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Edited Transcript of IHG.L earnings conference call or presentation 21-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Preliminary 2016 InterContinental Hotels Group PLC Earnings Call (US)

London Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of InterContinental Hotels Group PLC earnings conference call or presentation Tuesday, February 21, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather Woods

InterContinental Hotels Group - Head of IR

* Rich Solomons

InterContinental Hotels Group - CEO

* Paul Edgecliffe-Johnson

InterContinental Hotels Group - CFO

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Conference Call Participants

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* Chris Agnew

MKM Partners - Analyst

* Stephen Grambling

Goldman Sachs - Analyst

* David Katz

Telsey Group - Analyst

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Presentation

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Operator [1]

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Welcome and thank you for standing by.

(Operator Instructions)

This call is being recorded. If you have any objections you may disconnect at this point. I would now like to turn the call over to your host, Heather Woods. You may begin.

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Heather Woods, InterContinental Hotels Group - Head of IR [2]

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Good morning, everyone. This is Heather Woods, Head of Investor Relations at IHG. I'm joined this morning by Rich Solomons, Chief Executive, and Paul Edgecliffe-Johnson, Chief Financial Officer.

Before I hand over to them for the discussion of our results, I need to remind you that in the following discussion the Company may make certain forward-looking statements, as defined under US 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. With that, I will now turn the call over to Rich Solomons.

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Rich Solomons, InterContinental Hotels Group - CEO [3]

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Thank you, Heather. Good morning, everyone. Recording of our 2016 full-year results presentation we gave this morning is on our website, so Paul and I will give you the highlights before opening up to Q&A.

2016 has been an unsettled year for the global economy and particularly the travel and leisure sector. Through the year we saw multiple terrorist incidents impact travel in Europe, as well as two major political events in the UK and US, the full implications of which are unclear. Despite this backdrop of considerable economic and political uncertainty, our resilient asset-light business delivered strong results.

Before Paul talks through the details of our financial performance I just wanted to remind you of the journey we've been on. We sold the majority of our owned hotels, focusing on becoming an asset-light company. This created the resilience needed to weather the global recession from 2008 to 2010.

In 2011, I introduced our winning strategy, the importance of which cannot be overstated, particularly its enduring consistency over the past five years. Through disciplined application of our strategy, we made considered long-term sustainable investments across our business, each building on the growth platform we've created over the past 13 years as a stand-alone company.

In 2016, the five elements of our winning model remain the same, but we regularly refine our execution to meet ever-changing consumer trends and industry dynamics. This consistent incremental approach means we stay resolutely focused on doing what we do best -- creating preferred brands and delivering operational excellence, which we believe is the best way to drive industry-leading returns for our shareholders.

In our first year as a fully asset-light company, our low capital intensity and high quality fee streams continues to generate significant levels of cash flow. In line with our stated strategy of returning surplus cash and maintaining an efficient balance sheet, we've announced today a $400 million special dividend. And reflecting our confidence in the future, we have also increased our total ordinary annual dividend by 11%.

Our last major disposal was in September 2016, so this means we'll return over $0.5 billion to shareholders in the first half of 2017, completely funded from underlying operations. I will now hand over to Paul.

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [4]

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Thank you, Richard, and good morning, everyone. We are pleased to report another year of strong financial performance. On an underlying basis we translated 4.6% revenue growth into a 9.5% operating profit increase by leveraging the scalability of our asset-light business and by managing our cost base. This has allowed us to increase our fee margin by 250 basis points whilst continuing to invest for future growth.

Interest charges were flat on last year and our reported tax rate remained at 30%. We expect our tax rate to stay in the low 30%s for the next few years.

Weighted average shares decreased following the share consolidation relating to the special dividend in mid-2016. In aggregate, this enabled us to increase our underlying earnings per share by 23.1%.

Looking now at our levers of growth, rooms and REVPAR, we added 40,000 rooms to the system. At the same time as adding these new high-quality representations of our brand, we remain focused on removing underperforming hotels, exiting 17,000 rooms in the year. This took net system size growth to 3.1% which, combined with REVPAR growth of 1.8%, drove total underlying fee revenue up 4.4%.

To give you some more color, I will now take you through the performance in each of our regions in more detail. Firstly, the Americas region, where US industry demand has been at record levels for 69 of the last 70 months, and supply remains slightly below the long-term average. Consequently, our hotels in the region are continuing to drive record occupancies of nearly 70%.

In this environment, REVPAR was predominantly rate driven, with America's REVPAR up 2.1% and US REVPAR up 1.8%. We continue to be impacted by our higher weighting towards the underperforming oil market where 14% of our rooms are located compared to the industry's 11%. REVPAR in oil markets declined almost 8% in the year and over 6% in the fourth quarter, compared to 2.2% growth in non-oil markets.

We had expected to see a lower rate of decline in the fourth quarter given the easier comparables, but the high rate of supply in the market led to a continued decline in occupancy. In 2017 we expect ongoing elevated levels of new supply in these oil markets to continue to hold back their REVPAR growth.

For the Americas region as a whole, underlying revenue was up 6% and profit was up 8%. Franchise profit grew 5% driven by strong REVPAR and rooms growth, which more than funded our additional investments in development resources.

Managed profit was flatted by an unusually high number of small liquidated damage receipts totaling $4 million in the second half of the year. This was offset by $8 million of costs relating to our 20% interest in the InterContinental and New York Barclay and the impact of high supply growth on REVPAR growth in New York City, something we expect to continue to affect trading in this market in 2017. The Barclay continues to ramp up after its successful renovation and repositioning, which means in 2017 we expect our joint venture costs will be broadly offset by growth in management fees.

Regional overheads were $11 million lower than last year predominantly due to lower costs associated with our US healthcare scheme. We now have stop-loss insurance in place to minimize future fluctuations.

In Europe REVPAR growth accelerated towards the end of the year. Fourth-quarter growth of 3.1% drove full-year growth of 1.7%. Our performance in France, Belgium and Turkey continued to be impacted by security concerns. Excluding those markets, REVPAR in Europe grew 4%.

On a relative REVPAR basis we performed well, outpacing industry growth in our priority markets. UK REVPAR grew 2.6% led by the provinces up 4.5%. Fourth-quarter REVPAR was particularly strong, growing almost 5%, with the weaker pound boosting tourist arrivals.

In Germany, REVPAR grew 6.8% benefiting from a favorable trade day calendar. Franchise profit grew 8%, while managed profit declined due to the impact of two hotel exits and a refurbishment, along with weak trading in Paris following the terror attacks in November 2015. This led to underlying profit for the region as a whole being flat on 2015.

Moving now to Asia, Middle East and Africa where comparable REVPAR was broadly flat. Oil markets continued to have an impact on overall trading, with REVPAR for the Middle East falling 7%. Excluding the Middle East REVPAR grew 3.7%. Underlying revenue and profit were both down 4% impacted by disposal of an equity stake and the renewal of three hotels onto standard market terms.

During the year we opened 4,000 rooms, 60% of which were in developing markets. These markets, whilst profitable, still trade at a sizable REVPAR discount. We are purposefully expanding into these developing markets where the long-term demand drivers are favorable to build a scale position which will drive strong future fee growth. This, combined with a number of other individually insignificant items means we expect 2017 managed profit in EMEA in to line with 2016's.

Turning now to greater China, where we continue to outperform the industry. Comparable REVPAR increased 2.2%, with mainland China growing almost 4% and tier 1 cities over 6% driven by strong corporate demand. The combination of our strong REVPAR and net rooms growth increased underlying fee revenues by 13% after the 8% increase in 2015. Our ongoing investment behind strengthening our deal signing capabilities was more than offset by scale benefits and cost efficiencies, driving underlying profit up 15%.

Our strong performance in greater China is a result of the strategic choices we have made to position us to take full advantage of the long-term opportunity. We invested early to build the operational infrastructure needed to support rapid growth in what has become our second largest market. In 2011 we established greater China as a stand-alone region to ensure it received the focus and resources it needed to secure IHG's position as the country's leading international hotel company.

In the last five years we've opened almost 40,000 rooms, taken our total hotels opened in the region to almost 300, and become the most broadly penetrated international hotel company in the country. At $2.6 billion, China now delivers almost 10% of our global gross revenue and the same proportion of our fee revenue.

We have continued to evolve our cost base as the business matures, investing and strengthening our operational capabilities, whilst finding efficiencies through scale and still increasing our profit by 50% since 2011. This has all been done without the need for growth capital investment.

Looking ahead, we already have a pipeline of 239 hotels with 70% under construction. We continue to see long-term demand for hotels increasing in greater China, much of which will be in the mid-scale segment as rapid urbanization spreads from tier 1 into tier 2 and 3 cities.

To ensure we take the maximum share of this growth, we launched in 2016 our tailored franchising solution for Holiday Inn Express. Under this model we are able to capitalize on the benefits of franchising, namely more rapid growth and access to a new owner base, but also protect against the risks. We support our owners in delivering against our brand standards by appointing the general manager, by mandating that hotels use our performance support tools.

We considered other options such as master franchising but our model allows us to keep control of who we work with, where our hotels are located, and the pace at which we grow while still retaining the full economic benefit of the fee stream. We believe this is the most value enhancing business model.

We have seen immediate success with this approach. Since May we have signed 20 Holiday Inn Express franchise contracts, all with new owners. We expect signings under the franchise-plus model to continue to accelerate in 2017 and beyond.

Moving back to the group level, I will spend some time now on our disciplined approach to both cost and capital. Since 2013 we've been able to hold overhead broadly flat as we've offset inflation in our cost base, and investment behind growth initiatives with a rigorous focus on procurement and cost efficiencies.

Through strategic management of our costs and our targeted approach to expansion, we improved our fee margin by 250 basis points in 2016, and some 500 basis points across the last three years. We will continue to focus on efficiency improvements while investing behind our operational capabilities which will enable us to continue to grow margin in 2017, albeit at a slower rate than the last few years.

We have once again generated significant cash from operations with underlying free cash flow of $551 million. We have talked before about our priorities for the uses of cash. Our first focus is to reinvest capital into the business to drive growth.

In 2016 we spent gross CapEx of $241 million, and net CapEx of $185 million. Our overall CapEx guidance remains unchanged at up to $350 million gross per annum and $150 million net per annum.

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. And for 2016 we're proposing an 11% increase to $0.94 per share. Where there is further cash available which is deemed truly surplus, we have said before we will return it to shareholders. The $400 million special dividend we have announced today takes the total return to some $12.8 billion, almost $5 billion of which has been generated from operational cash flow.

Looking forward, our long-term funding sources are secure with our first bond debt maturity not for another five years. Every year our fee-based business model generates strong cash flows independent of asset sales. Excluding the contribution from owned hotels our free cash flow has grown on average 14% per year since 2013.

By leveraging the scale benefits of our business model and managing our costs to drive further fee margin growth, we will continue to generate significant levels of cash from operations, creating substantial funds for reinvestment or for future returns to shareholders. I will now hand back to Richard who will talk more about our strategic progress this year.

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Rich Solomons, InterContinental Hotels Group - CEO [5]

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Thank you, Paul. Going back to our consistent strategy that is delivering these results, the winning model is a virtuous circle of value creation. By leveraging our guest, owner and industry insights, we invest behind our brand's technology and people to drive long-term sustainable growth.

Since becoming a stand-alone company we have continued to build our clearly differentiated portfolio of preferred brands. We do this by enhancing our established brands, launching new ones, and expanding our presence in new markets.

We strengthened our industry-leading loyalty program underpinned by our innovations in digital marking and technology, which is driving an ever-increasing number of member bookings through our low-cost direct channels. And we're reinforcing our owner proposition with leading operational support.

I will now focus on some of our successes from 2016 and how these continue to build IHG's competitive advantage. Firstly, our brands. Understanding travelers through extensive consumer research gives us the insights we need to accurately target our brands against specific guest needs. This helps to us make them genuinely distinctive and relevant. It enables them to compete well against other hotels and, of course, other accommodation times.

Creating and delivering a consistent experience through our preferred brand is at the heart of our commercial strategy. All consumer brands need to be refreshed and honed over time, and the hotel sector is no exception. Innovation is one important way we ensure they stay relevant and continue to gain share. So, let me give you the highlights of the progress we made in 2016.

Starting with InterContinental, which celebrated its 70th anniversary last year, we have continued to aggressively expand the brand globally, keeping it relevant to the modern luxury traveler. And we consolidated InterContinental's position as largest luxury hotel brand in the world.

With nearly twice as many open rooms as our nearest luxury competitor, we have leveraged its leadership position to drive guest satisfaction and REVPAR outperformance over the past five years, resulting in over 20% growth in total gross revenue. The quality of the brand is recognized externally, winning multiple industry accolades, including leading hotel brand at the World Traveler awards for the eighth year running.

We continue to strengthen our leading position, signing 18 hotels around the world in 2016, our best performance in eight years. In 2017 we will expand our estate further with 12 openings, including hotels in LA, DC and Singapore, being in each case the second InterContinental in these cities.

As Paul detailed, our early investment in China is now delivering impressive results. Illustrating the vast scale of some Chinese cities, we opened our fifth InterContinental in Shanghai last year, the most hotels for the brand in any city globally. Our relentless focus on service quality and guest experience means that InterContinental is now recognized as the number one luxury hotel brand in China, overtaking Shangri-La.

Moving now to Holiday Inn, the engine of our business. Leveraging the multi-year refresh program we launched in 2007, we've had much success in recent years improving guest satisfaction and driving growth. The power of the Holiday Inn brand family cannot be overstated. With more than twice the scale of its nearest global competitor, it's a clear leader of the upper mid-scale segment, representing one-quarter of all open rooms and one-third of the global pipeline. This segment remains a highly attractive market, representing around 45% of future US industry room revenue growth over the next decade.

Following the successful refresh of Holiday Inn we're delivering the next stage of the brand's transformation. We're continuing to evolve our room and public space designs, enhancing the overall guest experience and driving satisfaction scores up.

Our open lobby is now in place in 50 Holiday Inn hotels in Europe, a number we expect to double by the end of 2017. By creating areas that enable more dwell time, we're changing how guests use our hotels, enhancing the enjoyment of their stay, and encouraging them to spend more time and money with us, which is leading to increased guest satisfaction and higher hotel revenues.

For Holiday Inn Express in the US we continue to roll out our Formula Blue designs, now in place at 175 hotels, which is driving meaningful incremental REVPAR and improved guest satisfaction. By 2020 we expect two-thirds of our open and pipeline Holiday Inn Expresses in the US to have these designs in place.

Moving now to Crowne Plaza where, outside of the Americas, open rooms have grown by 26% and guest satisfaction is up 6 points over the past five years. This progress continues to be recognized externally, with the brand winning multiple prestigious awards in Asia and Europe, including the world's best airport hotel at Changi in Singapore.

We're making good progress on our plans in North America, which will see us invest $200 million in marketing and capital over the next three years, and which is designed to bring the quality of this estate up to the standard we see in the rest of the world. Half of this will be system funded marketing, which by 2018 will represent a 200% increase on historic levels of spend and be supported by a dedicated commercial team. This capitalizes on the work we've done in cleaning up the estate to date, one factor in the four-point guest satisfaction increase we've seen since 2012.

We'll invest up to $100 million on refurbishments and [hailer] signings, funded out of our existing capital expenditure budget. We know this approach works. Where we've deployed capital to support refurbishments in recent years, post-renovation satisfaction scores have increased by 8 points more than the rest of the estate.

Although it takes time to reposition brands, we're already seeing the results of these initiatives. In 2016 we were delighted that Crowne Plaza was awarded best upscale hotel brand in North America by Business Travel News, up from eighth the previous year.

Moving on to our boutique and lifestyle brands, in 2016 we saw momentum building with each of these, taking them into new markets and growing traction with owners as we continue to demonstrate strong performance and guest preference. Firstly, Hotel Indigo. We have grown our open rooms by 14% annually since 2011, reaching our 75th open property this year, including iconic locations in Bangkok and Singapore. We continue to expand into new markets, signing hotels in Australia and Japan. And we look forward to opening our first Hotel Indigo resort in Bali expected in the half of this year.

In 2012 we launched EVEN Hotels, our wellness-focused brand. Last year we opened three properties, including our third owned asset located in Brooklyn and our first franchise hotel in Omaha. As an example of the almost universally positive guest feedback for the brand, the EVEN Hotel Times Square south was named one of Trip Advisor's top 25 hotels in the US in 2016.

Building on this appeal we signed a deal with our long-term partner, Pro-invest, to develop a portfolio of EVEN hotels in Australia and New Zealand. Traction continues to grow for the brand in the US, with around 15 projects either in the pipeline or advanced negotiations.

Last year we opened our fourth HUALUXE hotel, the first international hotel brand designed specifically for Chinese travelers. Demonstrating the strength of the brand proposition, the entire portfolio is already achieving top 10 Trip Advisor rankings in their respective markets. This impressive performance is converting into demand from new owners, with our pipeline now standing at more than 20 hotels, with three key openings expected in 2017.

In early 2015 we acquired Kimpton Hotels and Restaurants to fill a gap in our portfolio at the upper end of the boutique space. Delivering on our aim of growing the brand internationally, we opened our first hotel outside of North America, the Seafire Resort and Spa in Grand Cayman. We also signed two Kimpton Hotels in Paris and Amsterdam in 2016, the latter of which will open later this year. We have around 30 deals in the pipeline or under active negotiation globally, a record level for the brand.

So, that's an overview of some of the actions we've been taking to enhance preference, one pillar of our commercial strategy. Hopefully, many of you dialed into our capital markets event in September when Keith Barr and I covered the other two pillars of our commercial strategy -- lifetime relationships and strong direct channels. Given the importance of these, I will just touch on some highlights from the full year.

We've made major enhancements to our loyal program, creating a new elite top tier for our most loyal guests who stay more than 75 nights a year, and introducing Your Rate in 2016, our preferential member pricing structure. We've seen very encouraging early results.

Since launch, the relative change in our retail channel growth rate has outstripped that of the OTAs, demonstrating the shift in behavior as guests recognize the advantage of them booking direct. This has also driven increased IHG Rewards Club enrollments, which are up 16% year on year.

As well as growing our loyalty base, our existing members are staying with us more often and redeeming more points for their Reward Club stays. All of this has increased our loyalty contribution by over 3 points since 2014, delivering low-cost, high-quality revenues to our owners.

Our direct digital channels remain one of the fastest growing across our system and we continue to innovate and update them. Recognizing guests' desire for transparency, our websites now have over two million verified reviews from IHG hotel stays. We now offer 87 brand and language combinations, delivering over $4 billion of room revenues. Mobile continues to be the driver of growth, with bookings reaching $1.6 billion in 2016, up by one-third from 2015.

Recognizing the increasing importance of mobile devices in consumers' lives, and using it where we can to enhance the guest experience, we now offer mobile check-out at 1,800 of our hotels. Powering this growth in mobile is our award-winning app which has now been downloaded over two million times with year-on-year app bookings up 50%.

Altogether our investments aim to increase the proportion of revenue delivered through our most cost-effective channels. And with our strength and loyalty proposition we've increased our system contribution by 3 points since 2014.

Finally, I wanted to touch on the continuing technological innovations that underpin our commercial strategy. We've now implemented or are installing IHG Connect in over 1,800 hotels in the US, giving guests a seamless Wi-Fi log-in across our estate, using their IHG Rewards Club credentials. Hotels that have adopted the system have seen Wi-Fi-related scores increase by 5 points since implementation.

Ensuring our hotels adopt the most sophisticated revenue management practices, we'll maximize our revenues and owners' return. So, an approach fully endorsed by our owners' association, we have mandated either the appointment of a certified revenue manager or a subscription to our industry-leading revenue management for hire program. This approach continues to drive our performance, and hotels signing up to our services in 2016 saw a 6 point uplift in REVPAR index post implementation.

We talked at length at our September event about our next-generation guest reservation system that we are developing with Amadeus, and the benefits this will bring to owners, guests, and IHG. This multi-year transformational project is now nearing the end of its development phase and we're entering an intensive testing period. The project remains on budget and on track to begin piloting hotels this summer with rollout beginning in late 2017.

To summarize, we have a clear strategy guided by our winning model. This has allowed us to make consistent strategic choices and considered long-term investments, which have delivered outperformance in the past and will continue to generate sustainable growth into the future. Through disciplined execution of this strategy, we're driving operational excellence through our franchise performance support and management capabilities.

By focusing on what we do best, creating preferred brands and delivering operational excellence, we have improved guest satisfaction and owner returns. We continue to enhance our established brands and expand our boutique and lifestyle portfolio into high demand markets. This is underpinned by our innovative digital marketing and technology strategy, protecting and strengthening our competitive advantage.

These investments will continue to support our asset-light, highly cash generative model, which will allow us to drive superior shareholder returns. And though we recognize there remains uncertainty in some markets, we're confident in the outlook for the rest of the year as well as our ability to continue delivering long-term sustainable growth.

Thanks for listening. And with that, we will now be more than happy to take your questions. Operator, we'll go to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Chris Agnew, your line is now open.

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Chris Agnew, MKM Partners - Analyst [2]

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Thank you for all the color around the direct booking initiatives. I was hoping to dig a little bit into that. One of your competitors has called out the impact on REVPAR from member discounts. I don't know if you have thought about that and can maybe quantify what impact it has been having.

And can you also -- what share is IHG digital delivery as a percentage of revenue? And what was it in 2016? And can you compare that to OTA share? And then, finally, can you quantify what mobile represents as a percentage of digital delivery? Thanks.

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Rich Solomons, InterContinental Hotels Group - CEO [3]

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Yes, mobile is about $1.6 billion of $4.3 billion, if you take total digital. And, as I said, it's grown basically one-third on the prior year. So, really accelerating. And we've been very focused on mobile. We prioritized investment in the app and we saw that coming. I think we were the first big player to have apps across every platform. You asked a question about -- what was your first question again?

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Chris Agnew, MKM Partners - Analyst [4]

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Just REVPAR. I think one of your competitors --.

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Rich Solomons, InterContinental Hotels Group - CEO [5]

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I don't think it's anything that one can pull out or that one can particularly see. Really, it's in the mix. Because what you are doing is you're driving direct, you're driving loyalty sales, our loyalty enrollments are up 16%. So, there's a real benefit across the piece. And obviously direct booking is significantly more profitable to owners, which is ultimately what we're trying to do.

Honestly, even if it hit REVPAR a little bit, which we really can't isolate, I wouldn't mind about that. That's just an external number; whereas, internally driving profitability to our owners is what we're focused on. Paul, do you want to pick up the other question?

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [6]

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Chris, in terms of your question on channel contributions, digital has moved from -- in 2015 we're at 20.7%, up to 21.4%. And OTA has moved from 14% up to 15.6%. So, what we've seen with bringing in Your Rate is that we've seen a real change in the growth rates there. Our growth in the digital retail channel rate is up 5%, in the OTA growth rate is down 2% since the launch. So, definitely seeing business shifting across into our direct channels.

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Rich Solomons, InterContinental Hotels Group - CEO [7]

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Thanks, Paul. I will just add, I think what's important is that -- and this has been talked about in different ways, some of our competitors talked about -- we're not anti-OTA at all. I think what's important is, it's a good channel for price-sensitive leisure travelers who are never going to be brand loyal. And it's a great route to market for us. But it's very expensive. And I've told them that. They know that.

If it's incremental and positive, profitable contribution, then have at it. We're fine with that. But for a lot of guests, direct booking is preferable. They know what they're getting, they know who they're dealing with. We get rich data. It creates an engagement with the brand. And, obviously, again, for our owners it is much more profitable.

So, I think they're always going to exist in parallel. The important thing is you target it to the right guest. What you don't want is guests who are loyal or can be brand loyal booking through OTAs, because it's too expensive for the owners. They work in tandem.

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Chris Agnew, MKM Partners - Analyst [8]

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Thank you. And if I could ask one follow-up, just looking at your US pipeline, obviously a strong pipeline, just over 100,000 rooms, and given your gross openings in 2016, 24,000, is it fair to assume that the gross openings should accelerate from here? And then, also, the dispositions or the units removed from the system were probably at the higher end of the range. I think you said 2% to 3% before. How should we think about that going forward? Thank you.

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Rich Solomons, InterContinental Hotels Group - CEO [9]

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Paul, do you want to pick this up?

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [10]

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Chris, in terms of the removals, and we've said 2% to 3%, what we removed this year was probably in the mid point of that range. It may vary a little bit year on year, but I would hope that we will start to see it come, over time, down towards the lower end of the range. There may be some years where we have to nudge it up a bit if we want to take something out but on average I would expect to see it come down a bit.

In terms of the openings, we started really increasing the signings back from 2011. A lot of what we're signing is new build, so it does take a period for that to come through and get opened. But I would expect that to come through.

In terms of the US, we saw the highest rate of room openings in the US in 2016 we've seen for a very long time. So, it is starting to come through. And I'd expect in 2017 we will see more benefits.

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Chris Agnew, MKM Partners - Analyst [11]

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Thanks.

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Operator [12]

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Our next question comes from Stephen Grambling. Your line is now open.

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Stephen Grambling, Goldman Sachs - Analyst [13]

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Thanks for taking the question. You said having a differentiated hotel experience is a key part of the value proposition. You have some details on slide 53 about technology driving your commercial strategy. Can you just talk a little bit more how these will translate into improving personalization of the guest experience, and perhaps dig into any changes you have made or thought about with the reservation management system as you approach the testing and rollout phase?

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Rich Solomons, InterContinental Hotels Group - CEO [14]

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That could be a very long answer. I will give you a [covered copy]. I think personalization -- there's many aspects of personalization. There used to be the viewpoint -- you'll personalize my stay, I'd just like green apples in my room when I arrive. And it really isn't that.

What it is, is that we see, from the research that we do and the customers we talk to, is what they want is what they get across the stay. So, if you want to walk into the hotel and be greeted and spend a lot of time with the front desk and be taken to your room, then that will happen. If you want to have everything done on-line and just turn up, then that can happen.

And through technology, certainly through digital and use of the app, you can do an awful lot of different things for guests. We're piloting things like ordering on-line, complaining about problems in your room on-line through your app, and so on. And it's knowing your customers better, as well, whether it be the room they want, whether it be time of check-in, whatever it might be. There's just an awful lot you can do.

What GRS will do will give us a state-of-the-art reservation system which allows us to collect data, allows us to sell room attributes and stay attributes in a way that we just can't do today where we have an old mainframe system -- that works extremely well and extremely efficiently but doesn't enable us to personalize or sell things in a different way, much more in line with what we think guests will need in the future. So there's a lot of pieces to it.

I think the important thing here is there's lots of things you can do with technology that actually aren't necessarily of big value to guests and might take up a lot of time and effort. So, for example, we know that mobile check-out is much more attractive to guests than mobile check-in. There's different reasons for that so we focused on. And I think it's easy to get carried away by the art of the possible rather than the art of the relevant.

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Stephen Grambling, Goldman Sachs - Analyst [15]

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That's helpful. And then I think you may have talked about this on the earlier call, but maybe if you can elaborate on any change in corporate behavior you may have seen post the US election given the rebound we've seen in small- and medium-size business concepts.

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Rich Solomons, InterContinental Hotels Group - CEO [16]

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I think it's too early to say, isn't it, Paul?

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [17]

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Yes, it really is. You'd have seen the January numbers, as well, Stephen. They weren't a bad set of numbers. Obviously some benefits from DC and the inauguration and that.

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Rich Solomons, InterContinental Hotels Group - CEO [18]

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Big inauguration.

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [19]

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Yes, that huge inauguration. But nothing really that I'd read into the numbers other than that.

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Stephen Grambling, Goldman Sachs - Analyst [20]

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Thank you. And then on capital allocation priorities, can you just remind us of why the special dividend versus buyback, and how we should think about excess capital going forward, or cash going forward? Thank you.

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [21]

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What we've said consistently is we think the right leverage ratio for the business is 2 to 2.5 times net debt to EBITDAR. Where we have cash that is genuinely surplus that we can't invest it in the business, then we will return it to the shareholders. Over the last 13 years now, we will have returned $12.8 billion of it, some of that from disposals of assets and a very large portion, about $5 billion of it, from operating cash flows in the business. This is a very cash generative business.

We always evaluate how best to return funds. Having returned $12.8 billion, you have to use every mechanism at your disposal. What we know is it's quicker to do it as a special dividend. We're quite in a liquid stock now, and returning that much stock is always a risk that we are the buyer in the market, which we don't like to be. So, as we look at this time, we decided to do the special dividend with share consolidation. It doesn't mean that we completely rule out a buyback at some point in the future, but on this return, it is going to be a special dividend.

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Rich Solomons, InterContinental Hotels Group - CEO [22]

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And we talked to shareholders about it and they are happy with the dividend, as are we.

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Stephen Grambling, Goldman Sachs - Analyst [23]

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Great. Thank you so much. I will jump back in the queue.

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Operator [24]

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Our next question comes from David Katz.

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David Katz, Telsey Group - Analyst [25]

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Good afternoon, all, or good morning. Just a follow-up question on unit growth. We want to be careful not to look at just the total net unit growth and yours versus your competitors'. But when we do that, the net unit growth is a little bit lower than what some of the others have indicated. I don't want to guess, but my perception is that there are some net removals in there, particularly in the Americas, that is bringing down that net number. Can you just elaborate a bit more on what the strategies are for that? And have you done the math around, is it better to place the standard in a different place and have greater unit growth versus more removals and lower unit growth and presumably a higher-quality REVPAR along the way?

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Rich Solomons, InterContinental Hotels Group - CEO [26]

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Let me start that and I'm sure Paul will add. Our unit growth has been a little lower than Hilton and Marriott's, although ahead of a lot of other people. I think you can talk to them about some of their -- so, net at the gross level, where we're right up there.

And you're absolutely right. It is to do with removals, which we have not been shy about. We have talked a lot about and it has been consistent. Some of it has been historic cleanup, but we're not at the point very much very focused on maintaining and growing quality.

I think in this business -- making no comment on competitors because I have no idea what's really in there -- but from our perspective we could easily add more rooms, but we are genuinely trying to create, and are creating, a high-quality long-term sustainable growth business. And our belief, absolutely, as I've talked about and you have heard me talk about over the years, David, is you have to have brands that are consistent and truly deliver to guests through good and bad times. In good times, it's easy to fill rooms, but in bad times you do it because you've got something they prefer and they will pay a premium for.

In order to do that you have to be selective in hotels you bring in, the locations, the owners, and you have to be very rigorous in terms of what you remove. I am involved with retail businesses, have been in the past, and in any multi-unit retail business you have to refresh your estate. If you don't do that, for whatever reason, your ownership doesn't want it, or you are fixated on profit growth, in the short term you will damage the long-term value of the business. We've been very consistent about that.

Obviously we would always like to see higher system growth. That's part of one of our key metrics. But we aren't going to do it at the expense of quality and future sustainability. Paul, do you want to pick up on the numbers or anything?

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [27]

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If you look at the breakout of where the removals are coming through and where we're adding, you can see that outside of the Americas, the other three regions, the removals are less than 1% of our business stats. So, it's really just in the Americas where we're taking out the rooms. As I said earlier, we think that will come down a little over time. But, as Richard said, on a stick-built estate, you have got to continue to refresh it and make sure that those brands, Holiday Inn Express and Candlewood, in particular, they have a finite life when they're built, so when it's time to move them on, we will and we'll add better representation to the brand.

When you look at the number of signings that we're making, which in the US on a hotels basis was our highest for a decade, there's an awful lot of demand for the brand. So we can do. We can bring in more at the top and take a few out at the bottom.

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Rich Solomons, InterContinental Hotels Group - CEO [28]

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So it's a balance, obviously. But I think in a low-growth environment where we generated 5% revenue growth, 10% profit growth, 23% earnings growth, it's a balance we're comfortable with.

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David Katz, Telsey Group - Analyst [29]

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Understood. One more question, if I may -- and this is as much an industry question as it is related to you. There's certainly been a number of brands launched over the past positive cycle, and you have added some to your roster, as well. A two-part question. One, are we getting to a point where you think there are just too many brands out there? If we look at some things that Hilton has done and what Marriott is going through, et cetera, it would seem that there are some brands in important categories for you where the competition is going to ramp. And I think privately they would say they're coming for you. What's your perspective or view about the brand landscape, particularly in limited services as it relates to Holiday Inn and Holiday Inn Express, and how you position yourself to compete going forward?

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Rich Solomons, InterContinental Hotels Group - CEO [30]

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I think there are a lot of brands out there. As you say, we've done our fair share of them. It's interesting. There's a couple of things, I would say. If they're coming for us, we're used to that, so not too worried.

The way we think about brands is a little bit different. We have -- it depends how you count it -- 10 or 11 brands versus 30-plus for Marriott, and it's well into double digits and they keep adding new brands. I haven't counted recently. And our view is, what you want, actually, is large and more powerful brands.

So, Holiday Inn is the largest mid-market brand in the world, by far. It's double the size of the next one. InterContinental is double the size of the next luxury brand. And as I said, it's performing extremely well, overtaking Shangri-La, it's the top luxury brand in China in terms of perception, not just size.

So, being able to build owner awareness, customer awareness, scale, density, and marketing efficiency, because marketing multiple brands is incredibly expensive versus marketing scale brands. And I think you see the consumer goods companies doubling down on big brands. So, philosophically, it's the right way to go.

It's easy to add brands, again, if you think about it purely from a supply perspective. From a guest perspective, if your brand isn't meaningful, and relevantly differentiated, as I have been talking about, then all you're doing is confusing them. So, I think it's really important that we continue to take brands seriously.

You've got intermediaries who would love to commoditize the industry. And the more brands we've got that don't stand for something, the easier it is to intermediate them.

I think in the mid market we've obviously done an awful lot with Holiday Inn and Holiday Inn Express. We do see opportunity in the mid market to add a brand or two, particularly as we get to scale in the US with Holiday Inn and Holiday Inn Express, where you almost feel there's a limited number of places we can still add, although the pipeline is still well in the hundreds, and we're continuing to grow this brand, as you know. I think that's something we will continue to look at. But I think it's not just about number of brands, it's about the quality of what you have got.

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David Katz, Telsey Group - Analyst [31]

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Thanks very much.

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Operator [32]

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Thank you. And we do have a follow-up question from Stephen Grambling. Your line is now open.

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Stephen Grambling, Goldman Sachs - Analyst [33]

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Thanks for taking the follow-up. Perhaps I missed this but you called out franchise-plus signings and had some comments on what the new model brings to me. Can you just help clarify what the difference is between these franchise-plus contracts versus the standard contracts? Thanks.

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Paul Edgecliffe-Johnson, InterContinental Hotels Group - CFO [34]

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We launched franchise-plus in China for the Holiday Inn Express brand in May last year, and we have signed 20 to date. We mandate who the general manager is and we mandate that they use various of our tools which will help them deliver the service proposition. So, it's the intermediate step between managed and franchise.

You give more control to the owner, because that's what they're looking for, but in an environment where there's still a little bit of education required and we want to maintain a little bit more control. It works well for the owner and it works well for us. Very strong demand from owners, and I'm sure it will yield a lot more contracts in 2017.

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Stephen Grambling, Goldman Sachs - Analyst [35]

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That's helpful. Thanks again.

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Rich Solomons, InterContinental Hotels Group - CEO [36]

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It's important, though, it's an important business model for us in greater China. And, as Paul has been saying, it enables us to drive quality and retain control of this business; whereas, others have gone for master franchising with local players, which we don't think is a sensible route forward. Because we have scale and we have the quality operation out there, we can grow it. And we can retain the economics, which is what is important. It's a bit -- back to the earlier question, Dave, about system size -- we could drive system size through master franchising, but it risks quality and certainly doesn't drive the economics. So, we are taking a slightly different approach in greater China where I think our leadership position enables us to do that as opposed to having to play catch-up or accelerate growth artificially.

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Stephen Grambling, Goldman Sachs - Analyst [37]

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Thank you.

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Rich Solomons, InterContinental Hotels Group - CEO [38]

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Thanks, everybody. I appreciate the question. I appreciate you listening in. Please follow up with Heather and the IR team here if you've got any more questions. Perhaps we'll see some of you when we're over there in the US shortly. Thanks for very much. Thanks, operator, we're done.

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Operator [39]

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That concludes today's conference. Thank you so much for your participation. You may now disconnect.