InterContinental Hotels Group PLC

Good morning, everyone. Welcome to IHG Hotels and Resorts conference call covering the 2024 first quarter trading update. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Ellie Maloof, our Chief Executive Officer, and Michael Glover, our Chief Financial Officer. Just to remind listeners on the call that in discussions today, the company may make certain forward-looking statements as defined under U.S. law. Please do refer to this morning's announcement and the company's SEC filing for factors that could lead to actual results that differ materially from those expressed in or implied by any such forward-looking statements. For those analysts or institutional investors who are listening via our website, can I remind you that in order to ask questions, you will need to dial in using the details on page 3 of this morning's Q1 R&S release. The release, together with the usual supplementary data pack for the first quarter, can be downloaded from the Results and Presentations section under the Investors tab on isgplc.com. This morning, we also released a separate announcement regarding changes to system fund arrangements, which is summarized in the Q1 Trading Update release. You'll also find that separate full release under the Investors tab on isgplc.com, or by following the link within the Trading Update release. Now, over to Ellie.

Thank you, Stuart. And good morning, everyone. I'd like to start today by congratulating our teams on what has been a very busy and productive start to the year across our business, and which has been another period that has really demonstrated the attractiveness and strength of our globally diverse distribution. RevPAR continued to grow and on a global basis was up 2.6% on last year. This was driven by both ADR, which was up 2.3, and occupancy, which was up 0.2 percentage points. In terms of performance by state occasion, leisure demand remained robust, with global rooms revenue on a comparable hotels basis up 7% on 2023. Groups performance also improved, with revenue up 5%. Business revenue is flat, but that reflects the timing of Easter being in March this year compared to April last year, as the week leading up to Easter always experiences a lull in business travel. In terms of system growth, we opened more than 6,200 rooms across 46 hotels in the quarter, leading to 5% gross growth year-on-year and 3.4% net growth. The number of rooms opened in the quarter was 11% higher than in 2023, adjusting for the Bear Star rooms, which were being added this time last year. It is worth reminding that we typically experience seasonality in our system growth with relatively fewer openings and more removals in the first quarter of each calendar year. Year-to-date net system growth was therefore neutral, and we expect net growth to ramp up through the rest of 2024. Turning to signings, we added nearly 18,000 rooms into our pipeline in the quarter, which was an increase of 7% on the same period last year. This contributed to the milestone of over 300,000 rooms in the pipeline for the first time, an increase of 6.6% year on year. Over 35% of openings and signings were quicker-to-market conversions, reflecting the breadth and attractiveness of our brands and the benefits to owners of joining ISG's enterprise. This was further reflected with the major conversion deal we signed a couple of weeks ago, we were delighted to announce an agreement with Novum Hospitality, which will double ISG's presence across Germany and add up to 119 hotels or 17,700 rooms over the coming years. This deal boosts confidence in the outlook for our system growth and underlines the attractiveness to owners of our brands and enterprise platform. We expect the agreement to bring significant benefits for ISG and Novum Hospitality, including higher brand awareness increased direct bookings, and excellent loyalty engagement. Germany is one of Europe's largest hotel markets, and so there's strong domestic consumption that ICU will capture. The country also generated the highest number of international outbound trips globally in 2022, around 100 million, which is a further attraction to this priority market for us. Of course, we also expect agreement to drive the development of more of our brands across more locations. And in a separate announcement today, you will also see that we have made changes to our system fund arrangements, which will further improve economics for our owners and grow ancillary fee streams. This change is consistent with the strategic priorities we shared with you a couple of months back, which are value for owners through our leading commercial engines, and grow ancillary fee revenue and drive margin improvements for iSheet as part of our growth algorithm. In 2024, we expect the change to incrementally add $25 million to iSheet's revenue and operating profit from reportable segments. Then in 2025, it should be double that amount and will also grow further as more points are sold and as deferred revenue recognition ramps up. Michael will talk you through more of the detail on these new system fund arrangements in a moment after he has reviewed each region for you. And with that, let me hand it over to Michael.

Thanks, Ellie. Starting with the Americas, red bar was down 0.3% year-on-year. The U.S. was down 1.9%, whereas in aggregate, Canada, Latin America, and the Caribbean was up 11.3%. Occupancy in the region was down 1.1 percentage points, though pricing demand remained robust, with rate growing by 1.5%. In terms of demand types, groups demand was the strongest, with comparable rooms revenue up year-on-year by 5%. Leisure revenue was also ahead by 1%, while business revenue was slightly lower than the first quarter of 2023, down 2%. For the industry as a whole, this was a quarter with some adverse calendar timing and other seasonal impacts. When we look at the last eight weeks' rolling performance, which obviously smooths out the shift of Easter that impacts not just leisure travel but also the timing of business travel, our U.S. RepR in aggregate over the last eight weeks was ahead of last year. The quarter also had some other small adverse impacts to deal with, For example, the location of the Super Bowl this February compared to last year was less helpful in terms of the geographic distribution of our rooms inventory. And there was also less hotel demand for accommodation related to weather events than this time last year. And if you take our overall performance for the first quarter compared to the U.S. industry, we are very satisfied when we look at it on a weighted change scale basis. Looking ahead, booking trends would indicate a move back into positive repart for the second quarter. In terms of system size, over 3,000 rooms were opened in Q1 in the Americas, an increase of more than 60% versus the same period last year, albeit, as we've noted, Q1 is a seasonally small quarter for openings. This included 13 hotels across the Holiday Inn brand family, as well as openings for Avid, Atwell, and Garner as we continue to build momentum behind these newer brands. There were also two Kempton additions, one of which, the Kempton Todos Santos in Mexico, was an example of a hotel signed and opened in the same quarter, demonstrating the speed in which ISG can deliver to market high-quality conversions to our brands. We signed over 5,000 rooms across the Americas, broadly in line with the first quarter of 2023. It was a great start to the year for our newer mid-scale brands with eight Avid properties and nine Garner hotels added to the pipeline. Similarly, the 25 signings across our extended stay brands shows their continued strong appeal to owners. Moving on now to our Europe, Middle East, Asia, and Africa regions. where WebPAR was up an impressive 8.9% versus 2023. Pleasingly, this was driven by both pricing and demand, with rate up 4.5% and occupancy up 2.7 percentage points. The dispersion of WebPAR performance across EMEAA continued to narrow. WebPAR was up 17% in Japan, 10% in Australia, 7% in the Middle East, and 6 percent in continental Europe. RepR growth of 2.4 percent in the U.K. was simply a reflection of the normalized growth in a market which fully recovered earlier than much of the rest of the EMEA region. This time last year, RepR in the U.K. was already 12 percent ahead of 2019 levels, and so now we are further 2.4 percent ahead of that. Just over 1,000 rooms were opened in the quarter representing growth gross year-to-day growth of 0.4% and gross year-on-year growth of 7.2%. Net system growth was a slight decrease of 0.2% in the quarter. We expect a return to net growth as we progress through 2024. 5,400 rooms were signed to the pipeline in the quarter, 4% more than a year earlier. These signings were well dispersed across all our segments. demonstrating IceG's ability to compete and win deals all through the chain scales. It was great to see the first three Gartner deals signed as the brand becomes available across the EMEA region, having only launched in the Americas back in September. And, of course, the Novum deal will add more than 50 further Gartner hotels. Finally, moving on to Greater China, where Repar was up 2.5% year-on-year, driven by occupancy improvement of 0.7 percentage points and rate growth of 1.3%. An increase in international travelers in the quarter contributed to a 7.3% rise in Tier 1 city REPAR. In Tier 2 to 4 cities, REPAR was down 2.1%, given tougher comparables from the resurgent demand this time last year. And outbound leisure travel, particularly to Southeast Asia, has also picked up, which is a benefit we've seen in our EMEAA region. Looking ahead, we expect to continue to see a tailwind through 2024 from the return of more airlift capacity into greater China. In terms of system size, over 2,100 rooms were opened in the quarter, driving gross year-to-date growth of 1.2%. and gross year-on-year growth of 10.4%. Net system size growth was 0.2% year-to-date, while net year-on-year growth was 7.9%. Development momentum continues to build, and the 7,200 rooms signed in the region is an increase of 22% on the same period last year. Now, to update you on the share buyback, We are currently 30% of the way through the $800 million program announced in February. To date, this has reduced our share count this year by a further 1.4%. Ellie has already noted the new agreement recently announced with Novum Hospitality that will double IHG's presence in Germany. Just to add some further color for you, we currently have just under 100 hotels in Germany, And this portfolio of 119 hotels would add a further 111 in Germany, and the remaining eight are in Austria, the Netherlands, and the UK. The increase in our global system size would be up to 1.9% over the coming years, with the majority of the convergence expected to take place over the next 24 months. IHG is contributing key money capital that will reflect the phase conversion and timing of openings of this major portfolio of hotels, which of course includes the European debuts of our Garner and Candlewood Suites brands, which we are very excited about. And then in terms of fees, IHG will receive franchise fees after the phase conversion of the existing properties and upon the opening of the hotels under development. The fee revenue net of key money amortization once all the hotels are in our system, would be in excess of $10 million a year. Additionally, standard assessments were received into IHG's system fund, including those to cover the operation of IHG-1 rewards and marketing and reservation services. Finally, to cover off for you the separate announcement regarding the changes to our system fund arrangements, under the new terms that govern the sharing arrangements with the system fund, a portion of the revenue from the sale of certain loyalty points and some other ancillary revenues will now be recognized by IHG within our results from reportable segments. Initially, 50 percent of this will be recognized in 2024, which is expected to deliver an estimated incremental $25 million of both revenue and profit for the year, before increasing to 100 percent from 2025 onwards which doubles the run rate of this incremental fee stream. The run rate is expected to further increase in subsequent years as the number of points sold continues to grow and also due to the ramp-up effect of deferred revenue recognition. As analysts and investors revisit their expectations for our fee revenue and operating profit from reportable segments, or EBIT, you'll want to bear this in mind in this for future uplift. As Ellie mentioned, it is important to recognize that the changes we are making are also improving the economics for our owners. We're able to do this because of the successful growth and development of the IHG I Rewards Loyalty Program and the efficiencies and scale of the system fund. For example, the assessments into the fund meant that the system fund revenues in 2023 totaled nearly $1.6 billion, which is $330 million, or 27% greater than five years earlier. ISG's hotel owners' benefit from the substantial scale and efficiency of the system fund will continue to do so as it further grows and as the overall enterprise achieves new levels of strength. to the immediate benefit of owners and reflecting the efficiencies that are already being achieved, IHG is lowering its standard loyalty assessment that owners pay into the fund and is also increasing the reward night reimbursements that owners receive back out of the fund. Across all the changes being made to the system fund arrangement, IHG and the IHG Owners Association have worked together to ensure that overall capacity and effectiveness of the fund to invest and spend on behalf of all ISG system hotels remains strong, and that the operation of the fund continues to be on a net yield surplus or deficit basis over the long term. With that, I'll hand back to Ellie for some closing comments.

Thank you, Michael. So, to summarize the first quarter, global FFR has increased by 2.6% year-on-year with both occupancy and rate. showing further improvement. Growth system growth was 0.7% year-to-date, and net system growth was 3.4% year-on-year. Our newer brands continue to build momentum, including a dozen signings globally for Garner as it accelerates in Americas and secured its debut in EMEAA. And the progress we have made in securing large conversion deals and delivering ancillary fee streams gives us confidence in our ability to deliver our growth ambitions and drive shareholder value. As we progress through 2024, we expect to continue advancing the strategic priorities that we have laid out for ISG in order to drive the core components of value creation. As a reminder, these are growing our fee revenues through the combination of REVPAR system size expansion and ancillary fee streams, which in turn will drive further margin accretion. And with our typical strong cash conversion, this allows ICHE to both reinvest in the business and to return surplus capital to shareholders. With that, I will now pass back to the operator to open up the call for your questions.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Vicky Stern with Barclays. Please go ahead.

Yeah, morning. Just wanted to start off on the system fund changes. So it looks like it's sort of described as a win-win for all. IHG gets more and the owners seem to pay less. So if you could just help us understand sort of who loses here. Is that ultimately lower marketing spend? Where does the difference come from? And with that, how do your owners sort of feel about the initiatives? Yeah. Certainly on that point, you talked about the faster growth from beyond next year. So just any sense of what that 50 million by next year could ramp up at, what pace of growth beyond that. And then the final question was just back on the Novum deal. I don't think you've called out exactly how much key money will be involved there. So just any sort of quantification there and then, I guess, particularly whether that could lift you above that sort of 200 million capex level you've talked about for this year. Thanks.

Okay. Thank you, Vicky. Let me just start on your first question and second question. Also, I'll take part of the third question and turn it over on key money and expectations for that to Michael. First of all, the system fund, you know, when we made this arrangement to start selling points on the back of ISG1 rewards and the strength of our brands back in the mid-2000s, I think 2008, 2009, well before my time. The system fund was a fraction of what it is today. ICO won awards or hadn't grown like it had today. And we always assumed back then, I understand, that at some point when the system fund reached a certain scale, there would be a change made when the system fund reached that scale and had all the capabilities that it has today. Today, the system fund's nearly 1.6 billion. It has grown nearly 40% since 2018, and there's ample capacity to do everything we're talking about and continue the marketing of our brands and continue the effectiveness of our operations as it is. Remember, the system fund grows every year with the ref bar, grows with system size, grows with more ancillaries. And so it is a growing fund. It's not static. It's not a zero-sum game in the way that you might be thinking about it. Second, it is also not an accounting change. It is actual... fee stream that is today being recognized in the system fund that is now going to be the P&L. It's not an accounting change of that sort. It is high quality, high margin, and growing beyond that. Our owners are benefiting, as we said, by having higher reimbursement for loyalty nights, lower loyalty assessment, but that's something that we envision doing all the time across all the fees that we charge in the system fund at some point. When a fee When the system fund gets a certain scale, the unit cost per hotel is lower, and we are always trying to invest in our owner's value proposition. And because the system funds run at a net nil surplus or deficit, we want to make sure that they're getting the best value for the operation. So there's not a reduction in capability of what the system fund marketing will do, nor there is, say, somebody winning and therefore somebody has to be losing. Because as the system fund has grown, it's able to do all these things at once. That's the first question. On the ramp up, it ramps up for two reasons. One, because there is an element of deferred revenue that can only be recognized in future years when the points are consumed. Number two, because The point sales program is very popular with consumers, and people have been buying more points over recent years. And as ICHE1 rewards get stronger, and as our master brand gets stronger, and as our system gets bigger, we anticipate people to continue to buy more points. So that's the growth. On Novum, look, it's a terrific transaction. Let's step back. The opportunity to find a portfolio of 100 hotels in a straight franchise deal. It's not a partnership. It's not a distribution agreement. It is an actual franchise, a conversion deal. But to find a portfolio that can convert of this scale is very attractive, is very competitive, of course, in a high-value market like Germany, which is a very high, very large hotel market, but actually not very branded. So we and obviously other hotel groups are trying to grow our distribution in this high-value market, and we were successful in this. given the scale and size and quality of this portfolio and length of these franchise agreements, um, it was competitive as I said. So therefore there was some key money associated. We don't disclose that for, you know, commercial and competitive reasons, as I'm sure you understand. Um, I'll let Michael address how that, uh, plays into, uh, projections.

Yeah. So as Ellie mentioned, obviously we won't give out the absolute key money number agreed with this. Um, And the key money will be paid out over the time period in which the hotel is open. So it will be spread out over the next few years. In terms of our guidance, we did raise the guidance of key money of $150 to $200 million at the full year results announcement. That was primarily due to the increase in luxury and lifestyle properties that were opening. It's obviously very early in the year now. And so the mix of what opens... will change throughout the year. And so we're not changing that guidance as of now, but we will keep an eye on it, and obviously we'll be looking at it as we get to the half year.

Okay. Thanks very much.

Thank you. Thank you. The next question comes from the line of Jamie Rollo with Morgan Stanley. Please go ahead.

Thanks. Morning, everyone. Three questions, please. First, actually, just sticking with the loyalty changes, could you just quantify the reduction in the loyalty assessment fee and also where does that put you versus the competition in terms of that sort of percentage or even dollar value that you're spending on marketing and so on? Secondly, in terms of just U.S. rip-off, I appreciate your points about seasonality and some sort of one-off external factors, but it's probably fair to say it's been a bit weaker than expected this year. particularly sort of mid-scale economy segments. Why do you think that is? And are there any sort of forward-looking indicators you can give? I think you said you expect Q2 to be positive. So notwithstanding the March, April figures you gave, what else can we hear on the rest of the quarter or year? And then finally, just again, back on Novum, I think $10 million was the sort of mature run rate. So it's about just over half a percent to group fees versus about 2% to group rooms. I guess some of that. is the refurb CapEx. But just help us understand that, to understand that bridge, please, a bit more. Thank you.

Thank you, Jamie. In terms of the reduction, the actual reduction, Michael, was?

4.75 to 4.55. Yeah.

So 20 basis points. If you ask how, I think it's, we're in a competitive range. I mean, our competition is, Our competitors charge varying rates. Some have different rates by brands. Some have different rates by categories. So we think it's still a competitive rate. It does not affect our ability to market our brands whatsoever, if that's your question. This is a different thing. We charge a certain amount and then reimburse hotels when when a guest stays at the hotel. So it does not really affect the capacity of the system fund to do the marketing. But, I mean, looking at it, to go back to your point generally about marketing, we do a certain amount of marketing that's been actually growing over the last few years as the system fund has grown. You reach a certain point where as the system grows and the system fund grows and we find more efficiencies in the system fund and our overhead in the system fund does not grow at the same rate, of course, of the... of room nights and of ref par, and of rooms and ref par, that you just have more capacity in there. And in times before, we've actually lowered other fees to owners for other programs that we have, whether it's technology programs or other support programs or revenue management for hire program. We've found ways over time that we've not discussed in public, such as this, to lower those fees because the unit cost can come down while the total cost hasn't changed and there's more capacity in system funds. So actually lowering fees over time as the system grows and as our system, as our costs don't grow at the same rate of our revenues is a natural thing to do to our owners. This one is part of this disclosure because of the impact that it has to the P&L. So it is actually a healthy thing to be doing to lowering unit costs as the system grows over time, but does not affect our capacity because we're still spending the same amount in total, and we're still growing the system fund. On U.S. REVPAR, look, it's very hard to estimate the impact of Easter. We know it happens every year. It does move every year. It's very hard to estimate exactly how much it's going to be. It probably turned out to be more than some people in the industry expected, what some of the forecasters expected. Now, as Michael and Stuart said, April has shown a pickup, so we're pleased with that. I don't know if that's a read-across for the rest of the year or not. I think it's a smaller part of the year here in the first quarter. We're pleased with the start that we've had. The projections from the industry for U.S. REF PAR are still for positive growth. Actually, the U.S. economy is in pretty good shape. GDP is growing. Unemployment is low. Wage growth and job growth is high. In a way, that's kind of why the Federal Reserve isn't lowering GDP. interest rates as much as people thought, and our groups bookings are pretty strong. I mean, we're at the end of the first quarter, we're 11% year over year in groups booking, which is showing momentum and people wanting to travel for business and for large groups and meetings. We'll see how that plays out for the rest of the year, but projections are still for REF bar growth for the rest of the year. On Novum and That calculation, the 2% to the 1%, let me turn it over to Michael.

Yeah. So, I mean, we do talk about it being in excess of $10 million. This is a typical standard franchise deal that we've got here, typical arrangements, typical to what we would see in Germany in terms of kind of the fees that we get in both on a franchise fee and a system fund side. It also is important to recognize, remember, 50 of these will be Garner, so in the lower REPAR ranges and mid-scale ranges. So that affects the total fee take as well from that. So I think that's probably the main drivers of how we get to the key in excess of $10 million.

Thank you, Jerry.

Thank you very much.

Thank you. We now have a question from Richard Clark from Bernstein. Please go ahead.

Hi. Thanks for taking my questions. Three, if I may. Just starting again on the system fund changes, just want to understand what was the origin of this. Did the owners want a reduction in their fees, and that's what led to this, and you managed to make the make weight? Or was it you, was it IHG wanting the extra revenue for yourselves and had to negotiate this fee cut? Who went first? Maybe the second question, just on churning Q1, I'm struggling to find a year where Q1 was actually flat for system size. I think you have to go back to maybe 2017. So it looks like higher churn than normal in Q1. Few Kimptons left in the US, I think 1,200 holiday and express rooms as well. So anything you'd call out that's just driving higher than expected churn and what that might look like at the full year. And then lastly, quite a big gap between U.S. RevPAR performance and America's RevPAR performance. Just wondering how much of that is caused by Abiristar. You don't break out Abiristar, RevPAR. Is that going very well for you?

Thank you, Richard. Your last question, U.S. RevPAR versus America's RevPAR. Let me actually start an inverse here. Take the first question. Look, the rest of the Americas did very well. Latin America, Mexico, Caribbean, Canada. They were, on the one hand, later to recover. Those markets are doing very well. Our distribution is well located in either resort or urban areas that are progressing well. You've seen Mexico do very well with reshoring of manufacturing into the market with a stronger peso where they, you know, they benefit also from higher oil prices. And so everything is kind of going Mexico's way in the last 18 months or so. And resorts have been very strong in Mexico. I don't think it's, it's, Baristar, by the way, is going very well, but I don't think this is a reflection of just that whatsoever in any different way. And Canada did very well for us. So I think it's, it's actually a testament to, having a global diversification, regional diversification, not just across brands, but across regions where we know that there are highs and lows across regions, but we're diversified enough that our distribution attenuates that. But it's not necessarily a Bear Star thing, although Bear Star is going very well. Let me jump to the first question on the system fund discussions, and then I'll leave the second question to Michael. We're always in conversations with our owners' association. It's a constant thing. We have a formal association. We have a standing board. We have a very engaged dialogue that goes on all the time. Of course, as you would know, Richard, owners are always looking for lower costs. It's not today. or yesterday or tomorrow, it makes sense. They want the highest revenue delivery system, which we believe we deliver, at the lowest possible cost always. And so as I mentioned earlier, I think either Vicki or Jamie, we're always looking for ways to add value to them. And as we gain scale, and what is the purpose of scale? The purpose of scale is to deliver value to your customers through many times more services, higher value services. Sometimes it means lower unit costs because if you reach a level of scale, you can actually lower unit costs. And over the years, we've lowered other unit costs that we have not publicized before. For example, our Revenue Management for Hire program is a self-contained, no surplus or deficit program, one of those nil surplus programs that we offer owners, but But we've lowered unit costs in that program over the years as we've gotten more membership into it and more revenue into it. Then we use it to fund the services for revenue management for hire that we deliver to owners. But we lower the unit costs as the program grows. Same thing here. That discussion is always going on with owners on how we can deliver value to them. At the same time, as I said earlier, I think, to Vicki, I think it was always envisioned at some point when we created this point sales program, which is separate from credit card, which is separate from other ancillary revenues, but lives off the back of the strength of our brands, of our direct relationship with our customers and our G1 rewards. As our G1 rewards has grown, as the system fund has grown, we always envisioned at some point that this would belong in the P&L when the system fund would reach a certain capacity. It was our deliberate decision to place these revenues in the system fund way back when it was much smaller, But scale means that when you are bigger and stronger, you have different choices. And today we're exercising that choice in agreement with the owners. But it wasn't really sort of a, you know, this and that kind of discussion. We're always looking to add value to the owners, and we're always looking to use our scale to benefit the growth of our ancillary streams.

In terms of the kind of system size and the first quarter results, if you look at the kind of average over the last eight years, we've grown at about 0.2% in those eight years. And so the first quarter is always the highest for removals and lowest for openings. And so we would still fully expect our removal percentage to be in the 1.5% range as we talked about for the full year. So I wouldn't see anything change there in what we've said. And I think we've also been You know, certainly with the Novum deal coming in and some of those coming in this year, we feel confident in being around where consensus is on system growth and certainly definitely not below where it is. So you still want to reaffirm that and feel comfortable about where that goes.

I mean, Richard, one other way I'd look at it is we had a very strong year in signings and openings last year. We came back this first quarter with another 11% increase in openings, 7% increase in signings, pipeline up 6.6%. I think that's pretty good momentum. And by the way, those figures didn't even include the Novum deal, which was signed in April, but gives us greater confidence in continuing our growth momentum. I think that's actually pretty good growth momentum.

Makes sense. Thanks very much.

Thank you. The next question comes from the line of Muneeba Kayani. from Bank of America. Please go ahead.

Good morning. Thanks for taking my questions. So just a few more on the system fund changes, please. Can you explain what is the cash impact of this? Is that $50 million fully flowing through to cash? Then secondly, this You said it's a portion of the revenue from loyalty points. So can you help us understand what's the portion percentage of the overall? And then as we think about the growth going forward, what drives it? What drives the loyalty points? Should we be thinking about it as kind of driven by system size or ref bar? Just a framework would be helpful. And then the other question on China performance, the SDR data turned negative in April. Can you give a bit more color on what you're seeing in China and your outlook for the rest of the year? Thank you.

Thank you.

I'll take the, Ellie, if you want, I'll take the first one on the cash impact. We were obviously always getting the cash into the system. But as you know, we try to run the system fund as a surplus, needle surplus deficit. So you were spending that cash. So this is positive cash into our operating cash. And because we won't be spending the funds for that, it will be pure EBIT uplift at almost 100% margin. So cash accretive and then EBIT and margin accretive as well.

On the percentage of loyalty points, continue on that.

And then on the percentage of loyalty points, there's multiple programs in which we sell loyalty points. This is one of those. The credit card is another one. We're not giving any guidance on what percentage of the overall sale of what we do for loyalty points today, but this is related to points we sell and promotions we do. For example, if you go on our website, you may see a points and cash opportunity to do a room where you buy some points and you spend some cash. We do sales on things like points.com, and users go out and buy the points there. And it's really driven by the increase in our loyalty program. And the more loyalty members we have, the more people want to go out and buy those points. And that's why we've seen growth, as we've seen growth coincide with the growth in our loyalty program. And certainly the relaunch of the loyalty program has driven that. you know, increase numbers of members, increase engagement with members, that drives also point sales. And so that's kind of how we look at that.

I mean, your question on why does it grow? It grows because IG grows its system. We have more hotels. IG grows its members and IG won rewards. And it grows its brand portfolio and the strength of the brand portfolio. It grows the recognition of its master brand. And therefore, those customers customers want to be more engaged in the ISG system. They want to stay more with ISG. They want to earn more points with ISG. Sometimes they want more points before they've earned them to complete a stay or to reach a certain status or because they see a certain sale value on buying those points. It's a bit of a gamification of the points program and it keeps them engaged in the program. And so now that they're earning points through a stay, they're earning points maybe because they're a credit card holder. They're earning points because they're using a credit card to do their shopping, not just staying. And now they may want to buy some points to top it off. And that's where that final piece, that's where those points are coming from. And it's been growing because people are engaging more with ISG and ISG-1 rewards. And based on the trend that we've seen over several years, we expect it to continue to keep growing. On Greater China. look, multiple dynamics going on in China. We've seen tier one cities, red bar growth over 7%, tier two, three, and four, you know, not grow in the first quarter. But we've seen growth about travel to Southeast Asia, which we actually benefited from, you know, high rates of growth in Vietnam, Thailand, Cambodia, Japan, all the Hong Kong, all the adjacent travel markets from China, whether that continues for the rest of the year, we don't know. I think that Chinese economy had a 5, 5.2% GDP growth in the first quarter. Clearly, some segments are slower. We know that sectors like residential, real estate, financial sectors are slower. Hospitality sector seems to continue to go forward and grow. Our openings grew 10%. Our signings grew 22%, which to me, shows confidence in owners and investors and continue to grow in the hospitality market. We also recognize that it makes highs and lows, that it ebbs and flows, as other markets seem to do too. But we're in it for the long term, and we do benefit from Chinese travelers that may not stay in China and go somewhere else. We don't have any prediction for the rest of the year, but we feel good for continued growth in China for this year.

Thank you for that. If I may follow up on the cash question, just to clarify, so it's adding to your operating cash. So we should be thinking about this as kind of benefiting your net debt position at year end.

Yes, absolutely.

Thank you.

Thank you, Maniva.

Thank you. The next question comes from the line of Jaina Mistry from Jefferies. Please go ahead.

Good morning. Thank you for taking my questions. I've got three. The first question is around your balance sheet. At the capital markets day or at your four-year results, you mentioned you had a potential $500 million of excess cash. We've seen M&A activity pick up, particularly in the luxury slash lifestyle segment. Are you seeing any compelling opportunities this year or do you see potential to return the excess cash to shareholders this year. The second question is on the U.S. environment. I wondered if you could give us an update on what you're hearing from developers and banks in terms of bank financing conditions, specifically in the U.S. And then my third question, you mentioned earlier about the headwind from the location of the Super Bowl. And I wondered, do you have any plans to accelerate growth in Vegas specifically over the next few years? Thank you.

Thank you, Jaina. I think what we said in February was that we had another $500 million of headroom, which isn't necessarily $500 million of cash laying around, but $500 million of headroom within our EBITDA guidance. We don't comment on M&A. You know that we don't. You know that we have said that we're always looking for opportunities that might be strategically accretive, but also financially accretive. We've done some of those before. But don't comment about what could happen in the future.

I would also say on that, Ellie, I mean, we did talk about that was $500 million if we took net debt EBITDA all the way to three times. Yeah. And, of course, we've been very clear on our capital allocation policy. Obviously, we invest in the business first. We're going to grow the ordinary dividend, and then we're going to return cash back to shareholders. And assuming we don't find any other uses of that through an M&A activity, we will return that cash back to shareholders. As we said last year, we feel like the best time to do that is at our full-year results. I would expect that's when we would really look at that again. So that would be kind of our general guideline on how we would look at that.

Then U.S. environment, U.S. financing development environment. I think it continues to get better. It continues to get better. We said in February that it would not be sort of V-shape, and it's not a V-shape. We've seen interest rates sort of stabilize, maybe not go down any further. But I think stability... And predictability matters as much as lower rates. The fact that rates are, you know, kind of stable in the mid-fours on the 10-year and inflation, it may not be going down as much as people thought it might, but it's not going up. That gives people visibility and stability also to project their construction costs and to get the financing. We think that's reflected, you know, in our pace of signings. It's reflected in the fact that In the first quarter, our construction starts were more than two times higher than last year, so it's picking up, and we think it'll continue to pick up. We're optimistic about that, but it's going to be sort of a build. It's not going to be a V-shaped inflection. Meanwhile, conversions continue to go pretty well. We've had a very good start with Garner, and not just in the U.S., but we're very pleased to see Garner catch on quickly. We've announced deals in Japan and Germany. We've made it available in Mexico and in Canada. And I think you'll see the pace of the brand continue. I think it'll be both. New development will continue to improve and conversions will continue to improve. Regarding Las Vegas, look, we're always looking to grow our distribution in key markets. We don't have anything to announce right now, but our developers, our teams are always looking to add. And I mean, as we speak I'm sure we have hotels that are entering the pipeline and are being planned in Las Vegas. I don't have anything specifically to announce on that.

Thank you very much.

Thank you. We now have a question from the line of Jared Castle from UBS. Please go ahead.

Thank you. Morning, everyone. So just in terms of kind of how you approach marketing and, you know, related to the system fund, can you give a very broad picture of where the spend's going to in terms of loyalty points, digital, you know, TV, print, et cetera, just to get an idea of, you know, broadly speaking, where it would be going to? I know probably different by market as well, but any comments you can say on that? Sure. Yeah. And then secondly, just in terms of construction cost inflation, you know, what are you seeing at the moment and the ability to, you know, undertake construction on time? Are there any supply chain issues? And then just something noticeable about the U.S. I mean, we've seen occupancy falling for many months now, but, you know, pricing still seems to be pretty buoyant or, you know, in general. So I mean, how long do you think this can continue? Or is it just better revenue management systems in the industry and potentially doesn't lead to pricing under material pressure. Thanks.

Sure. You know, the scope of our marketing activities is vast. It's vast, it's powerful, it's highly sophisticated. Sure, it's the traditional media that you mentioned, TV, airport, airplane, radio, all those things. But it's way beyond that. Our digital marketing, our social marketing, our earned and paid media marketing on social and digital is very powerful. Our partnerships and alliances, whether that's sport partnerships and whether it's sponsorships, have been growing. I think you see IHG hotels and resorts everywhere you travel. every sport you watch, whether it's U.S. soccer, whether it's lead sponsor of Major League Soccer, whether it's rugby here in Europe, whether it's U.S. tennis open. And you see it in every major airport around the world, on many airlines today. In China, we're the sponsor of Hainan Airlines. I mean, it's really, our marketing has actually expanded significantly over the last two or three years. much more than it used to be. And that was a deliberate strategy. And we've talked about that strategy, which was first we were going to grow and fill out our luxury lifestyle portfolio. Second, we were going to relaunch IG1 Rewards, the app. And then we were going to market the heck out of those through much larger marketing. And we're doing that. And that has powered the growth of IG1 Rewards, has powered the growth of our system, has powered the growth of our system fund. So we're going to continue to do that. And there's nothing in today's arrangement change that deters that or defers that whatsoever. In terms of construction costs, I think they've stabilized in all of our major markets. They're not coming down. I don't get the sense they're coming down, but they've stabilized. Supply chain issues have not been really an issue for at least a couple years now. I think those got resolved. In fact, there's quite a bit of excess of supply in many materials today. I think what we have built out is a very robust procurement program that supports our owners to purchase all the way up to HVAC and mechanical supply equipment at the lowest possible cost and the highest quality. Our construction starts, as I said earlier, are more than two times higher in the first quarter than a year ago, which is an optimistic sign. That's a U.S. statistic. In China, our construction starts continue to move at pace. We signed 22% more hotels in the first quarter, opened 10% more hotels, and we're making good progress in Europe. And, I mean, let's not forget that the Novum deal that we announced in Germany comes with a healthy pipeline and a growing pipeline and a commitment to with Novum that all the future hotels that will open will be part of ISU brand. So there's confidence in that market, too, that will continue to open and develop hotels, either as conversions or new builds. So it has stabilized and improving.

I'll also add to that that this is not a one-time type fit. We are always, our brand teams, design and engineering, procurement teams, are looking at our brand designs continuously. They're looking at ways that we can create value. We value engineer our products. We did should-cost modeling. We go through and we're constantly looking at where do the guests value the experience in the hotel and where do we dial up costs in those areas and maybe dial down costs in other areas. So we're constantly looking at that cost to build as we move forward and as we continue to evolve the brands.

I have a question about ADR. In the U.S., can it keep moving up? Well, I mean, you have the fundamentals of good demand, strong economy, strong employment, good wage growth, and low supply growth. And then added to something we discussed also in February, which was it isn't necessarily raising individual rates for certain customers, but it's remixing the rates, mixing out lower-rated business because occupancy is still solid and demand is strong and supply is low and mixing in higher rated business. I mean, I'm sitting today in a hotel here in London, the Kempton Fitzroy, speaking to the GM. That's exactly what he was talking to me about this morning, which was, you know, given the strength that they're seeing from corporate business here in London, he's been mixing out some lower paying customers and mixing in some higher paying customers. Neither is paying more than they were a year ago. We're just taking more of the higher rated business and that's showing up in higher net ADR. But, you know, the solid demand and low supply is still a pretty good tailwind for rate.

Great. Thanks very much.

Thank you. The next question comes from the line of Leo Carrington from Citi. Please go ahead.

Thank you. Good morning. I've got Three separate questions, please. Firstly, in terms of the system fund changes, that 20 basis points of assessment fees that owners no longer need to pay, what was that spend previously on? And I suppose, is it fair to assume that those fees were not previously currently driving the owner benefits that you were hoping for? And then secondly, on openings, in EMEA, openings were quite low, even for Q1. Is that a timing issue, or is the European or EMEA development structure outlook not improving as you would have hoped? And how does this tie into expectations for around 4% net unit growth for this year, taking into account November as well? And then lastly, just thinking forward, I mean, are there any other changes to the system fund that in future you could implement to either move costs out of reportable segments like you did in December 2020 or other changes like those announced today? Thank you.

Okay. I'll take part of the first question and turn it over to Michael to follow up on it. I guess I was saying earlier, we had an assessment of 4.75%, but that's when our system was much smaller, the loyalty platform was much smaller, and actually our marketing spend was much smaller. And today, all of those things are much bigger, and therefore there's an opportunity to just lower the unit cost. But there are still more customers, and there are still growing room nights, So the total revenue of the system fund doesn't necessarily have to decline. It's just that it is growing more so the unit cost can decline. And remember, it's 4.75 of portfolio. So as rate grows, that grows too. But rate has grown significantly. And so we find the opportunity to return some value to owners and say, you know, we are covering the cost of the loyalty plan, of the loyalty marketing we have to do, and can still give you a little bit of benefit back because the system has grown so much that the unit cost can come down. It is just one of those very classic economic models that as you grow scale, you can lower unit cost while still having a greater opportunity aggregate take that is nobody necessarily loses because we've grown scale to the point where unit costs can come down but the total volume is still large and the marketing can still continue and everybody wins scale is actually one of those things where it is not a win-lose everybody can win when we grow scale properly and that's what we've done with ic1 rewards it was it is always the intent to grow scale to a point where everybody can benefit if conversely by some you know you know, unfortunate measure, you know, it dropped down in half like it did during the pandemic, then there isn't enough to do for everybody, right? But we've grown so much that there is the opportunity to lower the assessment just a little bit, but also to maintain the marketing of the loyalty plan. Do you want to add to that, Michael?

Just a reminder that the 20 basis point is is not off the marketing and reservation assessment. That stays the same. This is only on the assessment of reward night stay. So when a customer stays with us that is a rewards member, as Ellie mentioned, it is on, we charge 4.55% now on the full folio of what they stay. And so it's not taking out of the marketing and reservations assessment. It's coming from the loyalty program. And we don't expect to change what we've been able to do there in terms of marketing and targeting loyalty customers. Going after new enrollments, we'll continue to see that happen. As Ellie said, it's mainly a scale and efficiencies play. And so we feel really good about this. This is actually a great thing for our owners and hopefully will help us sign more deals in the future.

On your question about EMEA openings, that is mostly a timing thing. I've traveled throughout EMEA a lot since the beginning of the year. I've been in Japan, been in Southeast Asia. I just came back from India. I've been in the Middle East and Saudi Arabia. We see great momentum. I've been in Germany where we signed the Novum deal, which really isn't in these figures, but will clearly boost EMEA signings and openings for the year and beyond. I'm very comfortable with EMEA's you know, outlook for growth, for signings, for openings, for starts, for the whole thing.

I think that addressed your questions. The system fund was the only other question. And really with the system fund and are there other things, you know, we have a really healthy relationship with IHG's Owners Association. We're constantly looking at how can we drive more revenue and benefit for our owners? How can we drive benefit for IHG? It's an evolving thing that we will always look at, just like you would do in any business. We try to grow it, and we try to grow ancillary revenue streams. You know, we've been talking about the credit card, which is out there, and we're going through that process. So, you know, this is an evolving area, and we'll continue to look at it and do the right thing for our owners and for IHG.

Thanks. Maybe just any... Point not covered. The 4% net unit growth for this year, taking into account Q1 plus November, is that something you're still happy with?

Absolutely. It certainly doesn't come down after the November deal and the momentum we feel in our markets.

Thank you, Ali. Thank you, Michael.

Thank you. The next question comes from the line of Alex Brignol with Redburn Atlantic. Please go ahead.

Good morning. Thank you very much for taking the questions. The first one on RevPAR, it sounds like you don't give guidance, which I think you've explained why it's very sensible, but it sounds like you're suggesting that consensus could come down by about a percent for the full year. Looking at the second half, the comps for where we were versus 2019 last year, they get significantly harder. Probably 600 basis points harder in Q3 than Q1. How does that come into your thinking of what your year on year will look like? Because obviously international markets last year are recovering very rapidly. And so the base is very different in the second half of the year to the first half of the year. And then the second one is, I guess it's Novum related. It sounds like the free cash flow from Novum over the years where hotels are converting is likely to be sort of flat or negative. And other hospitality businesses have done conversion deals recently that were certainly on worse terms than we were used to, and quite a lot of them. FTR data kind of shows that a decade ago, only 55% of branded hotels were held by the sort of big ones. And now we're over 80%, which is positive, but means that there's just not very many left to convert. So I wonder what you might say about sort of how much there is left to go for in terms of smaller branded hotels that are converting to your bigger brands and whether that's a risk. Thank you.

Okay. Thank you, Alex. Let me start with your last question on how much is left to convert. And I'll turn it over to Michael for a question about comps and whatever guidance we don't give. Anyway, so I think on conversions, you have to keep in mind that not everything we're converting is necessarily unbranded. So even in a market like Germany, the Novum hotels would show up as branded. Actually, they're brands that they created and we're very happy with, but they would want to be part of a larger system. and a stronger system, and therefore chose to rebrand to ISG. So that doesn't actually show up in your figures as unbranded rooms going to branded. That's actually branded to branded. And in the US, which is high branded, higher branded, about 70% branded to 30% unbranded, a lot of what we convert is actually branded. from other brand companies that want to join ISG. So the potential for branding isn't just in the unbranded. I don't know. Then I would say beyond that in Europe, 70% is, you know, 70% is still unbranded. And therefore, that's on top of the branded that can move. Therefore, we don't think that the... addressable opportunity in conversions is really diminishing. I think the actual addressable opportunity in conversions stays alive as more branded and unbranded operators and independent operators realize the benefit of a strong global system like ours. I will tell you, when I was at the IHIF conference in April, where we signed and announced the Novum deal, but I was going there anyway, We had multiple meetings with hotel groups and owner groups interested in converting to ISG brands, irrespective of the note and transaction, but probably motivated by it because they're looking at the same economics of having to scale up costs that are very difficult, such as having a loyalty plan, having an app, having a digital distribution, having a global sales force, things they just cannot access. And they tend to be European or pan-European operators. So this is not a shrinking addressable market. I don't know what you may be referring to in terms of lower value partnerships or transactions. Novum is not that. Novum is neither a partnership nor an alliance. It is a franchise deal at full fees, full fees to P&L, full fees to system fund, Every single hotel is a separate franchise agreement with ICHE under an ICHE brand. It just happens to be a lot of them at once. That's what really differentiates it, but it's not different from having signed one franchise agreement. We're just signing a lot of them at once. In terms of the comps, Michael.

Yeah, in terms of rep bar, I think we've said we've done three... Consensus is at 3.6. We are at 2.6. We're not necessarily suggesting that consensus needs to come down. I think we just gave an indication of what, you know, if, for example, it did stay at that 2.6 range, what would be the impact on profit on the fee sensitivity? It's about $11 million for one point in Red Park. So I think we were just kind of giving that indication there. As we move forward, you know, the red par growth in the U.S. and really internationally started to actually slow as you went through the quarters. And you may remember, actually, the U.S. red par in the fourth quarter was, you know, roughly flat. So we think the comparables actually are a little better. Q1 in the U.S. last year was really strong. And then internationally, that will depend on the markets, but in a – Overall, the rep part, again, was slow. Rep part growth was slowing. So we're not as concerned about the comparables being too tough.

Thanks so much. I daren't ask you to answer that question again, Ellie, but I specifically asked about I was referring to brands converting to brands. Most franchise operators talk about brands, that their conversions are largely branded. I wasn't referring to independent hotels. I was saying that the mix of brands that is now large brands like yourself is now dramatically higher than it was 10 years ago. And so therefore. The amount of small brands that you referred to as weak and therefore wanting to join a bigger group is now a much smaller pool to fish in than it was. And that being a challenge, I understand the point about independence, but there aren't that many independents that convert into brands for kind of logical reasons. And then just in terms of the, I don't want to keep on asking, but on the rev bar, obviously the year-on-year numbers in 2023 were much lower in the second half because in 2022, what they were building on was much lower. It just seems that not looking at 2019 might just be a little bit narrow, but maybe I'm saying it wrong.

Now, we get your point about the, just your earlier point about the conversions. I still say that in Europe, there's still a very large unbranded or independent category that that is a ripe opportunity for conversions. So, we see the opportunity continuing. All right. Who else do we have? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche? Andre Deutche?

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Hi, morning, everyone. Yeah, I've got a couple, if that's okay. On that system fund economics point, I don't know if you have thought about this, but approximately how much profit do you think the fund would have generated in 2025 if you had just let it run with the current economics and not made these changes, please? And then I'd be keen to hear any discussion of how this value will be reflected by geography and then the other side of it. If I'm a median Holiday Inn Express owner, how much better off am I in dollars post this change, please? And just more broadly, it's just one quarter, but super, super rough, rounded numbers. You signed 18,000 rooms in Q1. There's three big buckets there. And interestingly, the bucket with all the newer brands, Vignette, Foco, Hualux, Garner, Atwell, Avid, stuff that didn't really exist six years ago, that's about a third of your signings, just shy of 6,000 rooms. is that the right, is that the desirable moving part there, that all the new stuff is about a third, and then the big engine, Holiday Inn and Express, are about a third, and then everything else is about a third? Or is there a point where you will either do more in terms of new launches, continue to have additions to that brand roster? Or is there a point, on the other hand, where you go, well, the Crown Plaza, et cetera, maybe we do another launch, relaunch another tweak because it should be a bit higher.

Maybe I'll start with the first one and then Ellie can pick up on maybe the last one there. In terms of what would it have been in 2025 should we have just left it in the system fund, it's a really complicated calculation because it deals with actuary and consumption curves. So really, I think the best way to look at this is that the $50 million that we've talked about, we get 50% of what's available this year, and we said that's approximately $25 million. We get 100% of that next year, so you can essentially double that. But as we've said, that's going to grow as there is consumption of the points. This is the deferred loyalty accounting method. And so that will grow, and that will also depend on consumer behaviors and how they use those points and things of that nature. And then on top of that, it grows just from the growth in the points. So it's really complicated, and so I wouldn't want to try to go back to a non-deferred revenue accounting method. I think the best way to look at it is $50 million and growing.

Then your question about what will that mean, I mean the – The improvements we made for owner economics, what will that mean for them at a hotel level individually? It will really vary based on their mix of loyalty customers that they take, what level of occupancy they're reaching. And so there just isn't one specific answer. I think it's going to be very well appreciated. and meaningfully incremental to their economics. But it's very hard to estimate it on what a specific hotel will be, because they have very different levels of loyalty contribution, very different rates, very different levels of occupancy to reach, where their reimbursement varies based on occupancy. So it's a pretty complicated thing, and it's very bespoke to each hotel. On your question about the signings across our brands, look, we're very pleased that our new brands launched and acquired represent a meaningful amount of our growth going forward and growth in our pipeline. We're less interested in maintaining a certain proportion. We're interested in growing them all. We'd be happy if they all continued to grow, but the proportions would shift. Because we think they all have incredible potential in their markets where they launched and the markets where they're going to expand to. I mean, we still have, as we said in February, in China, we still only compete in the mainstream space with two brands, Holiday Inn and Holiday Inn Express. But we have six mainstream brands globally, including the new one, Garner. So you can anticipate that we're going to have more brands there. that'll change the percentage of what gets signed in China. We're happy with that. We're not trying to limit how many we sign in each brand. On Six Senses, it will never be a very high percentage of the rooms that we sign by design. It is uber luxury, very high rates, super exclusive. We're going to keep it like that. We're going to grow the brand, but keep it very disciplined to very high quality resorts and urban locations, it won't contribute to system size, necessarily contribute to fees substantially and to the value of our loyalty plan, to the value of our portfolio, but not to system size. So, yes, we're pleased to see our new brands ramp up, but we're not trying to reach a certain proportion of each category.

Thank you. And just that point on the $50 million per region for you, if you've already made some estimates there, do you have each share, please?

Excuse me, say that again, that $50 million?

The system fund change, how will it be reflected in each of your reported regions?

Oh, it comes, sorry, it will be in reportable segments in the central.

Yeah, and so that, do you have a split of the $50 million, $25 million contribution in each of your reported regions?

No, no, no. It's in central.

Oh, okay. It's all in the central case. It's not in the overheads in the region. Okay. Thank you very much.

Okay. Thank you for your time today. We really appreciate it. We have no more questions coming in, and the operator will now hand back.

Thank you. I would now like to turn the conference back over to Elie Malouf for any closing remarks.

All right. Many thanks to all of you on this call. We just want to remind you that our second quarter 2024 update in financial results for the first half of the year will be announced on Tuesday, the 6th of August. Thank you, and have a great rest of your day.