
So, in terms of the new brand we do expect that it'll be new build, so we're not anticipating that this is somewhere where people who would otherwise have left us would go, and we do continue to be very stringent in terms of quality and ensuring that our brand always deliver consistent customer experience; that said I think we've recycled through a lot of the hotels we want to leave. We do think that within 2% to 3% of exits that we've talked about the potential of that to come down, down to the lower end of that range but that's not about us reducing our quality requirement or letting people stay in, it's more that recycle to some of that hotel and also we brought in longer contract which means that we've more ability to manage those contracts and we then have the same deadlines looming in after all hotels [leaving], so I think we're managing the process a bit better as well; so absolutely no any reduction to quality requirement.
Operator
[Operator Instructions] We have no further questions online, so I'll hand back to you Keith and Paul.
Paul Edgecliffe-Johnson
I say well thank you everybody, really appreciate you dialing in this morning and we'll be happy to pick up any further questions in due courses, so thanks again everybody and I think we can now disconnect, bye, bye.