Executives: Catherine Dolton - Head of Investor Relations Keith Barr - Chief Executive Officer Paul Edgecliffe-Johnson - Chief Financial

Officer
Analysts: Patrick Scholes - Suntrust Robinson

Humphrey
Operator: Ladies and gentlemen, thank you very much for standing by and welcome to the IHG Full Year 2017 Results Call. I'm now going to hand the call over to Catherine Dolton to begin.

Catherine Dolton: Good morning, everyone. This is Catherine Dolton, Head of Investor Relations at IHG. I'm joined this morning by Keith Barr, 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 U.S. 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. I will now turn the call over to Keith Barr.

Keith Barr: Thanks, Catherine.

Good morning, everyone, and welcome to our 2017 full year results call. Paul will talk you through our financial performance in a moment, but let me first share some highlights. We delivered another year of strong performance in 2017. Solid RevPAR increases in the U.S. and globally, as well as a 4% net system size growth, our best since 2009, drove underlying fee revenue up by 5%.

We again expanded our fee margin, increased underlying earnings per share by 22%. And our disciplined use of capital and high quality fee streams continue to generate significant levels of cash flow. Reflecting the strong performance and our confident outlook, we have increased our total annual ordinary dividend by 11%. Back at August last year, I talked about the success of IHG's strategic model and the crucial role that this has played in our consistent market outperformance over the past few years. I also talked about my intention to work our model harder in the future.

And so today, we are announcing a series of new strategic initiatives, which represent a meaningful change in how we run our business. They're aimed at positioning us to deliver industry-leading net rooms growth over the medium term, as well as continued strong returns for our shareholders. In order to fund these plans we are undertaking a comprehensive company-wide efficiency program, which we started in August 2017. The program will realize a $125 million in annual savings across IHG's P&L and system fund for reinvestment by the end of 2020. Over that period, our disciplined approach to managing our balance sheet and capital allocation will remain unchanged.

We are confident that these actions will enable us to deliver a quality long-term sustainable growth in cash flows and continue our record for maximizing shareholder returns. Let me now hand over to Paul, who will first take you through our results for 2017. Paul Edgecliffe-Johnson: Thank you, Keith, and good morning, everyone. We're pleased to report another year of solid financial performance with growth in all our key metrics. On an underlying basis, we translated 5% revenue growth into 8% operating profit growth, by leveraging the scalability of our assets by business and continuing our focus on relentless cost management.

This allowed us to increase our underlying fee margin by 140 basis points year on year, while continuing to invest for growth. Interest charges fell by $3 million. Due to the impact of the weaker pound a reduction on our bond coupon, following our refinancing in 2016, offset by higher average net debt levels during the year. Our reported tax rate stayed at 30%. We continue to expect U.S.

tax reform to benefit our group effective tax rate by mid to high single digit percentage points from the January 1, 2018, taking it to mid to low 20%s. This benefit will flow through to our cash tax rate, which we now expect to be in the high single digit percentage range in 2018, due to tax payments made on account in 2017. This will trend closer to the P&L rate over time. The measures outlined in the U.S. tax bill also resulted in a one-off exceptional credit to the P&L of $108 million in 2017, most of which relates to the rebasing for our deferred tax liabilities.

This will be realized in cash terms over a long period from 2018. The weighted average number of shares decreased by 9%, due to the cumulative effect of the share consolidations following the special dividend payments made in May 2016 and May 2017. In aggregate, this performance enabled us to increase our underlying earnings per share by 22%. We added 48,000 rooms to the systems and at the same time, we exited 17,000 underperforming rooms. This is at the low-end of the 2% to 3% range that we typically expect, but will tick back up slightly in 2018, before trending back down again over the medium term.

This brought net system size growth to 4%, our best performance in eight years, combined with RevPAR growth of 2.7%, this drove total underlying fee revenue up 5%. So, moving on to trading, U.S. RevPAR was up 1.2% with 3% in the fourth quarter with continued noise from the ongoing impact of hurricanes Harvey and Irma, and the shift in timing of Jewish observances in September. What we do know though is our underlying U.S. performance marked a significant step-up from that in the third quarter.

Underlying franchise profits grew 1%. Good growth in royalty revenue was partly offset, but they impacted the initial financial incentives associated with our Crowne Plaza Accelerate program, the annualized cost of operating our development resources and the delayed payroll tax credit, which we now expect to recognize in 2018. After normalizing for notional foreign exchange translation impact in Venezuela, true underlying managed profits were up 2%, driven by 5% rooms growth and lower costs associated with our 20% interest in the InterContinental New York Barclay. These benefits were partially offset by lower hotel termination fees and challenging trading conditions at one property. Regional overheads benefited from lower than anticipated claims in our U.S.

healthcare program, something that we don't expect to continue into 2018. We opened 22,000 rooms, our highest ever since 2010. And we signed 37,000 rooms, including 16,000 for Holiday Inn Express, up 15% on last year and 4,000 rooms at avid hotels, in its first three months of franchise sales. It is pleasing to note that, as we had expected, our average signings do not appear to be slowing the growth in Express. In Europe, RevPAR was 6.3%, and in the UK RevPAR was up almost 5% in both London and the provinces with some slowing of growth in the capital in the fourth quarter, due to strong comparables and a reduction in U.S.

inbound travel as the pound strengthened against the dollar. In France, RevPAR was up 7% with double-digit growth in Paris as demand continued to recover following the terror attacks in 2015 and 2016. This strong RevPAR performance combined with 3% rooms growth translated into underlying revenue growth of 10% and profit growth of 16%. In our Asia, Middle East and Africa region, RevPAR was up 1.5%, a 4% decline in the Middle East was primarily due to the ongoing impact of industry-wide supply growth. Performance in the rest of the region was strong with RevPAR up 4%.On an underlying basis, revenue was up 5% and operating profit up 12%, driven by double digit rooms growth and a reduction in overheads.

Finally, moving to greater China, where we continue to outperform the industry. RevPAR in Mainland China grew almost 7%, benefitting from strong transient, meetings and corporate demand in tier 1 cities. Tier 2 and 3 cities were also strong, driven by good meetings business and helped by some weak comparables in the second half. Improved trading conditions in Hong Kong and Macau led to RevPAR growth of 3% and 11% respectively. Underlying profit grew 16%, as we continue to leverage the scale of the operational platform we've built in Greater China.

Room openings totaled a record 11,000, taking our system size in the region to over 100,000 rooms and 300 hotels. Total signings for the region of 24,000 rooms represents of our best in 10 years taking the total signed in the past three years to more than 62,000 rooms. In recent years, we have maintained a relentless focus on removing cost in the business to improve our efficiency level and allowing us to invest to support future growth and drive margin accretion. This has driven a 10% reduction in our gross overheads over the past three years, and delivered material fee margin gains over the same period. So our steps to date had a big impact.

But there is a limit to what we can deliver each year without making broader structural and process changes to our business that is what we have now been working on. We will be simplifying our organizational structure making it leaner and flatter. We will outsource more non-core activities, introduce increased levels of automation and pool our expertise into global centers of excellence, removing areas of duplicated activity and maximizing our scale benefits. This will realize - this will release $125 million of additional capacity for reinvestment into our strategic initiatives, across IHG P&L and the system fund by 2020. These actions have designed to drive industry leading net rooms growth over the medium term.

Our plan is that on an annual basis, the delivery of these savings matches the ramp-up of spend on the new initiatives. As a result on a full year group wide basis, the net impact of new investments and of the savings overall should be minimal so there could be some noise from half-to-half due to phasing. Given the comprehensive nature of these actions and the structural and process changes to the organization that are required to be implemented, we expect to incur around $200 million in exceptional cash cost in relation to the program. To date $31 million of this total has been spent with most of the remaining balance expected in 2018. Our business model continues to generate significant amounts of cash with underlying free cash flow in 2017 of $516 million.

I've talked on many occasions about our priorities, the uses of cash. Our first focus is to reinvest capital to drive growth. The capital expenditure needs of the business have not changed. We continue to execute against the approach that we set out previously with growth CapEx of $342 million and net CapEx of $227 million during 2017. Our medium-term guidance remains unchanged at up to $350 million growth per annum, and we expect our recyclable investments to even out over the medium-term, resulting in net CapEx of $150 million per annum.

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 want to generate sufficient funds to support growth in the ordinary dividend. Our total dividend for 2017 is $1.04 per share, also up 11% and takes the total amount return to shareholders to $13 billion, 40% of which has been generated from operational cash flow. Lastly, where there is further cash available which is deemed truly surplus, we will return this to shareholders. We have clearly demonstrated this over the past 14 years, returning some $13 billion.

This is all in the context of our commitment to an investment-grade credit rating. The best external proxy for which is net debt to EBITDA of 2 to 2.5 times, we are happy to be at the top end of this in the current economic climate. The efficiency program we are undertaking will free up capacity to reinvest to drive sustained growth in the future. The costs we will incur to achieve this in 2018 means that the surplus funds we will have available will not be of a quantum that would justify paying an additional capital return to shareholders this calendar year. But we remain committed to doing so in the future.

Thank you. And I'll now hand you back to Keith.

Keith Barr: Thanks, Paul. I want to spend a moment giving you a sense of the broader context against, which we're announcing our new strategic initiatives. The success of our strategy to date has been borne out in our financial results.

We've grown our rooms faster than the industry, driven double-digit fee revenue growth and increased earnings per share more than 50% over the past three years. We've also consistently delivered against our key commercial metrics, driving meaningful improvements in Guest Love, loyalty contribution and system delivery which has driven superior returns for our hotel owners. But we are not complacent. We know that we must continue the strong performance for years to come. With our powerful global enterprise, which is driving strong performance across our full estate, IHG is well positioned to continue to grow, but the competition is not standing still.

That's why we're implementing new strategic initiatives to accelerate our growth. We'll do this, by making each element of our model work harder. In summary, we will be focusing and redeploying resources to better leverage our scale, strengthening our loyalty program, continuing to prioritize digital and technological innovation, and enhancing our industry leading franchise proposition, strengthening our existing brands and adding new ones, where we see the greatest potential for growth. Back in September 2017, we announced several changes to our operating structure, which became effective on the January 1 this year. Firstly, within our regional operations we brought together two of our current divisions, Europe and Asia, Middle East and Africa, whilst leaving our Greater China and America regions largely unchanged.

In what is a highly fragmented region, accessing growth opportunities in EMEAA means upweighting our investment in those individual submarkets that matter the most to IHG both in terms of overall value, but also where we can leverage our scale to accelerate our growth. We have also created a new integrated commercial and technology organization under the leadership of Eric Pearson, who was previously our Chief Information Officer. This will allow us to free up capacity to drive efficiencies and will enable us to bring new products and services to market much more quickly. And we welcomed Claire Bennett, our new Chief Marketing Officer in October. Claire has joined IHG from American Express in October.

Her new global marketing organization brings together and strengthens our brand, loyalty and marketing capabilities to drive greater agility and efficiencies. Our brands are strong and performing very well, but we believe that we have a significant opportunity to drive even better performance here. We can improve the efficiency of our spend, increase the impact of our marketing initiatives, and better leverage technology and data to drive even stronger performance. More broadly, the executive committee has worked together to ensure that the whole organization is structured in a way that best supports our growth plans, while freeing up capacity for reinvestment elsewhere. Moving to IHG Rewards Club, which is one of our greatest assets, by building long-term and trusted relationships with our guests, we drive highly profitable revenue into our hotels.

We have taken significant actions over the past couple of years to enhance our loyalty offer. In 2015, we introduced Spire Elite, a new top-tier for our most valuable and loyal guests, driving a 17% increase in these members, who now deliver almost one-quarter of our loyalty revenue. In 2016, we started to roll out member exclusive preferential rate, Your Rate for IHG Rewards Club, which members receive when booking through our direct channels. We completed the rollout during last year. And in the 12 months after launch, we drove direct channel growth up more than 3 points and retail segment growth up 2 points.

During 2017, we focus on launching new strategic partnerships that provide extra benefits to our loyal members. These included partnership with Amazon Kindle, Shell, OpenTable and Grubhub, as well as the ride-hailing service Didi in China. We will continue to focus on creating a more differentiated loyalty offer and be looking at further opportunities to secure more strategic partnerships and to enhance the value of the program. IHG's revenue delivery enterprise supports our entire global estate. This covers everything from our channel distribution systems and digital marketing, to our revenue management tools and operational expertise.

On average, IHG delivered some 76% of rooms revenues to hotels and our system up 5 percentage points over the last three years. Within this, digital is our largest channel and comprises revenues from our web and mobile devices, including our apps. 22% of rooms revenue to our hotels totaling $4.6 billion is now delivered via our digital channel. And we have more than doubled mobile revenue over the last three years to over $2 billion today. Looking ahead, we'll continue to prioritize digital and technological innovation to drive increased direct revenues.

IHG has a long history of leading the industry, when it comes to guest reservation and revenue management technology. We have continuously refined our technology over the years, and we are now in the process of rolling out almost recent update our new guest reservation system, which we've developed in conjunction with Amadeus. GRS will sit together with our enhanced proprietary revenue management system on our new cloud-based technology platform, IHG Concerto. Its initial functionality is GRS and revenue management, which in the future will be joined by an entire suit of hotel solutions, including property management, sales and catering, and point of sale. IHG Concerto is now online in more than 225 hotels worldwide, we are on track to complete rollout by the end of 2018 in to early 2019.

Moving now to the proposition we provide for our owners, and IHG has a long history of franchising hotels. It takes an immense amount of expertise, tools and scale to get franchising right, and to ensure that our owners have the support they need to drive superior guest experiences, revenues and returns. We have a winning formula and have created what we believe is the best franchise platform in the industry, but there is always an opportunity to do more to enhance and expand our owner proposition to unlock even more growth, and want to deepen the penetration of our brands in the highest value markets. So we'll be investing in more people on the ground and our focus market to support the expansion of our brands and more hotel developers to win more deals with more owners. We've also identified an opportunity to add in more resources to support owners through the hotel lifecycle.

This should help decrease the time taken between generating leads, signing and opening hotels and therefore help accelerate our net rooms growth. There is also significant potential for us to expand our franchise offer into new markets and brands. We launched franchise plus for Holiday Inn Express in Greater China in May 2016, and have since signed up 74 hotels to the new format, including 54 in 2017. We expect a strong momentum to continue into 2018. Building on this success, at the end of last year, we announced that we would expand our leading franchise offer to our Holiday Inn and Crowne Plaza brands in Greater China.

We've got agreements from four hotels to sign up to the new format to date, including the Holiday Inn Beijing Lido, which is the first - IHG's first ever hotel in China back in 1984. Over time, this will create significant opportunity for IHG, but we're taking a measured approach, working with established strategic partners who have proven track records of superior hotel management and operations experience. We're also looking at how we can evolve our operating model and owner proposition for Kimpton. This will allow us to further accelerate its growth both in its home U.S. market and globally.

We're currently looking at potential options for this. We'll have more news on this in due course. Moving now to our brands, as I touched on earlier, we have evolved our marketing functions so that we now have one comprehensive global approach. We now have one central chain that brings together everything relevant to our brands, positioning, pricing and priorities. This will help us deliver more coordinated approach to marketing and brand development activities allowing us to eliminate duplication of efforts and create significant efficiencies.

In recent years, we've developed a strong and differentiated brand portfolio, which appeals to guests and owners. I want to spend a few minutes talking about what we've done - what we're doing to strengthen some of our existing brands. I'll then touch on the opportunities we see to augment our portfolio. Starting with our mainstream brands and Holiday Inn. Our new modern guest room design is in over 75 open and pipeline hotels in the Americas, we're now scaling this concept for global rollout.

Our high impact public space design open lobby is in 70 European hotels with almost 80% of the estate across the region already committed to the upgrade. And the response from guests has been very positive with seven points uplift in Guest Love and 15% increase in food and beverage profit in pilot hotels. We are launching open lobby in the Americas in the first quarter of 2018. At Holiday Inn Express and our new guest room design is driving great results across the Americas and Europe, delivering meaningful Guest Love and RevPAR uplifts. Moving onto our upscale brand, Crowne Plaza has a position of strength in Greater China and EMEAA regions.

They've taken - the steps we've taken to strengthen the brand in Americas are wielding strong results. Our $200 million accelerate program is driving meaningful improvements in RevPAR index and Guest Love, and we've significantly upgraded our marketing spend, launching Crowne Plaza's largest multimedia brand campaign in 10 years. We're looking to take some of the design innovations that we originally developed in the U.S. to other markets globally. EVEN Hotels and Hotel Indigo appeals to guests wanting a more personalized experience.

EVEN is gaining momentum internationally, we launch the brand outside the U.S. in 2017 with our first signing in Auckland, New Zealand. This is part of a multi-unit agreement with our great partners Pro-invest to build 10 to 15 hotels for the brand across Australia and New Zealand. We also signed three EVEN Hotels in Greater China, with property set to open over the next years in Shanghai, Sanya and Jinan. Hotel Indigo is going from strength-to-strength.

In 2017, the brand saw its highest level of openings in five years, including an iconic property in Downtown Los Angeles, and our first resort for the brand in Bali. Moving to our luxury category, and the world's biggest luxury hotel brand, InterContinental Hotels and Resorts, we now have almost 200 hotels opened and more than 60 in the pipeline. We opened eight hotels in 2017, including a stunning property in Los Angeles. InterContinental continues to receive industry accolades, including jumping up to 64 places in the Nunwood customer experience ranking in the U.S. This means is now in third position, in between Disney and Amazon quite an achievement.

Since purchasing Kimpton at the end of 2014, one of our key objectives has been to take the brand global. We've made some good progress on this in 2017. We open the doors of our first property for the brand outside of the Americas in May, the Kimpton De Witt in Amsterdam, and it will soon make its debut in Asia and Greater China. This means that we now have our present secure for the Kimpton brand in 10 key markets around the world. I've talked before about the potential to add new brands to broaden and strengthen our portfolio.

We've always done this in a highly targeted, rigorous, and insights-driven way. This includes tapping into those segments that are both already high in value and have significant potential for growth. We make sure it's an opportunity that's very attractive to owners allowing them to add material supply at a high level of returns. And finally, IHG must have a clear advantage to win in the identified space. We must be able to deliver superior revenue at a price premium.

These things together allow us to create the optimum positioning of brand for both our owners and guests. I'm now going to touch on a couple of immediate opportunities we've identified. The first is the $40 billion upscale segment, which is expected to grow by 50% over the next 10 years. Our guest research has highlighted that many consumers are looking for something other than the traditional big-box upscale hotel. They want a more unique experience.

We think that there is a real opportunity for an upscale brand that offers the guest something more informal and differentiated, combined with the reassurance and quality standards of a branded chain. From an owner perspective, they want to brand that can be easily financed and provides a strong return on investment. They want rapid access to the revenue delivery benefits of IHG's global branded system, such as access to favorable negotiated rates with OTAs, strong direct channel contribution, access to IHG Rewards Club, a leading marketing capability and a strong business to business sales platform. So later this year, we'll be launching an upscale conversion brand that ticks all of these boxes. This will offer a new guest proposition, which delivers a strong visual identify through a focused set of high value brand standards, which from an owner's perspective requires a limited upfront capital outlay and are efficient to operate.

The rollout will be lead from our EMEAA region, after initial period we plan to extend this to other two regions. The second new opportunity is within the $60 billion global luxury segment, which is expected to grow by over 50% in the next 10 years. We see a real opportunity to round out our portfolio and add other luxury brands at a price point above InterContinental, and potentially also in the resort space. A more comprehensive luxury offer will have numerous halo benefits, including helping to strengthen our loyalty offer and attracting more B2B customers. It will further strengthen our owner proposition, giving us the ability to deepen our relationship with those who want to work with us across a broader range of segments and allowing us to fill a portfolio gap that many of our owners have.

It also gives us the opportunity to build our presence at higher price points and meet the demands of higher value consumers, whose needs our current brand - portfolio brands doesn't quite capture. Whilst, we already have considerable expertise in this area, we'll be upweighting our capabilities to the creation of a new luxury division with the center of excellence focused on the capabilities needed to win in luxury. By creating this dedicated division, we will bring together some of the most experienced and respected people in the industry. Collectively they will help drive our offer, ensuring that our existing luxury brands continue to evolve and allowing us to rejuvenate any new brands that we acquire in the future. On that point, we are currently looking to acquire one or two small luxury asset-light brands that we would incubate and grow in order to access these significant opportunities.

avid hotels is our new mid-scale brand, which we launched in September last year. It's positioned at guests who are feeling underserved by the existing mid-scale brands and the price-point below Holiday Inn and Holiday Inn Express. 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. For owners, it's a low cost to build, cost operate model that we anticipate will deliver cash on cash returns equal to Holiday Inn Express. avid is an incredibly enticing proposition for around 2,000 existing Holiday Inn brand family franchisees, who are ideal owners for this new brand and who were heavily involved in the key areas of its creation.

Since launch, we signed 75 hotels into the pipeline including our first in Canada. avid has been a perfect example of how we over a short period of time we identify the unique opportunity, engage potential owners, develop the successful concept and brought it to market. So, in summary, we have delivered a strong performance in 2017 and are confident in our ability to continue to accelerate our growth. The fundamentals for our industry remain strong and our scale has a significant competitive advantage. We have the right strategy and we are committed to making our model work harder.

We are reorganizing the company to create efficiencies, which we will reinvest behind the new strategic initiatives we've announced today. We are confident that these will deliver industry-leading and highly profitable net rooms growth over the medium term. This will in turn lead to significant cash generation and in line with past practice we remain committed to returning any surplus funds to our shareholders. Thank you. With that, Paul and I will be happy to take your questions.

Operator: Thank you very much. Apologies [Operator Instructions] Our first question comes from the line of Patrick Scholes with Suntrust. Patrick, please go ahead.

Patrick Scholes: Hi, good morning, good afternoon.

Keith Barr: Hi, Patrick.

Patrick Scholes: I'd like to ask some questions on the Kimpton brand. Certainly, looking at the results over the past year, it's been a big underperformer. And you laid out some - as far as the upcoming strategy, it seemed a little heavy on the brand expansion. I'm wondering can you drill down a little bit more on what is being done to improve the RevPAR index from that brand. Certainly, there is a - I'm sure you're probably aware that a lot of chatter at the ALIS conference, very unhappy Kimpton owners, and certainly chatter that the integration, the reservation system did not go well in January.

I wonder if you can comment on those. Thank you.

Keith Barr: Sure. I'd be happy to talk about that, Patrick. I guess, let me break it out from an owner perspective and from an IHG perspective in terms of - from an underperformance standpoint, in fact, actually the Kimpton brand in its entirety grew its RevPAR index last year in the Americas and had some very, very strong results.

And so, I guess, I would say that from a financial performance the Kimpton brand has been performing exceptionally well and performing very, very well for the owners overall. And from a group perspective, we've been accelerating the growth of that brand internationally. We've now have the signings in China, in Indonesia, in Taiwan and so forth. So from a group perspective, we're focused on accelerating the growth there. Coming back to the integration question you brought up, it's been a long-term integration.

In all transparency, when the conversion over from Synxis [ph] system, which is the platform that Kimpton was on, on to the IHG system, which is not what's happening with the rest of the people on GRS. There were a few challenges in the first few weeks, which we've been sorting out and working through with all the owners too. And I generally believe that we're on track now from a system perspective and loyalty integration standpoint. So anytime you're changing from a third party system into a new system, there are some challenges, so those definitely did occur. But we've been working very closely with the Kimpton owners.

We've been upweighting our investment behind marketing, sales, and loyalty to drive performance across that portfolio right now.

Patrick Scholes: Okay. That was all for me. Thank you very much.

Operator: [Operator Instructions] It appears we have no further questions on the telephone.

Keith Barr: Excellent. Well, fantastic then, Danielle. Thank you very much. Really appreciate you hosting this. And thanks everyone for joining the call and look forward to catching up with you later on in the year.

Thank you. That's it operator.

Operator: Thank you very much. Ladies and gentlemen, that does conclude the IHG call. This call has come to a close.

And you can now disconnect your lines.