INTERCONTINENTAL HOTELS
TRANSCRIPT OF
Q3 RESULTS
CONFERENCE CALL
TUESDAY NOVEMBER 23RD 2004
CHAIRMAN: DAVID WEBSTER
INTERCALL UK
Operator
Welcome to the Intercontinental Hotel Group’s Third Quarter results. At this
time, all participants are in a listen only mode. There will be a presentation
followed by a question and answer session at which time, if you would like to
ask a question, please press *1 on your telephone. I would like to advise you
that this conference is being recorded today, Tuesday November the 23rd,
2004. I would now like to hand the conference over to your first speaker this
morning, Mr David Webster. Please go ahead Mr Webster.
David Webster
Thank you very much and good morning everyone. As you know, I am
chairman and interim chief executive of Intercontinental Hotels. And I am
joined by our Finance Director, Richard Solomons. Thank you very much for
joining us today for our trading update for the third quarter and for the 9
months to the 30th of September 2004. First of all, I would like to hand you
over to Richard who will take you through some of the key financial results
and highlights of this announcement. I will then summarise key areas of
interest and priorities going forward before we open to any questions you
may have. Richard?
Richard Solomons
Thank you David. Good morning everyone. I will give you a brief overview of
the headline numbers before looking at the regions in more detail. Group
turnover for the third quarter grew 3% to £563 million in constant currency
terms. Turnover in hotels increased by 3.5% to £377 million whilst operating
profit was up 8.2% in constant currency terms. In sterling, hotels third
quarter turnover fell 2.6% and operating profit remained at last year’s level,
due primarily to the weak dollar, and trading remained a challenge in certain
European locations. The results were also affected by bonus costs in the
quarter compared to the same quarter last year when bonuses were not
accrued. Our soft drinks business, Britvic, showed a good performance
against a difficult comparable; due to the very good summer weather last
year. Turnover grew 2.2% to £186 million in the quarter. Due to continued
revenue investment in the business, operating profit was marginally down at
£26 million, however, Britvic gained market share during the quarter.
Looking now at hotels’ performance in a little more depth, in our Americas
region, we have seen encouraging growth with operating profit up 12% to
$84 million. America’s owned and leased estate was flat at both turnover and
operating profit level but adjusting for hotels sold, turnover was up 5%.
Revpar increased at our owned and leased Intercontinental Hotels by 7.9% in
the quarter. It has risen 9.3% year to date, driven by strong New York,
Chicago and Toronto performances. There was a small impact as a result of
hurricanes in the period, mainly impacting our San Juan, Miami, Jamaica and
Hilton Head properties. The Americas managed business saw considerable
profit growth in the period, partly driven by the Candlewood brand, which we
acquired at the end of last year. Americas franchise turnover increased 9% in
the quarter, Holiday Inn revpar was up 4%, Express up 6.2% and Crown
Plaza up 4%, all driven by both rate and occupancy gains. Post the period
end; we have seen considerable activity in the region. Our new hotel brand,
Hotel Indigo, opened its first property in Atlanta, and our new flagship
Intercontinental Buckhead also opened in Atlanta.
In Europe Middle East and Africa, we have seen a £2 million reduction in
operating profit in the quarter, due to weak market demand impacting certain
of our large owned and leased properties and the impact of sterling strength
versus the euro. We saw weakness in particular in our French owned and
leased estate with Cannes experiencing a lower level of Middle Eastern
business and Paris still impacted by the weak dollar and on going weakness in
corporate incentive business. The Frankfurt market was also weaker in the
quarter than in 2003 as a result of timing of trade shows. The UK Holiday Inn
estate continued to grow revpar, especially in London, with a 12.3% increase
in the quarter and an 18.3% increase year to date. Managed and franchised
turnover was slightly up in the period while operating profit was significantly
up, including the impact of a small amount of liquidated damages. As such,
year to date, we have seen strong profit growth in the region and we remain
on target for a strong full year.
There has been an 80% upswing in operating profit in our Asia Pacific region.
But this is of course against a backdrop of a weak SARS affected comparable.
We are seeing growth in market share in Intercontinental Hong Kong and
significant revpar increases throughout mainland China which is moving
forward encouragingly.
October trading has been strong with revpar growth experience in every
region. The strong growth in individual corporate traveller volumes is
expected to continue while booking lead times have lengthened slightly. This
gives us confidence for a full year outcome in line with company expectations.
Continuing on down the Profit and Loss account, central overheads are down
£11 million in the year to date, despite an increase in bonus costs over the
prior year, reflecting our continuing focus on driving costs out of the business.
As previously noted, we expect 2004 overheads to end the year broadly in
line with 2003 at constant currency. Our interest charge for the quarter was
much reduced versus 2003, primarily as a result of lower level of debt in the
business. Tax charge from ordinary activities for 2004 as noted earlier in the
year is expected to be approximately 18%. The exceptional tax credit year to
date is £150 million. Adjusted earnings per share grew by 23.5% in the
quarter and are up by 52.9% in the year to date. We continue to focus on
improving the cash flow of the group with strong control of working capital
and capital expenditure. Operating cash over the quarter was £145 million
with capital expenditure of 63 million down from 77 million in 2003. Hotel
capital expenditure is expected to be no more than 250 million for the full
year. Return on capital employed, calculated on an annual basis was 5.6%, a
considerable improvement over the same period last year but still well below
the level we consider acceptable. We are working hard to improve this further
through the execution of our growth strategy, coupled with asset disposals
and return of funds to shareholders.
Revenue through our reservation channels was up almost 20% on the same
period last year to around $1.1 billion. Quarterly revenue to our hotels from
Priority Club awards, our guest loyalty scheme which now stands at over 23
million members, increased 12.2% to $841 million. At a gross level, we have
added almost 18,000 rooms to our estate year to date, while at a net level,
we added 599 rooms after planned terminations in the US Holiday Inn estate
and disposals. Global pipeline growth has increased 10% year on year with
the strongest growth in the US, Mexico and China.
Moving on to returning funds, £239 million of our initial £250 million share
buy back announced in May 2004 has been completed at an average price of
£5.44. As part of our plan to return funds to shareholders, we will pay a
special dividend of £500 million in December, followed by a further share
buyback of £250 million to be carried out once the existing programme is
complete. As already announced in September, the total amount of funds we
have committed to return to shareholders is £1 billion. We will return more in
due course, depending on the progress of our asset disposal programme.
Earlier this month, we announced a new £1.6 billion syndicated banking
facility that will allow more appropriate financing and certainty moving
forward. The facility will provide more flexible committed funding at a reduced
cost for the medium term and will be used inter alia to fund a tender offer
launched to buy back Є600 million Eurobonds and to redeem £80 million
sterling bonds.
Turning to the asset disposal programme, we are making encouraging
progress on the sale of the hotels. The sale process for the Americas hotels is
well advanced and good progress is being made on the sale of the other
hotels on the market. The process of selling a hotel can take at least 6
months and we are encouraged by the level of interest we are seeing in the
various portfolios we have on the market.
Thank you and now let me hand you back to David.
Thanks Richard. Trading for the first 9 months of the year has been strong
with earnings up 52.9% over last year and up 23.5% in the last quarter. The
outlook for the full year remains positive and is in line with company
expectations. October trading, traditionally the largest month in quarter 4 was
strong, giving cause for optimism for the balance of the year. We are also
making good progress with our existing cost savings programme, which is on
track for completion by full year. As Richard has outlined, our asset disposal
programme is continuing and we are on track on returns to shareholders and
improving the capital structure for the group going forward. We continue to
concentrate on being a predominantly hotel management and franchising
company with high quality earnings, far less operationally geared to the hotel
cycle and significantly cash generative. Finally, I am of course focused on the
appointment of a new chief executive for the company.
Thank you ladies and gentlemen. Richard and I will now be very happy to
take any questions that you may have.