InterContinental Hotels Group PLC

Q&A session. As a reminder, if you'd like to ask a question, please press star 5 by 1 on your telephone keypad. Our first question for today comes from Vicky Stern of Barclays. Your line is now open. Please go ahead.

Good morning. First one was just on unit growth. So I think if we strip back and over from this year, it looks like you'll be sort of around the 3.5% range in terms of net unit growth. Is that the right underlying rate to have in mind for you going forward, or can you see that accelerating without any sort of larger deal signings like Novum? And related to that, I noticed that exits were just a nudge higher than your 1.5% in the first half, just checking that 1.5% is still the right level of exits that you've got in mind going forward. The second one's on incentive management fees in China. So I saw H1IMS was down a few million to 19 in the first half. Can you just talk about your expectations there for the full year? Obviously, one of your competitors has been flagging the weakness there. And then just more broadly, your outlook for China as you see it over the next six, 12 months. And then just finally on the credit card opportunity, that was helpful color from Heather in the prerecorded presentation. Just curious when you think you might be in a position to give any clearer guidance on the quantum of that material revenue upside that was mentioned there. Obviously, any indications today on how we should be framing that materiality would be great. Thanks.

Okay. Hello, Vicki. How are you? Thank you, everybody, for joining our call today. I was supposed to give an intro, but I guess we're jumping right into the questions, which is fine. Might as well get right to it. So on your question about net system size, growth expectations, and Novum, a couple things. We're exactly today where we said we would be at the first quarter when we announced the Novum deal and discussed it. We said that we were comfortable when a system size expectations consensus was four, and we said that – That included Novum, and we said that Novum gave us greater confidence in reaching that system size expectation this year and actually beyond this year. And so where we are today is that consensus moved up to 4.2. We're saying that we are comfortable with that, confident in that, and that still includes Novum. Now we have visibility of how many rooms are going to open this year. Over 7,000 rooms are going to open this year. In the year, we've already opened 1,000. And also, there is an equal amount, probably a little bit more, that will likely open next year and maybe some even into 2026. So it's not just a one and done. It's a multi-year thing. So, no, I would say that your expectation going forward should be closer to what the expectation was for this year. because every year we do organic conversion deals that sometimes we're aware of going into the year, sometimes we're not aware of. This is an organic conversion deal. Yes, it's a big one, but it is individual licenses. It's an individual 119 individual 20-year licenses. It's not a partnership. It's not an acquisition. It's a fee-paying deal, so it's very accretive to us. And We will do other in-the-year conversions this year that we're not calling out, and we'll do more next year in the year beyond. So we're comfortable with consensus where it is today, and I actually have very good visibility to it. And we're comfortable with next year, you know, maintaining a similar trajectory given, you know, not just all the in-year conversions that we're doing, but also the spillover of the November rooms next year and the acceleration of our pipeline. You've seen our signings increase even if you – took out no room, 23% globally. New builds and conversion signings increased in a healthy manner in the first half. That gives us some fuel going into the future. So that's your first question. Michael, do you want to add into that? Did you want to grab exits first and then we'll... Yeah, let's just touch on exits. No, we're comfortable with the 1.5%. In the first half of the year, we always have more exits than in the second half of the year. Maybe not always, always, but traditionally. If you look at our pattern over the years, the first quarter has more exits than the second quarter, but then it's fewer usually in the second half. So we're comfortable with the one-and-a-half long-term objective, and we've been roughly around that. IMFs in China, I'll turn it over to Michael, but I think it's a decent story there, too.

Yeah, Vicki, as you can imagine, you know, we don't give guidance or break out kind of where we said on IMF, so it will be a little limited about what I can say on the full year. But I will say that really as you step back and you look at IMF, it starts with the REPAR story. And certainly in China, you can see that half year, this year we were at 19 million in incentive management fees against a 23 million. Last year, we did 46 million in the full year in 2023. But if you look at the story on what's going on in China, You're seeing a significant amount of outbound travel. The market has opened up. Last year we were heavily domestic. Most of the travel was within China. We saw that. You saw the Tier 4 resort cities doing really well. Now that has moved out of China, and we've had more airlift, and visa restrictions cut. So you're seeing that. In fact, our Asia-Pacific region is up 15.4%. And some key markets within there, Vietnam's up 30%, Rappaport in the half, Korea's up 20%, Indonesia's up 18%, Thailand up 25%. And remember, we get incentive management fees for hotels we have there. And so if you then go back and look and see what's happened in the MEAA, we've actually delivered $55 million of incentive management fees against $43 million last year. And you will also remember that we had been fully recovered in terms of incentive management fees from a 2019 level in EMEAA. So that is really strong growth. So if you look at that, yes, we didn't deliver as many incentive management fees in China, but EMEAA is capturing a lot of that demand that comes out, and we've seen increasing incentive management fees in EMEAA. That's not one for one. But I think what you're seeing is a bit of that coming through.

And I think it speaks to, more broadly, the strength of our globally diversified business model, which intentionally places us in 100 countries and many of the most attractive ones around the world, to where we know that not every market, every quarter is going to be at full speed, but enough of them will keep growing. And we capture outbound business when domestic business is strong. So there's a method to our strategy, which continues to deliver, as we saw in the first half, even when not all markets are at full speed. Okay. To the China outlook that you were asking about, we can talk about the midterm and then a little bit about the long term. In the midterm, Mike will cover the fact that, yes, there was less domestic travel, but then a lot of it went into Asia Pacific, and we benefit from that as a group anyway. Number two, we saw, you know, we were comping against a very strong second quarter last year when the restrictions were lifted. We did say that the comps do get tougher in Q3 when we were up 9% last year over 2019, but then they get easier in Q4. when the comps, you know, last year we were at zero compared to 2019. So it goes up in toughness, goes down in toughness. That's sort of the near-term outlook. But fundamentally, if you look mid-term to long-term, we're still very confident in China. You see our owners are very confident. Our signings are up nearly 40% and a half. Our openings are up nearly 50%. Our total rooms revenue actually grew 10% and a half because of system growth, and ultimately that is one of the key measures of our growth and success. And nothing's really changed in the fundamentals there. The middle class is still projected to grow 80 million households over the next 10 years. The room's penetration is still only one-seventh. We have said, and I remember, if you remember in February, I'll repeat, this industry, even in our major markets, makes highs and lows. It's not just straight highs, but it makes higher highs and higher lows. And the trend line for China is upwards in travel. It's still going to become one of the largest travel markets in the world. It's quickly regaining its place as the largest outbound market in the world. And being strong in China is important for being strong in the rest of the world, as we saw in Asia Pacific. Okay, question number four. Never thought you'd ask about the credit card. On the credit card, as Heather took you through in her excellent presentation, we are already making very good progress organically with the credit card, with new accounts, with growing spend, with – great satisfaction with the new cards that we've launched on the back of a very strong issue on rewards, on the back of our strong luxury and lifestyle portfolio. So all that is working. And then we do know and we've talked about that there could be an optimization of the partnership. That is under review right now. So please be patient with us as we cannot discuss it in any detail. But as we've said and we repeat, we're very confident in the growth trajectory of our credit card. and what it can contribute to ISG's P&L, that it will grow significantly. It is growing already, that it will be multiples what it is today over time, and that the partnership review is one aspect of it, but I've said and I repeat, the organic growth and the strategy we're deploying for the credit card is the underlying power behind it. We will, at the right time, in the right order, bring more information and share more details for you when we conclude some of this review. I think that covers your questions, Vicky. Who's next?

Thank you. Our next question comes from Janey Rollo of Morgan Stanley. The line is now open. Please go ahead.

Thanks. Good morning, everyone. Three questions as well, please. Just on the U.S. data, your U.S. list of peers has proven all flagged the sort of slowdown in July, talking about weak domestic leisure demand, swimming guidance. What's your sort of view on that? what's really happening in the domestic leisure market, and also to hit full-year consensus group REVPAR growth of around 3%. You need a pretty similar second-half performance to the first half, and that looks perhaps optimistic given the July data in the U.S. and indeed in China. Secondly, on central revenues, they look like they're up about $11 million, which looks pretty equal to sort of half the annual $25 million loyalty points fee revenues. It looks like the underlying central revenues didn't go anywhere at all, despite your positive comments on your existing credit card growth. Just wonder what's happening sort of, you know, on underlying ancillaries. And then finally, also a slight modeling question. In EMEA, your fee business operating costs fell by about 7%, which drove a lot of that margin growth. Any sort of phasing or one-offs we need to do well there, please? Thank you.

Thank you, Jamie. I'll take your first, second, and fourth question and turn over the central revenue to Michael. So look, on U.S. data, we listened to the headlines of others in the industry. Of course, you know, we're watching the current very recent data that's coming out on the U.S. economy. But we're not seeing anything in our numbers right now. We certainly did not see it in Q2, and we saw an acceleration. Looking into July, we see a broad continuation of that pattern where we were up three months in a row in Q2. And even early into August, it seems to be the same. Now, when you talk about others taking down their guidance. I think it's important to look at where they were starting with, right? We don't give guidance. We're just working with consensus. And so I don't know where they were starting with, whether they came down from something that was higher. I think you will look at that in more detail yourself. But we're not seeing anything that is of a concern right now. But of course, as you know, our booking window is short as any of this industry. And and we can only look so far. I will say that, you know, for the rest of the year for the group, if you think about we did 3% in the half with the U.S. doing minus 1.9 in the first quarter, which is clearly the biggest part of our business, and we're not seeing that repeating in the rest of the year, then that is probably a bit of a tailwind into the second half, and our comps in the Americas in total are do not get harder in the second half, but get a little bit easier. China, we've said, gets harder in the third quarter, but then gets easier in the fourth quarter. EMEA seems to be steady going well. And so all of that puts us in a place where we're comfortable with consensus where it is today for REVPAR. The others may be starting from a different, you know, altitude that they set out in guidance. I don't know. Number two, or actually to your question, Third question, because I think I answered the second question there. I'll come back to central revenue for Michael. On EMEA margin growth, there's no one-off in there. That is actually what we've been saying. A lot of it happened quickly, but we've been saying as our Asian markets, as the East recovers and grows, we will get margin accretion. There was no significant, there's no one-off in there. It's the recovery of many of our Asian markets that were not quite recovered in the first half of last year. It's the strong outbound out of China into Southeast Asia, where APAC Asia Pacific for us was up 15%. So, yeah, it's not all leakage. If it's not happening in China, it may be happening somewhere else. Good for us. And that drops to the bottom line favorably with that 700 basis point accretion. I think it answers that. Michael, over to you on central.

Yeah. So on central revenue, there's a lot of moving parts within there, Jamie. certainly the new spend points or the consumer points coming in that we're taking. And you've got other things that move with Repar, like technology fees, particularly in China. You've also got some movements that we've done where we've looked to – and this is kind of a technical term – that are more just we do on the behalf of the owners and that's moved. So there's just some moving pieces in there. But overall, we're strong. We feel comfortable with where we're going to be with the credit card growing and the point sales coming into there in the long term.

Yeah, I just want to go back also to your general sense on the economy in the U.S. I know we're going to get a lot of questions, so let me just head it off on that. We're watching the data. We're listening thoroughly. to the commentators, as everybody is, obviously. We're also not going to come to immediate conclusions from a few days or one month of data. Yes, the unemployment ticked up to 4.3%. At the same time, if you look underneath it, the actual total people employed still increased in July. From June, there were more people coming into the labor force, which raised the unemployment rate. So what we really focus on are people employed. The economy is not losing jobs yet. And I think that We would all agree that if unemployment settled in the low fours, and so there was some slack in the labor market, if interest rates, especially long-term rates, come down and stay down as they have in the last couple weeks, if inflation stays subdued, that's actually a favorable environment for inflation. GDP growth next year for the development aspect of our industry especially. It's kind of what everybody has been waiting for, for the Fed to take the foot off the pedal. So we don't know if this is the beginning of a trend, but if things settle down where they are today, that would not be a bad outcome actually. So with that, next questions.

Thank you. Our next question comes from Richard Clark of Bernstein. The line is now open. Please go ahead.

Thanks. Good morning. Thanks for taking my questions. Yeah, three if I may. Booking Holdings on Thursday called out that they were seeing some trading down behavior in the U.S. market. I guess three of your brands in the Americas have posted negative ADRs, and I think they're probably the most U.S.-focused brand. So just what's happening with U.S. ADRs and outlook for the back half of the year while you're seeing trading down? Secondly, I know overall your signings were pretty strong, but it looks to me like U.S. signings down, and if I strip out Dana – down quite fast. I think Holiday Inn Express signings down 36% year on year in the first half. So just what's the outlook there? What's slowing down the signings? And then just following up, how can we think about a flow through of your overall signing growth? Maybe remind us of the definition of a signing. Is that just the contract signed? Does that mean financing is set up? And how quickly are signings turning into construction starts, turning into openings? Is that speeding up at all?

Okay, just make sure I got all your questions down. Time so I think we saw an acceleration of rev par in all of our brands in the US in the second quarter. Over the first quarter, except for one, except for Kempton, which is a great brand, but not our biggest. All of our brands in the second quarter, over the first quarter. So we're not seeing a trading down or trading uptrend yet that is discernible. I'll have Michael give you a little more color on that in a moment. But I think that we've heard of a lot of sectors talk about trading down. We're not seeing that yet. And that – but we're not seeing any discernible trading up either at this point.

Maybe just to add on to that, and Richard, in the three that you put out or you call out there, they're really relatively small size. So Kempton was one of those 50. That's really – and there's 50 hotels there. You've got Avid Hotels, which is 56, and you've got Even Hotels, which is 19 hotels. Relatively small geographic rep part growth in those will be really impacting that. So it kind of depends on the market they're in. But if you look at, like, a Holiday Inn Express – which is really broad geographic dispersion within the U.S., you saw rate up 1.7%. You saw Holiday Inn up another 560 hotels, 1.5%. So you've got really strong kind of as you look across the whole of the U.S., you've got really strong growth. Those smaller brands will be impacted by kind of sub-market and where they're at and things going on in those markets. And so I think overall we feel very comfortable with kind of how we moved on rate, actually, with rate up in the Americas for the quarter at 1.8%.

Yes. And then we had some upscale brands like Intercontinental where rate moved up. So we're not seeing a pattern across our larger brands in the U.S. right now. Your question on U.S. signings. Okay. Overall, year over year and a half, we actually signed a similar, almost similar number of deals, but there was a mixed shift to smaller key count in this first half. Last year, there were a handful of especially large deals signed in the first half. That could occur again. In the second half, we've got a lot of activity going on. But in terms of just activity, the number of deals was roughly similar. The key count mix was different. We're quite comfortable with the share of signings of Holland Express in the market. I think if you compare it in the half to its direct competitors from the other two largest brands, it was up. it was ahead of all of them. So we're comfortable with a share of signings of Holiday Inn Express. Now, sometimes industry signings will happen more in one quarter versus another. But if we look at total industry signings, at how our main brands are performing against their direct competitors, we're quite comfortable with them. We have, you know, nearly 1,000 hotels in pipeline in the Americas. Our ground break pace is significantly up versus last year. So we think that And last year was up on the year before, so we think the conversion is going to continue to support our system size growth. When you're asking me about what is the definition of a signing at ISG, the definition of a signing is a contract signed and whatever, let's just say, commitments are required. Sometimes we're requiring guarantees. Sometimes there are payments required. All that has to be in place and a form of control on the property, either you own the property or you have a right to control the property that's exercisable and we feel comfortable with it. You may or may not have financing in place. I think that is industry standard not to always require financing. There are some cases where we may be, you know, we may require financing to be in place, but in most cases in the industry, financing is not a requirement to counter those signings. We don't, like others do. you know, talk about approvals or other things that aren't a completed, executed, fully funded contract. To your last questions about the conversion from signing to open, has that anything changed? Michael can give you some color on it.

Yeah, Richard, if you look at our kind of construction link, link, It continues to improve. If you look at the 12, trailing 12 months average for new development and conversion projects, we're approximately 21 months for new development and seven months for conversions. That's actually a one-month improvement over where we were in 2023 at the full year. So, obviously, you know, a lot goes in there. There's a lot of variability based on brand and where the kind of in terms of conversions, how good the property currently is and what needs to be done. But that's on average where it sits. So it's improving a bit. Thank you.

Thank you, Richard.

Thank you. Our next question comes from Jaina Mystery of Jefferies. Your line is now open. Please go ahead.

Hi, thanks very much for taking my questions. Please, if I may, The first one, you know, we've spoken about US macro, but the other segment that's been called out by some of your peers is the European consumer group. And I wondered if you'd seen any signs of incremental weakness or pushback against pricing from the European consumer. Second question is around business rates. I saw on your slide that your room's revenue in the Americas was flat in H1. Does it have any read on the US corporate environment and do you have an early view on the business rate renegotiations for 2025? And then my third question, the presentation from Heather was really helpful. In terms of the 100 million system fund surplus that you're planning to run down this year, Are there any key areas such as segments or regions that you're planning on focusing on to reinvestment this year? Thank you.

Thank you, Jaina. I'll take your first two questions and flip the third one to Michael. So on U.S., I mean European consumer pricing pushback, nothing that we've seen yet. I mean, as I said earlier, we're always mindful of of new information, watching data, watching trends. I think the summer got off to a pretty good start here in Europe. There are very different markets, but we're not sensing anything right now, not in June and not in July that gives us any indication. But, you know, as I said earlier, different groups start from a different starting point. They might be in a different place in terms of their pricing already and in a different industry, but we're very watchful of this and we're not seeing anything yet. On U.S. business rooms revenue, what you might be referring to is that room nights in our business segment were down in the U.S. year over year, but what I call out also is that they're down marginally, but what I call out also is that group was up. And that's all – both are business travel. One is business transient. One is business group. Sometimes there's a little more of this or that. We're not seeing a trend there. Our corporate rate negotiations were pretty successful at the end of last year. We're seeing them flow into this year. As you can see, rate was up for the half in business. Room nights were down a bit, but group nights were up. more and group rate was up too. So group revenue more than made up for it. We might be seeing, you know, corporations getting their people together more in groups in the first half of this year, but it's all business travel and we're happy that it's all growing. And the last question was on where we might be prioritizing system fund spend this year. Heather, over to you.

Yeah. Yeah, so, I mean, our focus and priorities really remain consistent, first in maintaining our marketing investment to drive revenue for hotels. That continues and continues to grow year over year. And then there's other strategic investments in some of the platforms that we talked about in the presentation, whether that's the continued investment in optimizing our channels and the mobile app, the launch of our new revenue management platform, and the continued investment in the loyalty program. And so I'd say those were some of the big investments that continue as we go into 2024. Thank you, Heather.

Thanks very much.

Thank you. Our next question comes from Estelle of JP Morgan. The line is now open. Please go ahead.

Hi, good morning. I have two questions. I mean, on wealth power again, I mean, the 3.2% in Q2, you used to provide some, the monthly evolution. Can I ask how this evolved from April to June, or at least give us some color? Then on margins, I mean, I'm trying to understand the fee margin upside potential for the second half of the year, especially as the margins did quite well in the second half of last year. I'll say differently at the EBIT level, growth, I think the EBIT growth was 9% if you exclude the accounting change versus the guidance for the full year, closer to 10%. So with some further normalization out there, especially at the REVPAR level, is there room for H-2AB to grow by more than 10%? Please, thank you.

Thank you for your questions. I'll take the first one, turn over the second one to Michael. You know, we don't, we're not providing monthly REVPAR Since the pandemic, that was a pandemic-specific thing where the turbulence was such that things didn't change just by the month. It changed by the week and the day. We did say, and we'll repeat, that in the U.S. we saw a positive red bar for all three months, and we've added that we've seen a continuation of that in July and as far as we can see into August. So that's positive. It is, of course, on a short booking window, but it gives us confidence in the rest of the year. And we saw nothing in the monthly evolution of our U.S. REF PAR in Q2 that gave us any particular concern. We had said in Q1 that there was a shift of some Easter business or not business because of Easter that was going to go from March to April. We saw that in April, but then the trend continued in May and June. On H2 margins, what do you think, Michael?

Well, as you know, we don't give guidance, but we've done $535 million here in the first half with EBIT up 12%, as you correctly point out. There was 130 basis points. If you back out the system fund changes or the points from consumers, it was 130 basis points of margin. We've said all along we'll deliver between 100 and 150 basis points. We're very confident that we'll continue to do that with the point sales on top of that. If you look at EBIT and where consensus is at 10% on the full year and earnings per share at around 15% growth, we're very comfortable with where that sits.

All right. Thank you. Next question. Thank you.

Thank you. Our next question comes from Muneeba Kayali of Bank of America. Your line is now open. Please go ahead.

Hi, Muneeba.

Hi, good morning. So just on the U.S., I don't know if you talked about this earlier, but one of the other things that came up from one of your competitors was weakness around the U.S. elections in November. Are you seeing that? Then secondly, just going back to your comments earlier, Ellie, around how to think about net system growth beyond this year. I think you mentioned that new build is improving. So if new build is improving, conversions remain a big contributor, then why not above 4%, especially given the pipeline growth? And then a third question on Heather, in slide 48, you laid out the impact from the master brand strategy in the last couple of years. As you look forward, Heather, Where do you see additional contributions from the master brand? Is it one of these kind of going further, or is there anything else?

Thank you. Okay. Just make sure I got your questions down. Let me tackle the first two. So, on the commentary about USRF bar groups, somebody even got specific about November. I think you have to look at the fact that we have a certain distribution and mix of properties that may be different than others in the U.S. Yes, we have some group business, some large hotels. We don't have the mega hotels of four or five, even 2,000-room properties. I think our biggest property in the U.S. is not even 1,000 keys. We have a decent urban distribution. It's not as large as some of the others where they end up doing big conferences and big events, which a lot of times don't happen in some key cities like Washington, D.C., when you get to a presidential election year, because nobody knows who's going to be there by January, and they just say, we'll come back and meet who's here starting February. So it tends to be a low business season, definitely a low group season in big markets like Washington, D.C. Some of our competitors are are very heavily represented in our market. We have a decent representation. It's nowhere near theirs and not the same group distribution across the country. So what could be true for others may not apply to us. We've looked at our forward bookings into November, which is quite a ways away. I mean, I'll be honest with you, given the booking window, but we looked at our group booking window, which tends to be longer term into November, and we don't see any dislocation at this point. from the election or anything for that matter. On that system size growth, yes, we feel that while we're not yet at the levels of new build signings, ground breaks, or openings of pre-pandemic, and it's gradually improving, but gradually we do see that gradual improvement. We saw our new build signings increase. We saw our new build openings increase. Our ground breaks increase. We hope that trend continues. We hope that the lower interest rates favor that going forward. And we'd be happy to see, you know, our net system size continue to grow. Our mix today has increased significantly towards conversions. We want more of both. We're not really targeting a percentage of either. We want more of both. We're comfortable with where, you know, we are this year with net system size consensus. We're comfortable that continues forward. If it's better, that's fine, too. But we want to see that evolution continue.

Yeah, and if you look at 2025 consensus as it sits today, it's at 4.2%. You know, as we look forward, obviously that's a long ways away, and there's a lot of water that needs to go under the bridge to that point, but we don't look at that and say that's off. So certainly with no one, and as Ellie mentioned earlier, the rooms that it's going to provide next year in terms of openings, that really underpins our system growth for next year. So, you know, we feel comfortable.

And the acceleration in signings we've had in the first half, X number, plus 23% year-to-date. That's also promising. Now, I just want to make sure we got your third question correctly. You were asking about are there other aspects of the master brand that we can monetize, or I just want to make sure we got it properly.

Well, yes. So are there more aspects of it that you can monetize? Is there more to it, or kind of you're happy with what you've achieved so far?

Well, let me just start off on that question and then turn it over to Heather for the real answer, actually. I mean, our principal objective of the master brand is to make ISG a household name and have it everywhere, which then powers each individual brand. So before ancillaries, we want ISG Hotels and Resorts to be a household name so there's an affiliation with all of our brands so that there's strength in the loyalty program, which powers us. room nights, but also powers owner returns and just drives the whole enterprise. And then it helps ancillaries, too, of course. It helps credit card. It helps point sales. But I just want to establish the premise that MasterBrand powers the hotel brands first.

What about you, Heather? Yeah, just to build on that, Ellie, and I think you may have been referring to the page in the presentation that calls out just some of the leading indicators of MasterBrand awareness, engagement, social review scores from our customers. I characterize those as leading indicators that suggest we are making progress. But to Ellie's point, the investment in the master brand is about powering the revenue for the system. And as we continue to monitor that investment, we'll also be looking at some of the revenue metrics, whether it's revenue for our hotels and how that compares to the competition, but also some of those loyalty metrics. metrics around paying more relative to non-members, increasing return rates, and other indicators that that master brand investment together with the loyalty investment really powers the enterprise engine.

It does underpin IC1 rewards, which then drives point sales, which then also drives credit cards. But you've got to be strong at the master brand first, which is what we've been making very good progress on, and the rest flows from there. Thank you, Miniba.

Thank you. Our next question comes from Jared Castle of UBS. The line is now open. Please go ahead.

Thank you, and good morning, everyone. Just coming back to conversation, obviously, you know, where things were in 2017 versus, you know, very strong delivery on the conversions that we do. I mean, if you think about medium term, do you think the conversion momentum will remain very high over the medium term? Then as the new build momentum grows, you know, what that gets to, I guess, a higher rate of net new. And then slightly related, I mean, when a conversion's up, I guess, you know, an RFP. Is the signing process, do you think, more competitive versus a new build or is it pretty much the same? Then secondly, also just linked to Pipeline, you know, anything further on potential partnership deals like Verit, obviously, Nova.

Excuse me. The line is... Hasn't been great and has been getting worse. I think I got your first two questions. I'm sorry. I just don't want to misunderstand your questions, but it's been breaking up quite a bit. I apologize for that. Maybe you can come back later with a clearer line for the third question. Let me try to address your first question, if I understood it, which is conversions versus new builds. We've made a lot of progress in conversions. How does that underpin conversions? and support our growth going forward. There have been a few things happening in conversions, as we said in our presentations. First, we've actually built the brands that are more conversion-friendly, like VOCO, Vignette Collection, Avid. Second, we've accelerated and improved our capabilities to convert hotels more quickly, have them ramp up more quickly, which has seen the rest of our brands, too, increase their conversions, even Holiday Inn, Grand Plaza, Kempton, Holiday Inn Express. and so forth. So we've built brands that are conversion-driven. We've built capabilities that are conversion-driven. And as our enterprise, which what Heather was talking about, as ICO and award gets stronger, as our master brand gets stronger, as our revenue systems get stronger, it is attracting more owners with existing hotels that are branded or independent into our system. We hope and are confident that will continue. We're confident that the new-build environment will continue to gradually and underline gradually improve. all that should sustain our system growth going forward. I'm not saying it won't be more in the future. I'm saying that we, you know, we're comfortable with where it is today. We're going to work hard to make it more. Yes. And I think 2019 or we as a group, uh, did 4.8 before we had all these brands before we had, you know, uh, conversion brands. Uh, but it was also a time where interest rates were much lower and, uh, There wasn't a pandemic in between, which changed a few areas of momentum, which are gradually recovering. So we're comfortable where things are today. We think we have the ability to go further, but we're gradually getting there. On your questions about RFPs and is it making it more competitive, I think there have always been RFPs. Not every conversion goes through an RFP. I will tell you we do a lot of our conversions, especially RFPs, the smaller ones, smaller being individual hotels or two to three at a time, that are off-market, that are owners that we have relationships with or that are introduced by others to our system and that we negotiate with and reach an agreement. It is overall a very competitive industry and very transparent, and we've always been in a competitive industry, but not every deal gets competed, whether new build or conversion because of our track record and our reputation. I think the last question is, that you're getting to have something to do about our composition of our pipeline.

Or other deals kind of like Averastar or Novum.

Yeah, the first thing I want to articulate is that they are different deals. They're both organic deals. They're both, you know, asset-like deals. But Averastar is a commercial partnership that is full fee payings. unlike others, the full fee-paying commercial partnership. But those hotels are not converting to our brands. We actually have a license for the embarrassing our brand versus them licensing our brand. So it is different in that way. Nobun Deal is a straight franchise deal like any Holiday Inn Express or Holiday Inn out there. It just happens to be 119 of them at once, but they're all converting to ICU brands, whether it's Holiday Inn, whether it's Garner, or whether it's Candlewood Suites. and they're on straight franchise, full fee paying. So do we see more of those? We are in conversations always for multiple portfolios or different ideas. Those are pretty big ones. Things like that won't come along every quarter and sometimes not every year, but it's pleasing to see that even without those, our individual signings increase 23% year over year and a half. So we've got good momentum even without portfolio deals. I hope we got your questions. Sorry for the

Our next question comes from Jafar Mustari of PNP Paribas. Your lines are open. Please go ahead.

Hi, good morning. I've got a couple with us. Okay. Just firstly, are you able to quantify what you describe as a lower free cash flow conversion you expect this year? How much lower than 100%? It looks like the system fund working capital is about 100. Key money was about 20 million higher just in H1. So is it 15% slower, 85? Is it a bit worse, a bit better? And then on total fee revenue growth, based on your comments, Just now on REFPA and on net openings, it can probably be around 7% for the full year, 3 plus 4. Your medium-term guidance is high single digits. Is there potential to actually reach 8% or 9%? And what would be the levers to get there, please?

Okay. Michael, I want to... go with a free cash flow question?

Sure, sure. So, yeah, thanks for the question. Really simple answer what's going on here. This year, we started the year with a really large surplus within the system fund. And you'll know that the system fund is a pot of money that owners pay into, and we have to spend on their behalf and generally break even over time. Now, we've run a surplus, so we're spending that surplus down on some of the things that Heather mentioned earlier. So this year, our free cash flow conversion will be a little lower than it normally is, so we would expect it in that kind of 80%-ish range. on the full year, but we fully expect it to get back to normal as we move into the future and still generate 100%. There's nothing changing in our model that would change that 100% free cash flow conversion definition. It's only just that we had this surplus, and we're spending that down. So that's the primary reason. The other thing I'd say is, you know, even with that, and you look at where we talk about our net debt to EBITDA getting to At the end of the year, we're still expecting that to be around the low end of the range. It was 2.4 times. At the half, we would still expect it to be around the low end of the 2.5 to 3 times range we talk about. So still plenty of capacity to continue on and invest in the business, grow our ordinary dividend, which we've done and shown at 10% here at the half. and then also then return cash back to shareholders.

Thank you, Michael. On your question about sort of the algorithm and the fee revenue growth, yes, we did say low, high single digit, and I think we also articulated that's seven to nine. Once you get to ten, it's double digit. In our view, high single digit is seven to nine. I think we'll be around there this year. More is better, of course. And in some years we've done more, and in some years we will do more. And it is, by the way, as I said, on average over the mid to long term. Our track record historically has delivered that, and we're confident we can deliver that on average, you know, over the mid to long term. So we're on track for that this year. And the thing to focus on is what does it deliver at the bottom? You've seen with good cost control with 180 basis point, you know, margin accretion, 130 of it being before the point sale, but that's going to be in the numbers and, you know, going forward anyway. We still delivered 12% underlying, not underlying reportable segment EBIT growth and adjusted EPS of 12%. So, and we, when we talked about how it would have flowed through, we said 12 to 15% EPS growth. So it is, the model is working even when, You know, China's not at full speed. And even when the U.S., you know, had a negative first quarter but then recovered second, even when all the pieces aren't at full steam ahead, the algorithm is working and driving that EBIT and EPS growth that we said because of the strength of our global distribution and the asset-like strong operating model we have. Thank you for your questions. Thank you very much.

And if I can just follow up on free cash flow conversion, am I reading it correctly? You put a lot of focus on the system fund element, so that's about $100 million, if I'm correct, and presumably that's now done. It's happened. So it's going to be 80% on probably something like a billion plus funds. What are the other parts, please? And I think in particular, key money, you do flag in the release. If it's $100 million from the system funds, that's not taking you down to 80%. If the balance is all key money, that sounds like a lot of key money, so I'm probably missing something here.

Okay, yeah. Key money did go up as well. We highlighted that at the beginning of the year in that – One, our traditional guidance was about $150 million a year. We've moved from $150 to $200 million as we move into the more luxury and lifestyle-based area. So we do expect it to be at the high end of that range as we move forward. So a little bit more there. And then, of course, in terms of, you know, The conversion on EBIT, it's on net earnings, and it's after tax and interest. And so we've also had, as you've seen in kind of the first half, our tax rate is up a little bit, and that was mainly due to a tax credit that we had in the Middle East, in a country in the Middle East. That was $9 million, and therefore our tax rate is at 27%. You may remember at the end of 2023, it was 28%. We would expect the full year to be 27%. So that's – and then if you look at kind of where we sit in the half year in terms of interest growth, we're at about 36%. But we're not changing our guidance around that for the full year, so we'd expect that to still be in the $160 million to $170 million range, and therefore less pronounced at 26% in the full year.

I would just add on the key money point, too, is yes, key money is higher, but that is by design as two things are occurring. One, we are signing and opening more premium and luxury lifestyle hotels in both categories. Premium and luxury lifestyle usually require a level of key money. However, within that, our key money per hotel and key money per room is roughly the same as it's been over time. Right. It's not becoming more intensive per hotel per room. We're just doing more of it. So it's a mixed thing. Second is, as we do more conversions, we open up the hotels sooner, of course. Michael said earlier, on average, a conversion hotel is opening in seven months versus a new build in, you know, 2.1 years. But when we open, it's when we pay the key money. So, yes, the opening and the fees move up in time, but the key money moves up in time, which is a good thing. But... So that's why we moved up our guidance from, you know, 150 to 150 to 100. We're going to be close to that top end this year. Thank you for your questions. Let's move on to the next caller.

Thank you. Our next question comes from Alex Brignall of Redburn Atlantic. The lines are open. Please go ahead.

Good morning. Thank you very much for taking the questions. Just on this revolution through the year.

I'm trying to just work out the growth numbers that you're doing in the context of year-on-year versus 2019, because for China, you're attributing the slowdown to the 2019 comp, but when we asked about 2019 comps at Q1, you said that we were quite a long way past 2019, so not to think about it, but if I think about H2 versus H1, the comp versus 2019 is about 440 basis points harder, which is kind of 550 in Europe, slightly less in China, and 900 in the US, and 900 in China. So I guess my question is, is the comp 2019? Why would we not see a slowdown in red spot growth in H2 versus H1 if the comp versus 2019 is dramatically harder? And you just flagged that as the reason why China got weaker. And then I guess that ties into the trading question. There's obviously been a lot of questions on this topic, but it seems like the first conclusion on the trading is that you simply haven't seen it yet because your booking window is very short. The OTA's booking is flagged here, but I guess their booking window is more like two to three months. So is it just that somebody with a booking window might have seen weakening or slowdown or whatever word they're using for it before you have? And then my third question is on China. So there's been lots of people asking about China and the consequence of WETA RevPAR on China. net unit growth. And for the most part, your peers have been saying you don't think it will have an impact on net unit growth in China if RevPAR is lower. It seems unusual that if RevPAR really just stayed lower, that there wouldn't be any impact at all on openings. But can you just talk about the lag impact that there is between, you know, RevPAR being weaker, and how that might then manifest in any kind of new development opportunities in China. Obviously, it wouldn't happen yet, but when we might see that. Thank you very much.

Yeah. I mean, the reason that we're looking at comps in China versus 2019 is because it didn't really reopen until 2022, and you had some anomalously large and volatile numbers in 2023 and still in the first part of 2024. But the U.S. was fully recovered in 2022. So were most of our EMA markets. And that's why the relevant comps for most of our business, which is U.S. and America's, is really 2023. And looking into the rest of the year, those comps do not get harder than for the U.S. and for the Americas in the rest of the year. And we started the year, the first quarter, we were negative in the U.S., 1.9. We covered in Q2. Right now we're not seeing a negative REF PAR for the rest of the year. And so that would be a tailwind for the rest of the year. So overall, when we take all of our 100 countries and look at the trends, we're comfortable with a consensus REF PAR for the year or not. I would not take 2019 as the relevant point of start for 2024 in the U.S. China was in a different recovery situation. On your trading window, look, I mean, yes, on your booking window for trading, all we can talk about is the data that we have, information that we have, not just for the three months of Q2, but also July and looking into August and then looking into our group bookings, Well, beyond that, our group bookings are significantly up year over year, and those consume over 24, 25, and beyond. We're not seeing deceleration in group bookings. We're not saying that something couldn't happen to create a deceleration. What we're telling you is our data that we published today and that we're seeing in our forward bookings, whether it's leisure, business, or group, aren't indicating that today. Now, every business starts from a different starting point. So, what they may be seeing may be actually correct too, but because they have a different starting point, it's a deceleration from a different starting point versus we don't have guidance and so, and we don't give guidance and so, therefore, you know, our view is based on much more current information than some projection given last year by somebody else. On your lag effect in China, I think that If you're not incorrect, I would say theoretically that if there is a persistent decline, frankly, in any industry demand, then supply at some point does react, right? I don't care whether you're making shoes or room nights. But that is not our hypothesis or our experience in nearly 50 years in China, that our experience has been that there are highs and lows, there are ebbs and flows, but that the trend line is actually upwards in China, and that right now, the softness that we've seen in left bar, a lot of it attributable to outbound travel, although we're not saying it's all of it, we have no way of measuring it, but definitely some of it attributable to outbound travel, but that is not a persistent structural thing. The middle class keeps growing. Travel is significantly under-penetrated. Rooms per capita are significantly under-penetrated. Every projection... every projection of where the global travel market is shows that China and then, of course, India on its heels are going to be among the largest, if not the largest travel markets going forward. So we don't think there's something structural. And I think what's happening is smart investors in China are looking at the same information and are investing in this sector. I don't know that our Openings and signings will continue to grow at 50% and 40% respectively, but I do know that the long-term fundamentals of that market are strong and that demand will continue to grow and supply will continue to grow, and we're going to get a pretty good share of it. Thank you for your questions.

Thank you. Our next question comes from Andre Julian of Deutsche Bank. The line is now open. Please go ahead.

Good morning. Two main questions, if I may. First one about Middle East, regarding the actual situation and tensions that we can see. Do you have any comments on the operating trend and potential fears we could have in the region? Second question is about capital allocation. So you clearly said that you were ready to continue to return the excess cash to shareholders, but regarding your 19 brands and the creation of Gartner last year, do you see any opportunity to continue to create brands or to buy some small ones to repeat what you've been doing with Kympton or other brands in the past and to continue to develop your portfolio? and better address the market like that. And same question in terms of capital allocation. Do you see any new opportunity in terms of geographies? Thank you.

All right. Thank you for your questions. First, on the Middle East, of course, we're following all events. Right now, just to give you the facts and give you sort of some color, right now, in the area of conflict, that's broadening a little bit, you know, Israel, Lebanon. Between the two countries, we have 10 hotels. They're obviously, we've seen cancellations and lower occupancy, and that's natural. It's a very small part of our business, but we've seen it. I'll tell you personally, I'm of Lebanese origin. I was going to travel there in October with my mother. We're probably not going right now under the circumstances. I'm not sure you could get there if you wanted to. But if you – where our main business is in the Middle East, which is in the Gulf, United Arab Emirates, TSA, Qatar, the rest of that region, at this moment we've actually been checking. I have not seen any change in booking pattern. It doesn't mean something won't happen if the situation further expands and escalates. It's clearly out of our control. But nothing's happened yet. And we actually didn't see that. Over the last year, almost one year now into the conflict in Gaza, and we have not seen an impact to our Gulf business. Probably what I'll tell you is being from that region, conflicts have been going on for 60 years, and right or wrong people just have become accustomed to it. Sad, but true. Sad, but true. So we hope that there's an end to the hostilities, but at this moment, in a material part of our business, which is you know, the goal for not seeing anything. Um, in terms of capital allocation, new brands, whether launched or, or, uh, or acquired, you know, we're clear and I'll repeat our capital allocation policy, which is first invest in the business, which would be this, uh, second, maintain and increase our ordinary dividend, which we just did today, again, at 10%. And third, return surplus capital to shareholders, which we're doing this year at a higher level than last year. Um, We will create or acquire new brands if and when we see a strong consumer demand and owner demand to invest in a space of scale where we're not participating. If we're participating already, we don't need to add to it. If we're not and it's a strong segment of demand and owner interest for capital investment, we will participate. That's why we've added nine brands in the last nine years or so, not planfully one per year, but because we found opportunities. And that may happen again. I would say our balance sheet's in a strong place. Our cash flow generation is a strong place. We do not need to change our capital allocation annually to do organic launches like Garner or before like Abbott, Atwell, Volco, Vignette. And sometimes even if there is a bolt-on acquisition, if there are larger ones, that would require rethinking and a in the short term, how we handle that, but all in the interest of the first priority of capital allocation, which is to invest in the business for higher returns to our shareholders. We feel today we have a very strong portfolio to address all customer needs and a strong loyalty plan to address it, but consumer tastes do evolve and we're always on the lookout for some. In terms of geographies, we talked at the February strategy update about expanding our geographies. We highlighted Japan, India, Germany, Kenya, Saudi Arabia. And I tell you, six months later, we made very significant progress in each one of those markets. We have increased signings significantly. In KSA, our pipeline is more than double our open hotels and is likely to be our strongest or second, probably second strongest signings market this year after Germany because of Northern Deal. In Germany, we've made it a persistent approach to grow in that very hard-to-penetrate market. We've definitely broken through now, doubling our presence. In Japan, our pipeline is increasing rapidly. India, I was there in April, and our pipeline there now is double our 50 open hotels. and we're making great strides in that market. So expanding the map, it's not requiring a lot of capital at this point. If certain opportunities come up, we'll address them in that order, but we're able to expand organically while maintaining good cost control. Remember, a lot of our spending is on the system fund, not on the P&L, whether it's marketing or operations support people. Now, if it's development, that's going to be on the P&L, but we're able to fund that organically so far. Excellent. Thank you for your questions, and we can go to the next caller.

Thank you. At this time, I'll hand the call back to Erin Lou for any further remarks.

Okay. Well, thank you for joining us today on this call. Let me just sum up where I was going to start, which I didn't get a chance to. We're pleased with the performance and trajectory of In the first half, our RFR grew 3%, accelerating in Q2. We delivered growth system growth of 4.9% and net system growth of 3.2% and are confident in delivering full-year growth expectations. We secured record-breaking signings of over 57,000 rooms, up 67% year-over-year, and our pipeline grew 15%. And as we mentioned, it was 23%, even excluding the November deal on signings. We expanded our fee margin by 180 basis points, supporting operating profit growth and EPS growth of 12% each. Cash generation is funding growth investments, and we expect to return over a billion dollars to our shareholders in 2024, representing over 7% of our market cap at the start of the year. And as you heard from Heather and Michael and myself in the recorded sessions, we're making excellent progress on all of our strategic priorities. We're confident in the strength of our enterprise system. an attractive long-term growth outlook. Thank you, everyone. It's been great to connect with you today to update you on our 2024 half-year results. We're very pleased with the first half, and our teams have done an excellent job to position us for a successful year. Our next market communication will be our third quarter trading update on Tuesday, 22nd of October. Thanks for your time and interest in ISG, and look forward to catching up with you all soon.