InterContinental Hotels Group PLC (NYSE:IHG) Q3 2023 Earnings Call Transcript

InterContinental Hotels Group PLC (NYSE:IHG) Q3 2023 Earnings Call Transcript February 20, 2024

InterContinental Hotels Group PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Stuart Ford: Hello and welcome to IHG’s 2023 full year results presentation. I’m Stuart Ford, Head of Investor Relations at IHG Hotels & Resorts, and shortly you will be hearing from Elie Maalouf, our Chief Executive Officer, and Michael Glover, our Chief Financial Officer. Before we proceed, I am obliged to remind all viewers that the company may make certain forward-looking statements as defined under U.S. law. Please refer to the accompanying full year results announcement and the company’s SEC filings for factors that could lead actual results to differ materially from those expressed in, or implied by, any such forward-looking statements. The results release, together with the usual supplementary data pack, as well as the presentation slides accompanying this webcast, can all be downloaded from the ‘results and presentations’ section under the investors tab on IHGplc.com. Now over to Elie.

Elie Maalouf: Hello and welcome to IHG’s 2023 full-year results presentation. I’m Elie Maalouf, Chief Executive Officer of IHG Hotels & Resorts. I was honoured to take on this role in July 2023, and to now be presenting my first set of annual results. Our results presentation follows a slightly different format this year, as we are holding a separate live webcast and Q&A session to talk about IHG’s update on strategic priorities. All material background for that update is contained in the full year results announcement that we have released. This webcast that you are currently watching is specifically to cover the performance in 2023. In a moment, Michael Glover will talk you through our financial results, but before that, let me share some key highlights.

We saw excellent progress in 2023, with key metrics for our trading performance, hotel openings and signings, profit and earnings all significantly ahead of last year. RevPAR improved significantly, up 16% versus 2022, and up 11% versus 2019. Despite tougher comparable as we progressed through the year, Q4 RevPAR still finished up 8% year-on-year, and up 13% versus 2019. Looking at system size, our gross growth was 5.3%, and net growth was 3.8%. We added 275 hotels to our system, delivering 16% more room openings than 2022 after adjusting for Iberostar. Signings were up 26% on last year, driven by one of IHG’s best ever quarterly signings performances in Q4. We continue to successfully capture conversion opportunities, which represented over 35% of both openings and signings.

Our Essentials and Suites brands had another strong year, and Luxury & Lifestyle is a rising proportion of our future growth. IHG’s overall pipeline increased 6% year-on-year to almost 300,000 rooms, representing secured growth equivalent to more than 30% of today’s system. Our fee margin continued to expand, growing by 3.4 percentage points in the year and helping to drive operating profit to just over $1 billion, up 23% on 2022. Earnings per share grew 33% year-on-year, and is 24% ahead of where earnings were back in 2019. 2023 saw another record year of cash generation, with free cash flow totalling $819 million. We are pleased to propose a final dividend of $0.104, contributing to total dividend growth of 10% for the year to $152.3. After completing buyback programmes in each of 2022 and 2023, and while continuing to invest in our business, we have announced a further $800 million buyback programme for 2024, demonstrating our commitment to routinely return surplus capital to shareholders.

Let me now handover to Michael who will take you through the details of our financial results for the year.

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Q&A Session

Michael Glover: Thanks Elie. I’m Michael Glover, Chief Financial Officer for IHG Hotels & Resorts. Let me take you through some more detail of the strong financial performance that we delivered in 2023. I’ll start as usual with our headline results from reportable segments. Revenue of $2.2 billion and operating profit of $1 billion and $19 million represented growth of 17% and 23% against 2022, respectively. Revenue from the fee business increased by 17% to $1.7 billion, while operating profit from the fee business increased by 23% to $992 million, or by 25% on an underlying basis. Fee margin once again made considerable progress, improving by 340 basis points to 59.3% — and I’ll touch on this in more detail shortly. Adjusted interest increased to $131 million, while our full year effective tax rate was 28%.

Later in the presentation I’ll give a view on outlook for these line items to help with modelling. Earnings per share includes the benefit of accretion from the $750 million share buyback programme completed in 2023, as well as the annualization of the previous $500 million buyback that was conducted in the second half of 2022. So, taken all together, along with the reduction in our share count as a result of the share buyback programmes, earnings per share increased by 33% to $375.7. Moving on to a summary view of RevPAR performance by region. In the Americas and EMEAA regions, you can see the sustained recovery of RevPAR versus 2019 levels over the last 12 months to 18 months. As had become well known, trading in Greater China was bumpy in 2022, but in 2023 there was a sharp and sustained improvement and full recovery in RevPAR, with the year as a whole up 1% versus 2019.

Q3 RevPAR was particularly strong, up 9% versus 2019, driven by a better-than-anticipated uptick in domestic leisure trips. Q4 RevPAR dipped back down to a percentage point behind 2019 levels, but this was expected given the seasonally higher business demand in that quarter, which still lags leisure demand given the delayed return of international airlift capacity. I will come back to each of the three regions in more detail in a moment. Looking at RevPAR performance on a versus 2022 basis, substantial improvements were seen in the first half of the year due to a lower base in 2022 as a result of the residual COVID impact on trading in that prior year. As we moved through 2023 we lapped much stronger comps and so the growth rate decelerated — which was always the expectation — and you can see how it stabilised still significantly ahead of the prior year.

It is worth pointing out that as we move into 2024, we will no longer report trading metrics on a versus 2019 basis given the full recovery of nearly all of our markets. Here, we are showing our global demand split between Leisure, Business and Groups, and the component drivers of revenue split between room nights and rate progress. We’ve previously shown this to you for the U.S., and now we are showing the global picture as this is now instructive given the pattern of full recovery. Leisure demand as we previously knew recovered first, but what you can see from the top charts is how that strength of demand has been sustained. Business demand continued to strengthen, both in terms of occupancy and pricing. We returned to regular renegotiation of corporate rates on an annual basis, which continues to drive ADR.

Meanwhile, the ongoing return of international airlift capacity into and out of China has supported demand throughout Asia, and this will remain a tailwind into 2024. Groups, which had been the slowest demand driver to recover, continues to advance, and whilst for 2023 as a whole it was still 5% behind 2019 revenues, it turned positive for the final quarter. What’s on-the-books for Groups is 17% ahead of this time last year, which would more than complete the recovery of this category. As I mentioned at the start of the presentation, we have seen further expansion of our fee margin, which, at 59.3%, increased 340 basis points ahead of 2022.This improvement was led by our EMEAA and Greater China regions, which saw margins increase significantly as trading performance continued to accelerate.

Both regions have seen margins restored to above pre-COVID levels. The Americas region saw margins slightly dip, down 210 basis points to 82.2%. As you will remember, we had previously signalled that there was cost investment in 2023 to support various growth initiatives. Margins are still substantially ahead of 2019 levels and sustainably so. It’s worth noting that in the appendices there is further detail on the components of our revenue, our overheads and our operating profit. Our fee business overheads increased by 8.5% year-on-year, though the underlying overheads inflation rate was only around 5%. The integration costs for Iberostar, the launch of Garner, and other investment in systems and growth initiatives meant that overheads grew by more than we’d expect in a typical year.

But the outlook and fee margin opportunity remain the same. Our efficient cost base and operating model enables investing for growth as well as expanding margin at an expected average of 100 basis points to 150 basis points a year — just as IHG has delivered over the prior decade. This is a topic that I will cover in our separate presentation updating on our strategic priorities. Turning to system growth. Gross additions were 5.3% as we opened 48,000 rooms in 2023, equivalent to 16% more openings than the prior year when excluding Iberostar. 13,000 rooms exited the system during the year, equivalent to a 1.5% removal rate, in-line with the historic underlying average. Taken together, net system growth over the last 12 months was 3.8%, matching our expectations of achieving close to 4% growth for the year.