Preliminary Results for the year to 31 December 2015

Strong results driven by disciplined execution of our winning strategy

¹All figures before exceptional items unless otherwise noted. ²Excluding owned asset disposals, managed leases, significant liquidated damages and Kimpton; at constant FY14 exchange rates (CER). Underlying adjusted EPS based on underlying EBIT, effective tax rate, and reported interest at actual exchange rates. ³Group revenue excluding owned&leased hotels, managed leases and significant liquidated damages; underlying excludes Kimpton. ⁴After exceptional items.

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

“Our strong momentum in 2015 was driven by a clear strategy and disciplined execution. We delivered our highest room openings since 2009, our best signings since 2008, 11% underlying profit growth and 19% underlying EPS growth.

Our high quality, fee based, business continues to generate significant operating cash flows following the completion of our major asset disposal programme. Reflecting this and our on-going focus on delivering shareholder value, we today announce a $1.5bn special dividend, which will take total funds returned since 2003 to $12bn.

We have strengthened our brand portfolio, adding Kimpton Hotels & Restaurants into the IHG family and accelerating signings across our mainstream and extended stay brands. Through effective online distribution management we grew our direct digital revenue more than any other channel, and building on our track record of innovation we are on course to begin the roll out of a next generation cloud based Guest Reservation System in 2017.

Looking into the medium term, despite economic and political uncertainty in some markets, the prospects for the hotel industry remain good and the strength of our business model gives us the confidence to propose a 10% increase in total dividend for the year.”

Financial Highlights

• Strong revenue growth driven by both RevPAR and rooms
  • Global comparable RevPAR up 4.4% (Q4: 2.4%), led by rate up 3.1%, with RevPAR growth across all regions.
  • Net room growth of 4.8% (3.2% ex. Kimpton acquisition), with 44k room openings up 8% year-on-year.
  • $24.0bn total gross revenue from hotels in IHG’s system (up 5% year-on-year; 11% CER).
• High quality business model with a focus on disciplined execution and capital allocation
  • > 95% profit now from the fee business; ~85% of fee revenue from hotel revenues.
  • Group fee margin of 46.3%, up 1.6%pts (1.3%pts CER); scale benefits and tight overhead control creates capacity to invest for further growth, whilst driving consistent fee margin progression.
  • Focused investment in our brands and asset recycling led to net capital expenditure of $226m (gross: $264m).
  • $1.5bn will be returned to shareholders via a special dividend with share consolidation, to be paid in Q2 2016.
  • Proposed 10% increase in total dividend to 85.0¢, reflects confidence in the future prospects of the business.
  • Return on capital employed of 57% up from 9% in 2004.

Strategic Progress

• Strengthening our preferred brands
  • Record year for opening and signings for Kimpton Hotels & Restaurants, and in January 2016, we signed the first for the brand outside the Americas, in Amsterdam; other management agreements being negotiated in all regions.
  • Expanded our boutique footprint, opening Hotel Indigo Lower East Side New York, IHG’s 5,000th hotel, as well as adding our first property for the brand in AMEA, Hotel Indigo Bangkok Wireless Road.
  • Crowne Plaza RevPAR up 6.1% with new brand hallmarks driving higher guest satisfaction.
  • Innovative guest room and public area enhancements for the Holiday Inn Brand Family, which drove guest satisfaction levels to an all-time high and the most pipeline signings for seven years.
  • Momentum continued across our new brands, opening the first three HUALUXE Hotels and Resorts in China; a flagship property for EVEN Hotels in New York and signing a further six hotels for the brand into the pipeline.
• Growing through targeted hotel distribution
  • Signed 78k rooms into the pipeline, up 13% year-on-year, led by the Americas.
  • Highest global room signings for seven years, demonstrating owners’ confidence in IHG and its brands.
  • 214k pipeline rooms of which ~ 45% are under construction and ~90% are in our ten priority markets.
  • 15% share of the active industry pipeline, more than three times current supply share.
• Driving revenue delivery through technology and loyalty
  • Digital revenue of $4.2bn, up more than $0.4bn year-on-year, ahead of any other channel.
  • 40% of digital traffic from mobile devices, delivering gross revenue of $1.2bn, up from under $50m five years ago.
  • Enhanced IHG Rewards Club with the launch of Spire Elite, a new top tier of membership, and enhanced personalised member marketing campaigns, driving registrations up 35% year-on-year.
  • Industry’s first cloud-based Guest Reservation System on track to begin roll-out in 2017.

Americas – Double digit profit growth driven by rate led RevPAR increases and room growth

Comparable RevPAR increased 4.6% (Q4: up 2.9%), driven by 3.8% rate growth. US RevPAR was up 4.7%, led by Crowne Plaza up 6.6% and Hotel Indigo up 7.5%. Fourth quarter US RevPAR growth of 2.9% was impacted by our concentration in oil producing markets, where RevPAR was down 9.8%; the remainder of the estate grew 4.8%.

On an underlying¹ basis revenue was up 9% and operating profit up 10%, driven by franchise royalty growth of 5% and an $8m (28%) increase in fees associated with the initial franchising and relicensing of hotels. Managed profit was impacted by costs relating to our 20% interest in InterContinental New York Barclay during its refurbishment (2015: $4m, 2014: $5m). Underlying¹ owned profits increased 26%, driven by 7.1% RevPAR uplift at InterContinental Boston and 6.3% RevPAR growth at Holiday Inn Aruba. Reported revenue and profits both increased 10% (revenue 11% at CER, profit 12% at CER), benefiting from Kimpton operating profit of $18m which included previously disclosed liquidated damage receipts of $3m.

Opened 23k rooms (183 hotels), including four Holiday Inn Club Vacations properties (1k rooms), growing this portfolio by 30%. 15k rooms (104 hotels) were removed as we continue to focus on high quality brand representation. We signed 38k rooms (325 hotels), including 78 hotels (8k rooms) for our extended stay brands.

2016
The significant refurbishment and repositioning of InterContinental New York Barclay is planned to complete at the end of the first half. We expect to incur costs of $6m in the period before the hotel re-opens, which will result in improvements to the long-term profitability of the hotel. From the third quarter the hotel will start to contribute fees, which will increase to approximately $7m per annum once trading is fully ramped up.

To drive further growth across our brand portfolio we will invest an additional $7m, primarily into franchise development resources. Non-exceptional Kimpton integration costs are expected to be in line with 2015, at approximately $2m.

Europe – Robust trading in major markets and acceleration in signings pace

Comparable RevPAR increased by 5.4% (Q4: up 3.6%), driven by rate up 3.9%. UK RevPAR increased by 5.1%, led by rate growth in both London and the provinces. In Germany, our second major market, RevPAR growth was 4.4%, and across the rest of Europe our RevPAR grew in the mid-single digits, despite challenging trading conditions in Paris.

On an underlying¹ basis revenue was up 8% and operating profit up 23%, with the transition of 61 UK managed hotels to franchise contracts driving a 14% increase in underlying¹ franchise fees and cost efficiencies reducing regional overheads. Reported revenue declined 29% (17% at CER) and reported operating profit was down 12% (up 3% at CER), negatively impacted by foreign exchange translation and the sale of InterContinental Paris – Le Grand on 20 May 2015, which was retained on a long term management agreement.

Opened 5k rooms (36 hotels) including the landmark InterContinental London – The O2, and InterContinental Bordeaux – Le Grand, a conversion which marks our fifth open property for the brand in France. We signed 9k rooms (48 hotels), including 14 properties in Germany, a record number in that country for the second year running, realised through our multi-development agreements.

AMEA – Solid growth led by RevPAR in Japan and new openings in priority markets

Comparable RevPAR increased 4.5% (Q4: up 0.2%), driven by growth in both rate and occupancy. Trading across the region was mixed, with Japan continuing to outperform through rate led RevPAR growth of 14.6%, benefiting from international demand. Australia increased 4.5%, while South East Asia grew 5.7%, led by recovery in Thailand after political disruption. However, the Middle East was impacted by declining oil prices, ending the year up 0.2%.

On an underlying¹ basis, revenue was up 6% and operating profit increased 9%, driven by robust trading in the managed business, and net room growth of 7% across the region. Reported revenues declined 0.4% (up 10% at CER) and profit increased 2% (11% at CER), adversely impacted by foreign exchange translation.

We opened 7k rooms (22 hotels) and signed 12k rooms (35 hotels), our fastest pace in seven years. This included strong growth in Indonesia, one of our priority markets, increasing our presence by more than 30% with the opening of five hotels (1k rooms), and signing a further four properties (1k rooms).

2016
Of the 7k rooms opened in 2015, 3k are located in Makkah, Saudi Arabia. Due to the highly seasonal nature of demand in this market, the stabilised annual contribution from these rooms is expected to be approximately $1m from 2016.

Greater China – Market out-performance and rooms growth drive strong fee revenue increase

Comparable RevPAR increased by 0.3%, with growth of 2.9% in mainland China offset by significant declines in Hong Kong and Macau; fourth quarter RevPAR declined by 0.9% with mainland China up 0.5%. IHG’s operational excellence in the region resulted in significant industry out-performance, with full year growth particularly strong in mainland tier 1 cities, up 6.0%, and the rest of the mainland showed marginal increases. Our strategy of using our mainstream brands to penetrate less developed cities impacted total RevPAR, which was down 2.3% for the region.

Underlying¹ revenue was up 8% driven by the addition of 20k rooms into the managed estate over the last two years. Underlying¹ profit declined by 11%, adversely impacted by $5m of on-going investment into building long term people capability, as well as the year-on-year impact from $5m of previously disclosed one-off upsides in 2014. Reported revenue and operating profit declined by 14% (14% at CER) and 21% (20% at CER), respectively, both affected by the sale of InterContinental Hong Kong on 30 September 2015.

Opened 9k rooms (32 hotels) and signed 20k rooms (66 hotels), significantly ahead of the nearest international competitor on both metrics. The openings included the rebranded 495-room Crowne Plaza Sanya City Centre, whilst signings pace was up 24% year-on-year, driven by 13k Holiday Inn rooms entering the pipeline.

Highly cash generative business with disciplined approach to capital allocation

• Significant free cash flow from operations
  • Free cash flow of $466m, up 45% year on year (2014: $321m)

• Completion of transition to asset light with $1.3bn proceeds from major asset disposals
  • Completed the sale of InterContinental Paris ‐ Le Grand for gross proceeds of €330m
  • Sold InterContinental Hong Kong for proceeds of $928m after final working capital adjustments and cash tax, marking the successful conclusion of our major owned asset disposal programme.

• Investing for growth
  • Acquisition of Kimpton Hotels & Restaurants completed in January 2015 for $430m before working capital. Future tax relief associated with the tax amortisation of the purchase consideration expected to be approximately $160m.
  • $264m gross capital expenditure in 2015 comprised: $115m maintenance capex and key money; $78m recyclable investments; and $71m system funded capital investments. $17m proceeds received from asset recycling and $21m system fund depreciation received via working capital, resulting in $226m of net capital expenditure.
  • Gross capex guidance remains unchanged at up to $350m per annum into the medium term, including approximately $100m of system funded investment in 2016, primarily for development of our new Guest Reservation System.

• Shareholder returns
  • Proposed 11% increase in the final dividend to 57.5¢, taking the total dividend for the year up 10% to 85.0¢, reflecting our confidence in the future prospects of the business.
  • $1.5bn, equating to 632.9¢ per share, will be returned via a special dividend with share consolidation.

• Efficient balance sheet provides flexibility
  • Financial position remains robust, with an on-going commitment to an investment grade credit rating.
  • Entered into a new $1.3bn syndicated loan facility during the first half and in August issued a £300m, 10-year bond at a 3.750% coupon rate, the lowest funding rate IHG has achieved in the Sterling bond market.
  • Year-end net debt of $529m (including $224m finance lease on InterContinental Boston), down $1,004m on 2014 due to the proceeds from asset disposals, partially offset by the purchase of Kimpton.

Foreign exchange – volatile currency markets impact reported profit

The strong US dollar in 2015 reduced reported profit by $25m and adversely impacted RevPAR growth by 4.6%pts when translated at actual rates. Europe and AMEA were the two regions most affected, with foreign exchange reducing RevPAR growth by 13.6%pts and 8.0%pts respectively.

Currency markets continue to be volatile and we expect foreign exchange to have an impact on 2016 reported profit. If the average exchange rate during January 2016 had existed throughout 2015, 2015 reported operating profit would have reduced by a further $4m.

A full breakdown of constant currency vs. actual currency RevPAR by region is set out in appendix 2.

Interest, tax, and exceptional items

Interest: Net financial expenses increased by $7m to $87m due to the bridging loan used to acquire Kimpton, which was subsequently re-financed by a £300m sterling bond in August.

Tax: Effective rate for 2015 was 30% (2014: 31%). 2016 tax rate expected to be low 30s.

Exceptional operating items: Net exceptional operating gain of $819m for the full year was driven predominantly by a gain on the disposal of hotels.

¹ Excluding owned asset disposals, managed leases, significant liquidated damages and Kimpton; at constant FY14 exchange rates (CER).
 

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