IHG Announces 2012 Operating Profit Up 10%

Preliminary Results for the year to 31 December 2012

Strong growth and scale efficiencies drive double-digit increase in profits

Financial summary1	2012	2011		% Change YoY
			Actual	CER3	CER & ex. LDs4
Revenue	$1,835m	$1,768m	4%	5%	6%
Operating profit	$614m	$559m	10%	11%	13%
Adjsted basic EPS	141.5¢	130.4¢	9%
Basic EPS2	189.5¢	159.2¢	19%
Total dividend per share	64.0¢	55.0¢	16%
Net debt	$1,074m	$538m
Fee revenue5 growth	6.8%	5.7%
RevPAR growth	5.2%	6.2%
Net Rooms growth	2.7%	1.7%

Richard Solomons, Chief Executive of InterContinental Hotels Group PLC, said:

“2012 was another year of significant progress for IHG with our preferred brands driving RevPAR up 5.2%, led by the US up 6.3%.  Together with 2.7% net rooms growth, which is fuelled increasingly by our expansion in developing markets, this drove up fee revenues by an impressive 6.8%.  This growing scale allowed us to reinvest in the business while achieving better than anticipated margin progression.

The financing environment remained tough through 2012 in many of our key markets, but we still signed on average one hotel a day into our pipeline.  This reflects the excellent relationship we enjoy with our owners and further strengthens our foundation for high quality growth.  We extended our portfolio of preferred brands, launching in the first quarter of 2012 the innovative HUALUXE Hotels & Resorts and EVEN Hotels.

The $1bn return of capital, announced in August, underlines the benefit of our asset light strategy in delivering strong free cash flow, and our commitment to return value to shareholders.

IHG’s proven strategy and resilient business model position us for further good performance in 2013, despite the challenging economic environment.  The 16% increase in our dividend demonstrates the confidence we have in our ability to deliver sustained high quality growth, as we prepare to celebrate our 10th anniversary as a standalone business.”

Driving High Quality Growth

• $21.2bn of total gross revenue⁵ from hotels in IHG’s system, up 5%
• 2012 global RevPAR growth of 5.2%, with rate up 3.2% and occupancy up 1.2%pts
  • Americas 6.1% (US 6.3%); Europe 1.7%; AMEA 4.9%; Greater China 5.4%.
  • Q4 global RevPAR growth of 3.9%: Americas 5.7%; Europe 1.2%; AMEA 1.8%; Greater China (0.3)%.
• System size of 676k rooms (4,602 hotels), up 2.7% year on year
  • 34k rooms (226 hotels) opened and 54k rooms (356 hotels) signed, both up around 5% on an underlying5 basis.
  • 16k rooms removed, down 51% on 2011, and now at more normal levels post completion of Holiday Inn relaunch.
  • High quality pipeline of 169k rooms (1,053 hotels), with c. 40% under construction.
  • 5% global industry supply share and 12% active global pipeline share support high quality growth.
• Fee revenues⁵ up 6.8%
  • Increasing proportion of new rooms are now coming from developing markets, driving strong fee revenue growth, albeit at lower absolute RevPAR levels, particularly in the initial years as demand drivers mature.
  • Developing markets represent 19% of system size, 29% of 2012 room openings and 50% of our pipeline.
• Building preferred brands
  • Good traction for our new brands, with 15 HUALUXE hotels now in the pipeline and our first EVEN hotel signed in the fourth quarter.
  • Holiday Inn continues to outperform, growing premiums to the upper midscale segment in the US over the past 5 years by 7%pts for Holiday Inn and 5%pts for Holiday Inn Express. Holiday Inn ranked "Highest in Guest Satisfaction Among Mid-scale Full Service Hotel Chains" by J.D. Power and Associates for 2nd year in a row.
  • Crowne Plaza repositioning programme is progressing well.
  • Hotel Indigo system size at 50 hotels with a further 47 in the pipeline (total gross revenue: $172m, up 29%).
• Best in class delivery
  • 69% of rooms revenue delivered through IHG Channels and by Priority Club Rewards members direct to hotel.
• Growing margins
  • Fee based margins of 42.6%, up 2%pts, a particularly strong result, which will revert back to more normal levels of growth in 2013.

Asset sales

• The disposal process for InterContinental London Park Lane has commenced, and continues for InterContinental New York Barclay.

Current Trading Update

• January global RevPAR up 6.6%, with rate up 2.1%. Americas 7.0%, Europe (0.1)%, AMEA 6.0%. Greater China up 21.0% principally reflects the shift in timing of Chinese New Year in 2013 into February from January.
• One individually significant liquidated damages receipt of $31m in Americas managed in Q1 2013. $6m benefit in the full year 2013 from cessation of depreciation on the InterContinental London Park Lane, now held for sale.

¹ All figures are before exceptional items unless otherwise noted. See appendices 3 & 4 for financial headlines

² After exceptional items 

³ CER = constant exchange rates

⁴ Excluding significant liquidated damages: $16m 2011, $3m 2012.

⁵ See appendix 6 for definition

Americas – Double-digit adjusted profit growth driven by RevPAR outperformance

RevPAR increased 6.1%, with 4.1% rate growth, and fourth quarter RevPAR increased 5.7%. US RevPAR was up 6.3% in 2012, with 6.2% growth in the fourth quarter, despite uncertainty regarding the presidential election and "fiscal cliff". On a total basis, including the benefit of new hotels, US RevPAR grew 7.0% in the year, outperforming the industry⁶, which was up 6.8%.

Revenue increased 1% to $837m and operating profit increased 8% to $486m. After adjusting for owned hotel disposals, liquidated damages receipts in the managed business of $3m in 2012 and $10m in 2011 and results from managed lease hotels5, revenue was up 6% and operating profit up 10%. This was predominantly driven by the franchise business, where royalties were up 9% due to 6.0% RevPAR growth and 2.3% net system size growth. Owned profits increased 41%, driven by double digit RevPAR growth at our InterContinental hotels in Boston and San Francisco and 4% RevPAR growth at InterContinental New York Barclay.

We opened 17k rooms, up 8% on 2011 on an underlying⁵ basis, including 6 Hotel Indigo hotels, and IHG's second InterContinental hotel in Mexico City. We signed 26k rooms, with the first EVEN hotel, a flagship property in Manhattan, New York City, signed in October. The Holiday Inn brand family accounted for c.70% of hotel openings and signings in the year, demonstrating the ongoing benefits of the re-launch.

Europe – Robust performance and strong pace of openings

RevPAR increased 1.7%, with 1.2% rate growth and fourth quarter RevPAR increased 1.2%. Despite challenging economic conditions across Europe, RevPAR during the year grew by 2.5% in the UK and by 5.4% in Germany, where the industry benefited from a busy trade fair schedule.

Revenue increased 8% (13% at CER) to $436m and operating profit increased 11% (16% at CER) to $115m. At CER and after adjusting for a leased hotel disposal and excluding results from managed lease hotels5, revenue increased 5% and operating profit increased 16%. This was driven by a 2.1% increase in net system size and solid RevPAR growth, including 8.0% at InterContinental London Park Lane and 2.5% at InterContinental Le Grand Paris, plus a $4m decrease in regional overheads.

We signed 7k rooms (48 hotels), up 22% on 2011, including the first 2 Holiday Inn Express hotels in Russia, 6 Holiday Inn brand family hotels in Germany and 7 Hotel Indigo hotels, with firsts for this brand in France, Israel and Spain. 5k rooms (39 hotels) were opened into the system, the highest number of hotel openings in the region in the last 4 years. Openings included InterContinental London Westminster, our second for the brand in London, and 5 Hotel Indigo hotels, doubling the system size in Europe for the brand.

AMEA – RevPAR growth and cost control drive good profit growth

RevPAR increased 4.9%, with 1.8% growth in the fourth quarter. Strong trading in South East Asia and Japan was offset by slowing economic growth in some other markets in 2012. In the Middle East, political tensions continue to impact trading in some countries such as Lebanon, but markets such as Saudi Arabia and the UAE have performed well, with RevPAR up 8.0% and 5.5% in the year, respectively.

AMEA revenue increased 1% (0% CER) to $218m and operating profit increased 5% (4% CER) to $88m. At CER and after adjusting for a $6m liquidated damages receipt and the related disposal in 2011 of a hotel and partnership interest in Australia, revenue increased 3% and operating profit increased 16%, benefiting from robust trading in the managed business and careful cost control.

We signed 8k rooms (36 hotels) in the region, of which 4k were Holiday Inn brand family rooms signed in India and Indonesia. We also signed 6 InterContinental hotels, including 2 resort locations in Australia and Thailand. We opened 4k rooms (16 hotels) in the year, including 4 Crowne Plaza hotels, 2 Crowne Plaza Resorts and the first Holiday Inn Express in India, in Ahmedabad. This hotel was opened by IHG and Duet India Hotels Group, and was awarded '2012 World's Leading New Mid-Market Hotel' by World Travel Awards.

Greater China – Increasing scale drives another year of double-digit profit growth

RevPAR increased 5.4% with rate growth of 3.1%. RevPAR was down 0.3% in the fourth quarter reflecting the ongoing industry-wide impact of the China-Japan territorial island dispute, the political leadership change and the broader economic slowdown across the region.

Revenue increased 12% (12% CER) to $230m, with fee growth5 of 16%, and operating profit was up 21% (22% CER) to $81m. This was driven by 19% profit growth in the managed business where RevPAR was up 5.6% and net rooms up 10% (following 14% rooms growth in 2011). InterContinental Hong Kong also had a strong year with 6.7% RevPAR growth and good cost control, driving owned operating profit up 22%.

We opened 8k rooms in the year, taking our system size in the region up 12% to 62k, our 7th consecutive year of double digit room growth. Openings included 8 Crowne Plaza hotels, 2 Hotel Indigo hotels and Holiday Inn Macau Cotai Central, which at 1,224 rooms is the largest Holiday Inn in the world. Signings of 13k rooms were up 11% on 2011, taking our pipeline to 51k rooms and affirming our market leading position. Signings included 15 HUALUXE hotels.

⁵See appendix 6 for definition

⁶ Source: Smith Travel Research

 

Uses of Cash

• Cash generation: Free cash flow of $463m (2011: $422m) plus $8m cash proceeds from disposals, more than covered growth investment and ordinary dividends in the year.
• Growth Investment: 2012 growth capital expenditure of $20m reflects the unpredictable timing of this type of spend. $113m maintenance capital expenditure. 2013 expectations unchanged: $100m-$200m growth capital expenditure and c.$150m maintenance capital expenditure.
• Ordinary dividend: up 16%, the third consecutive year of double-digit growth.
• Capital returns: $0.5bn special dividend paid in October 2012. $107m of $0.5bn share buyback programme completed in the fourth quarter.

Interest, debt, tax and exceptional items

• Interest: 2012 charge of $54m (2011: $62m), decreased by $8m primarily due to lower average net debt levels.
• Net debt: $1,074m at the end of the period, up $536m on 2011 including the payment of $612m in relation to the special dividend and share buyback programme. IHG has extended its maturities and diversified its debt profile, issuing a 10 year £400m bond in the fourth quarter.
• Tax: Effective rate for 2012 is 27% (2011: 24%). 2013 tax rate expected to be in low 30s, as previously guided.
• Exceptional operating items: Net exceptional charge before tax of $4m (2011: $35m net credit). An exceptional tax credit of $142m relates to the settlement of prior year matters and changes in legislation resulting in the recognition of deferred tax assets.
• Pension: IHG has agreed with the Trustees of the UK defined benefit pension plan to make additional contributions of £30m in 2013 and £15m in 2014, in addition to the £45m which was announced at Q3 results and paid in October 2012. This follows the triennial actuarial valuation as at 31 March 2012 which showed a deficit of £132m.

Change from Quarterly to Half Yearly Reporting

• IHG will release interim management statements for Q1 and Q3, and in line with wider UK market practice, focus on reporting full financial statements for a more meaningful time period of 6 months.
• We will continue to publish supplementary data for rooms and RevPAR for Q1 and Q3, and hold a conference call with Q&A session.

Appendix 1: RevPAR Movement Summary

	January 2013			Full Year 2012			Q4 2012
	RevPAR	Rate	Occ.	RevPAR	Rate	Occ.	RevPAR	Rate	Occ.
Group	6.6%	2.1%	2.3pts	5.2%	3.2%	1.2pts	3.9%	2.5%	0.9pts
Americas	7.0%	3.9%	1.5pts	6.1%	4.1%	1.2pts	5.7%	3.8%	1.1%
Europe	(0.1)%	1.2%	(0.7)pts	1.7%	1.2%	0.4pts	1.2%	0.5%	0.5pts
AMEA	6.0%	1.4%	2.9pts	4.9%	1.2%	2.4pts	1.8%	(0.2)%	1.4pts
G. China	21.0%	(6.7%)	12.8pts	5.4%	3.1%	1.3pts	(0.3)%	1.4%	(1.1)pts

Appendix 2: Full Year System & Pipeline Summary (rooms)

	System					Pipeline
	Openings	Removals	Net	Total	YoY%	Signings	Total
Group	33,922	(16,288)	17,634	675,982	3%	53,812	169,030
Americas	16,618	(9,199)	7,419	449,617	2%	25,536	72,573
Europe	5,477	(3,335)	2,142	102,027	2%	7,023	15,184
AMEA	4,243	(2,589)	1,654	62,737	3%	7,866	30,357
G. China	7,584	(1,165)	6,419	61,601	12%	13,387	50,916

Appendix 3: Quarter 4 financial headlines

Operating Profit $m	Total		Americas		Europe		AMEA		G.China		Central
	2012	2011	2012	2011	2012	2011	2012	2011	2012	2011	2012	2011
Franchised	128	118	108	99	15	14	3	4	2	1	-	-
Managed	67	54	15	9	10	9	27	23	15	13	-	-
Owned & leased	40	32	8	4	13	11	2	1	17	16	-	-
Regional overheads	(36)	(32)	(16)	(12)	(10)	(10)	(4)	(5)	(6)	(5)	-	-
Profit pre central overheads	199	172	115	100	28	24	28	23	28	25	-	-
Central overheads	(38)	(35)	-	-	-	-	-	-	-	-	(38)	(35)
Group Operating profit	161	137	115	100	28	24	28	23	28	25	(38)	(35)

Appendix 4: Full year financial headlines

Operating Profit $m	Total		Americas		Europe		AMEA		G. China		Central
	2012	2011	2012	2011	2012	2011	2012	2011	2012	2011	2012	2011
Franchised	547	511	466	431	65	65	12	12	4	3	-	-
Managed	221	208	48	52	32	26	90	87	51	43	-	-
Owned & leased	125	108	24	17	50	49	6	5	45	37	-	-
Regional overheads	(123)	(121)	(52)	(49)	(32)	(36)	(20)	(20)	(19)	(16)	-	-
Profit pre central overheads	770	706	486	451	115	104	88	84	81	67	-	-
Central overheads	(156)	(147)	-	-	-	-	-	-	-	-	(156)	(147)
Group Operating profit	614	559	486	451	115	104	88	84	81	67	(156)	(147)

Appendix 5: Constant exchange rate (CER) operating profit movement before exceptional items

	Total***		Americas			Europe		AMEA		G. China
	Actual*	CER**	Actual*		CER**	Actual*	CER**	Actual*	CER**	Actual*	CER**
Growth/ (decline)	10%	11%	8%		8%	11%	16%	5%	4%	21%	22%

Exchange rates:

	GBP:USD	EUR:USD		* US dollar actual currency
2012	0.63	0.78		** Translated at constant 2011 exchange rates
2011	0.62	0.72		*** After central overheads

Appendix 6: Definitions

Total gross revenue: total room revenue from franchised hotels and total hotel revenue from managed, owned and leased hotels. It is not revenue attributable to IHG, as it is derived mainly from hotels owned by third parties. The metric is highlighted as an indicator of the scale and reach of IHG's brands.

Fee revenue: Group revenue excluding owned & leased hotels, managed leases and significant liquidated damages. Growth stated at CER.

Fee based margins: adjusted for owned and leased hotels, managed leases and individually significant liquidated damages payments.

Managed lease hotels: properties structured for legal reasons as operating leases but with the same characteristics as management contracts.

Underlying openings & signings: openings growth adjusted to exclude 5k US Army base rooms and 7k InterContinental Alliance rooms opened in 2011. Signings growth adjusted to exclude 5k US Army base rooms also signed in 2011.

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