GROUP SUMMARY

IHG turnover increased by 0.4% on the same period in the prior year, with Hotels turnover increasing by 7.5% in US dollar terms but declining by 2.0% to £724m in sterling terms. Total Hotels operating profit of £79m was 27.5% down on last year.

Within Soft Drinks, sales volumes and profit were both ahead of the prior year, a year in which the business saw record results.

HOTELS

The table above shows operating results by quarter for Hotels. In summary, encouraging trends in the first quarter (three months October to December 2002) were subsequently eroded in the second quarter (three months January to March 2003). The benefits of refurbishment programmes and the decision to increase investment in sales, marketing and technology were particularly evident in the first quarter but planned cost increases and the loss of trading profit from hotels in renovation reduced profits. In the second quarter, profits were also down on last year as the global downturn in travel took effect, particularly impacting Europe, the Middle East and Africa (EMEA) and Asia Pacific. The operating mix of the business did provide some resilience to the difficult trading conditions, with the franchise and management contract income streams being less affected than the owned and leased (O&L) business.

AMERICAS

The table above shows operating profit by quarter for the Americas region. Despite all the negative influences on the hotel industry, total operating profit at $107m for the six month period was the same as last year.

The Americas O&L estate is heavily weighted towards upscale properties in key markets disproportionately affected by the events of September 11 2001, hence the initial revenue per available room (RevPAR) recovery of 20.8% in the first quarter. In particular, the results from the InterContinental hotels in New York, Chicago, San Francisco and Miami reflected the investment in renovations at these properties, with RevPAR growth at these properties being ahead of their relative markets. RevPAR for the total O&L InterContinental estate was up 11.3% on last year, with occupancy 6.3 percentage points higher and average daily rates 0.4% higher. Overall O&L operating profit was $4m, the same as in 2002, primarily because RevPAR growth was occupancy driven.

Operating profit for the Americas midscale franchise estate at $87m was 4.8% better than 2002. RevPAR was level with last year for Holiday Inn and 1.3% up for Holiday Inn Express. This good performance is a demonstration of the strength, scale and resilience of our midscale franchise business and its strong presence in the ‘drive to’ market in the US, which is not reliant on international travel. Express continued to outperform the market and Holiday Inn performance was in line with the market.

Operating profit for the managed and upscale franchise business was $16m compared with $20m for the first half of 2002, reflecting in particular the difficult economic environment in Latin America.

EUROPE, THE MIDDLE EAST AND AFRICA (EMEA)

EMEA has been impacted significantly by the fall in international travel as a consequence of the sustained weakness of the global economy and the threat of, and subsequent war in, Iraq. All of these factors have particularly affected key gateway cities in which EMEA’s upscale properties are concentrated. Overall, EMEA operating profit for the six months was £32m, substantially lower than last year.

In the O&L estate, InterContinental hotels in London, Paris, Frankfurt and Rome were all adversely impacted by the reduction in international airline travel, particularly inbound from the US. InterContinental RevPAR (excluding the InterContinental Le Grand Hotel Paris) for the first quarter was up by 12.8% on last year but the second quarter to March 2003 saw RevPAR decline by 6.1% against the same period in 2002. The InterContinental Le Grand Hotel Paris closed as planned in December 2001 for its major refurbishment and 234 rooms were re-opened by the end of April 2003. The hotel will be fully functional from late August 2003 with all 478 rooms open.

The midscale Holiday Inn O&L estate in the UK saw RevPAR in the six months to March 2003 increase by 3.6% driven most significantly by performance in London. More encouragingly, Holiday Inn UK RevPAR growth outperformed its relative market in both London and the regions reflecting the benefit of increased revenue investment which has taken place over the last year.

Whilst the region’s O&L hotels saw overall RevPAR increases for the six month period, these were primarily occupancy, rather than room rate, driven. This factor, combined with the impact of specific revenue investment, which has yet to benefit operating margins, and increased fixed costs and depreciation, meant that operating profit for the O&L hotels was £20m compared with £37m for the same period last year.

The EMEA managed and franchised estate was more resilient than O&L with operating profit down £1m on 2002.

ASIA PACIFIC

The region had a strong first quarter, particularly driven by the excellent performance of the InterContinental Hong Kong, which saw RevPAR growth of nearly 60% in the first quarter. This period also included $4m of one-off income. The onset of the SARS virus, however, severely impacted key markets towards the end of the second quarter. The region is taking stringent measures to reduce the impact of SARS by implementing cost containment programmes, particularly in key properties. Trading in Australia and New Zealand has also been affected by SARS late in the period, with reduced inbound international travel, however, IHG hotels have continued to outperform the market.

Overall, Asia Pacific operating profit was $25m, compared with $20m for the six months to March 2002.

OTHER

The Other segment, which includes central overheads, marketing costs and goodwill amortisation less dividends received from FelCor and other income items, was $57m compared with $43m in 2002. Dividends received from FelCor were $3m compared to $6m in 2002. The first six months of 2003 saw planned investment in marketing and IT including the InterContinental ‘ICONS’ brand positioning, particularly in the October to December 2002 quarter. In the second quarter, central overheads and marketing were slightly below last year due to the weighting of the additional spend to the first quarter and tight control of costs.

SOFT DRINKS

In the Soft Drinks business, both volumes and profit were ahead of the same period last year. Sales volumes were 3.6% ahead, driven primarily by the performance of Pepsi, Robinsons, Fruit Shoot and J2O. Key brands performed well with Pepsi’s market share growing by around one percentage point on volume growth of 3.4%, whilst Robinsons also increased its share of the dilutables market by around one percentage point on volume growth of 1.9%. The performance of the more recently launched brands was very strong, with both Fruit Shoot and J2O showing volume growth in excess of 65% over last year. Overall, the Soft Drinks business grew its turnover by 6.5%, whilst continuing strong control over costs contributed to the growth in operating profit of 25.0%.

MAJOR EXCEPTIONAL COSTS

Major exceptional items before tax for Six Continents PLC for the six months to 31 March 2003 totalled £300m. These included the exceptional costs incurred on the demerger and bid defence (£97m), the premiums paid on the repayment of the Group’s £250m 10 3/8 per cent debenture and EMTN loans (£136m) and the costs relating to the delivery of the Hotels cost reduction programme £67m ($100m).

The total cost of the separation and defence costs for Six Continents PLC is approximately £129m. Of this figure £4m was charged in 2002 and approximately £28m relates to facility fees that will be amortised to profit over the facility periods. IHG’s share of the non facility fee element of costs is £56m, and of the facility fees is approximately £13m. At separation, approximately £132m relating to the major exceptional items was accrued in the IHG balance sheet.

ORGANISATION REVIEW

IHG is proceeding with the implementation of a fundamental reorganisation in Hotels, aimed at achieving significant cost reductions and more efficient processes. As a result of this, at least $100m of annual ongoing overhead savings against the budgeted cost base for the fiscal year to 30 September 2003 will be delivered by December 2004.

The reorganisation includes significant redundancies which will provide approximately 75% of the savings, the closure and consolidation of facilities (approximately 10% of the savings) with the remainder to be achieved through streamlined processes, outsourcing, and general cost control. In total, approximately 800 positions are expected to be eliminated as part of the reorganisation.

TREASURY

Operating cash flow for the companies in the Six Continents PLC Group that now comprise IHG in the six months to March 2003 was an inflow of £54m after net capital expenditure of £172m. This reflects tighter working capital management and capital review procedures. Capital expenditure in the period included the continuing investment in the Holiday Inn UK estate, the refurbishment of the InterContinental Le Grand Hotel Paris and spend on the construction of the Holiday Inn Paris Disney. On separation, IHG net debt was approximately £1bn and this is expected to be around £1.2bn by 31 December 2003.

The credit rating of IHG was confirmed at investment grade with a Standard and Poor’s rating of BBB and Moody’s, Baa2.

IHG has confirmed ongoing banking facilities of $2.4bn, a reduction of approximately $200m from that anticipated in the Listing Particulars for IHG following a detailed review of ongoing requirements. Approximately $900m of the total falls to be refinanced within 12 months with the remainder over periods up to five years. With the current credit ratings, interest on the syndicated loan facility is payable at 80 basis points over LIBOR.

PRO FORMA INFORMATION

IHG will report to 31 December to be in line with the majority of other quoted hotel groups and to better reflect annual contract negotiation timings. The first set of audited published results for IHG will therefore be for the 15 months ended 31 December 2003. These results will include pro forma results for the 12 months to 31 December 2003.

The pro forma information set out below comprises the results of those companies that form IHG following the separation, as if IHG had been in existence since 1 October 2001. The information is provided as guidance only; it is not audited and, as pro forma information, it does not give a full picture of the financial position of the Group. The key assumptions used in the preparation of the information are as follows:

1. The pro forma information has been prepared using accounting policies consistent with those used in the historic Six Continents PLC interim and year end financial statements.
2. Pro forma interest has been calculated to reflect the post separation capital structure of the Group as if it had been in place at 1 October 2001, using interest rate differentials applicable under the post separation borrowing agreements and excluding facility fee amortisation. Dividend payments have been assumed at the expected ongoing level.
3. Pro forma tax is based on the estimated effective rate of tax for IHG applied to pro forma profit before taxation.
4. Adjustments have been made, where appropriate, to exclude any arrangements with the demerged Mitchells & Butlers Group.
5. Pro forma earnings per share is based on pro forma retained profit divided by 734m shares, being the issued share capital of IHG on separation.
6. The pro forma Profit and Loss account and Balance Sheet exclude all exceptional items as being non-recurring.

PRO FORMA PROFIT AND LOSS ACCOUNT

PRO FORMA BALANCE SHEET

IHG pro forma net operating assets can be summarised as follows:

Pro forma net assets at separation were approximately £2.5bn and net debt was approximately £1bn.

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