Annual report and summary financial statements 2006 

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Operating and financial review

Corporate information

Other operating income and expenses

Other operating income and expenses of £27m includes the gain on the sale of the Group’s investment in FelCor Lodging Trust, Inc.

Other operating income and expenses are treated as special items by reason of their size or incidence and are excluded from the calculation of adjusted earnings per share in order to provide a more meaningful comparison of performance.

Net financing costs

Net financing costs decreased from £33m in 2005 to £11m in 2006, primarily as a result of significantly lower average debt levels in the year (£92m in 2006 compared with £700m in 2005). Financing costs included £10m (2005 £5m) of interest costs associated with Priority Club Rewards where interest is charged on the accumulated balance of cash received in advance of the redemption points awarded. The increase over 2005 arises from growth in the scheme membership and higher interest rates. Financing costs in 2006 also included £4m in respect of the InterContinental Boston finance lease. Prior year costs included £9m in respect of the discontinued Soft Drinks business.


The effective rate of tax on profit before tax, excluding the impact of special items, was 24%. By also excluding the impact of prior year items, which are included wholly within continuing operations, the equivalent tax rate would be 36%. This rate is higher than the UK statutory rate of 30% due mainly to overseas profits (predominantly in the US) being subject to statutory rates higher than the UK statutory rate, unrelieved losses and other disallowable expenses. The equivalent effective rates for 2005 were 29% and 38% respectively.

Taxation within special items totalled a credit of £94m (2005 £8m credit). This represented, primarily, the release of provisions which were special by reason of their size or incidence relating to tax matters which were settled during the year, or in respect of which the statutory limitation period had expired. In 2006, taxation special items, in addition to such provision releases, included £12m for the recognition of a deferred tax asset in respect of tax losses.

Net tax paid in 2006 totalled £49m (2005 £91m) including £6m in respect of disposals.

Gain on disposal of assets

The gain on disposal of assets, net of related tax, totalled £117m in 2006 and primarily comprised the gain on the sale of seven InterContinental hotels to MSREF.


Basic earnings per share in 2006 were 104.1p, compared with 95.2p in 2005. Adjusted earnings per share were 42.9p, against 38.2p in 2005. Adjusted continuing earnings per share were 37.5p, 66.7% up on last year.


The Board has proposed a final dividend per share of 13.3p; with the interim dividend of 5.1p, the normal dividend for 2006 will total 18.4p.

Share price and market capitalisation

The IHG share price closed at 1262.0p on 31 December 2006, up from 839.5p on 31 December 2005. The market capitalisation of the Group at the year end was £4.5bn.

Cash flow

The net movement in cash and cash equivalents in the 12 months to 31 December 2006 was an outflow of £152m. This included net cash inflows from operating activities of £230m, net cash inflows from investing activities of £620m and net cash outflows from financing activities of £1,002m.

Proceeds from the disposal of hotels and other financial assets totalled £744m.

Capital expenditure totalled £124m and included a major refurbishment at the InterContinental London Park Lane and the completion of a rooms refurbishment programme at the InterContinental Hong Kong.

Cash outflows associated with shareholder returns during the year included a special dividend of £497m and share buybacks of £260m.

Capital structure and liquidity management

Net debt at 31 December 2006 was £134m (see figure 16). In November 2006, the InterContinental Boston opened; this hotel is operated under a finance lease and the lease commitment of £97m is therefore included within Group borrowings.

Gearing (net debt expressed as a percentage of IHG shareholders’ equity) at 31 December 2006 was 20%.

Figure 16

Net debt at 31 December 2006
Borrowings (including derivatives):    
Sterling 102
US Dollar 282 220
Euro 101 488
Other 48 71
Cash (including derivatives) (403) (686)
  130 93
Excluding fair value of derivatives (net) 4 (5)
Net debt 134 88
Average debt levels 92 700

Figure 17

Facilities at 31 December 2006
Committed 1,157 1,163
Uncommitted 39 14
Total 1,196 1,177

Medium and long-term borrowing requirements at 31 December 2006 were met through a £1.1bn Syndicated Bank Facility which matures in November 2009. Short-term borrowing requirements were principally met from drawings under committed and uncommitted bilateral loan facilities. At the year end, the Group had £944m of committed facilities available for drawing.

The Syndicated Bank Facility contains two financial covenants, interest cover and net debt/Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA). The Group is in compliance with both covenants, neither of which is expected to represent a material restriction on funding or investment policy in the foreseeable future.

Treasury management

Treasury policy is to manage financial risks that arise in relation to underlying business needs. The activities of the treasury function are carried out in accordance with Board approved policies and are subject to regular audit. The treasury function does not operate as
a profit centre.

The treasury function seeks to reduce the financial risk of the Group and manages liquidity to meet all foreseeable cash needs. One of the primary objectives of the Group’s treasury risk management policy is to mitigate the adverse impact of movements in interest rates and foreign exchange rates.

The US dollar is the predominant currency of the Group’s revenues and cash flows and movements in foreign exchange rates, particularly the US dollar and euro, can affect the Group’s reported profit, net assets and interest cover. To hedge this translation exposure, the Group matches the currency of its debt (either directly or via derivatives) to the currency of its net assets, whilst maximising the amount of US dollars borrowed. A general weakening of the US dollar (specifically a one cent rise in the sterling: US dollar rate) would have reduced the Group’s profit before tax for 2006 by an estimated £1m.

Foreign exchange transaction exposure is managed by the forward purchase or sale of foreign currencies or the use of currency options. Most significant exposures of the Group are in currencies that are freely convertible.

Interest rate exposure is managed within parameters that stipulate that fixed rate borrowings should normally account for no less than 25%, and no more than 75%, of net borrowings for each major currency. This is achieved through the use of interest rate swaps and options and forward rate agreements.

Credit risk on treasury transactions is minimised by operating a policy on the investment of surplus funds that generally restricts counterparties to those with an A credit rating or better, or those providing adequate security. Limits are set for individual counterparties. Most of the Group’s surplus funds are held in the UK or US and there are no material funds where repatriation is restricted as a result of foreign exchange regulations.

Figure 18

Interest risk profile of gross debt for major currencies (including derivatives) at 31 December 2006
At fixed rates 53 36
At variable rates 47 64


The Group operates two main schemes, the InterContinental Hotels UK Pension Plan and the US-based InterContinental Hotels Pension Plan. Including the unfunded element of the Plans, the accounting deficits at 31 December 2006 were £29m and £33m respectively.

Following the 2006 actuarial review of the UK Pension Plan, the Group has agreed with the Plan Trustees to make a special contribution of £40m. The special contribution will be paid over three years with £20m in 2007 and £10m in each of 2008 and 2009. The defined benefit section of the UK Plan is generally closed to new members. The US Plan is closed to new members and pensionable service no longer accrues for current employee members.


IHG employed an average of 11,456 people worldwide in the year ended 31 December 2006.

The hospitality industry is a people-based business and as such the Group’s HR strategy places great emphasis on the following:

  • Leadership Strong leadership is central to IHG’s aim of becoming one of the very best companies in the world. The Company’s senior leadership programme involves the creation of development plans for top performers, supported by individual assessment and accredited business training and incorporates long range succession planning;
  • Development Across the Group, development training is designed to increase the skills and knowledge of our employees wherever they work. This year IHG launched employee ‘on-boarding programmes’ to assist new employees, in addition to continued brand specific training and individual development and coaching;
  • Engaging employees Great emphasis is placed on employee communication, particularly on matters relating to the Group’s business and its performance. Communication channels include global management conferences, team meetings, informal briefings, in-house publications and intranets. Regular feedback is obtained through employee focus groups and employee opinion surveys, the results of which are utilised in developing management policies and best practices. A European Forum brings together senior managers and employee representatives from EU countries to discuss pan-European issues;
  • Rewarding achievement Compensation and benefit programmes are designed to be market competitive and the Group recognises employees with appropriate individual or team based awards;
  • Pensions The Group offers access to a comprehensive retirement savings plan in all the geographic areas in which it operates. IHG makes matching contributions and the plans provide various investment and currency options;
  • Health and safety The Group-wide commitment to health and safety for guests and employees alike is detailed in the Corporate Social Responsibility section of the Annual Review and Summary Financial Statement 2006;
  • Equality of opportunity The Group is committed to providing equality of opportunity to all employees without discrimination and continues to be supportive of the employment of disabled persons. Where existing employees become disabled, it is the Group’s policy to provide continuing employment wherever practical in the same or an alternative position;
  • Diversity IHG benefits from the diversity of its employees, owners, business partners and guests. The Group regards diversity as a fundamental factor in its success in operating as a global organisation.

Information on the Winning Ways, IHG’s recently developed core values and behaviours framework, can be found in the Annual Review and Summary Financial Statement 2006.

Corporate social responsibility (CSR)

IHG is committed to maintaining a strong culture of CSR and to meeting its global obligations as one of the world’s leading international hotel businesses.

A comprehensive review of the Group’s CSR strategy was carried out and a revised strategy was considered and approved by the Board in December 2006. The intention is to concentrate on the global environment and local communities to realise this ambition. IHG also made important organisational changes during the year and management is now working to integrate the CSR policies into the business. As a result of the significant work undertaken in 2006, IHG believes it is now well placed to make significant progress during 2007.

Further details can be found in the Annual Review and Summary Financial Statement 2006, and on the website

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