Earnings Call: H2 2018

Feb 19, 2019

Good morning, everyone, and welcome to IHG's 2018 full year results presentation. I'm Heather Wood, Head of Investor Relations. In a moment, I'm going to hand over to Keith Barr, Chief Executive Officer, and Paul Edgecliffe-Johnson, Chief Financial Officer, to take you through our results in more detail. First, as we won't be holding a separate call for U.S. investors today, but will be making the replay of this presentation available on our website, I need to remind you that in the discussions today, the company may make certain forward-looking statements as defined under U.S. law. Please refer to this morning's announcement and our SEC filings for factors that could lead the actual results to differ materially from those expressed in or implied by any such forward-looking statements. I will now hand the presentation over to Keith. Thanks, Heather, and good morning, everyone. In a moment, Paul will talk you through our financial performance. First, let me share some quick highlights. We delivered a strong performance in 2018. Our room signings and openings were at the highest level for a decade, and we're driving real momentum in each of our regions, delivering 2.5% RevPAR growth for the group. Together with net system-size growth of 4.8%, this drove underlying operating profit up 6% and underlying earnings per share up 19%. Our high-quality fee streams and disciplined use of capital continued to generate significant cash flow. Coupled with our strong performance and confident outlook, we have taken the decision to increase our total annual ordinary dividend by 10%, in addition to the $500 million special dividend that we paid last month. 2018 has been a year of meaningful change for IHG. Last February, we set out a series of strategic initiatives which were underpinned by a renewed focus on delivering long-term, sustainable growth for our business. Combined, these initiatives will help drive industry-leading net rooms growth over the medium term, along with continued strong returns for our owners and shareholders, whilst delivering on our commitment to provide true hospitality for everyone. At the heart of this are our brands. We're constantly enhancing our established portfolio, and we are moving quickly to add new brands in the underserved areas of the market, where we see a clear opportunity to strengthen our offer to guests and owners. To that point, our rollout of Avid and voco moved at pace in 2018, and we added Regent Hotels and Resorts to our luxury portfolio. Further strengthening our luxury footprint is the acquisition of Six Senses, announced last week. Momentum extends to our mainstream category with the news today that we will launch a new brand in the fast-growing all-suite segment of the upper midscale market later this year. To support the growth across our business, we've embedded a new organizational structure, which is helping us move with greater focus, speed, and agility. You'll recall that we've brought together two of our four operating regions to better focus resources on the highest opportunity markets. We've also combined our commercial and technology functions and created a new brand and marketing organization with global accountability. These moves are already driving efficiencies, speeding up our pace of innovation, improving the efficiency and impact of our marketing spend, and ultimately maximizing revenue delivery for our owners and for IHG. The investments in our strategic initiatives are being funded by our $125 million efficiency program, which is on track with savings being wholly reinvested back into the business. There's a lot to celebrate from 2018 as we've driven a strong performance from our existing business and made rapid progress executing against the strategic initiatives that will set us up for faster growth in the future. I'll go into more detail later on this morning, but before that, 2018 was also a year in which our business suffered a great loss. We recently announced changes to our executive committee after Eric Pearson, our Chief Commercial and Technology Officer, sadly passed away in December. Eric had taken some time off from the business with illness, during which time George Turner, our EVP, General Counsel, and Company Secretary, had taken on additional commercial and technology responsibilities on an interim basis. I'm pleased to say that George has now been appointed into the role permanently. Nicolette Henfrey, currently SVP, Deputy Company Secretary, and Head of Corporate Legal, will take up the position of General Counsel and Company Secretary. I'm going to hand over to Paul now, who will spend a few minutes taking you through our full-year results. I'll then come back to talk through more detail behind our strategic initiatives before we open up to Q&A. Paul. Thank you, Keith. Good morning, everyone. Before I get into the details, there's a lot of feedback. Can you hear me okay? Yeah. Before I get into the details, I should remind you that my commentary focuses on our results from reportable segments. These exclude the impact of hotel cost reimbursement and the system funds, which are now reported as part of our group results following our adoption of IFRS 15 at the beginning of 2018. Focusing on these reportable segments, we're pleased to report another year of strong financial performance with growth in all our key metrics. Starting with the column on the right-hand side of the slide, reported revenue increased 12% to $1.9 billion, and the operating profit increased 8% to $816 million. On an underlying basis, so excluding current year acquisitions, $13 million of individually significant liquidated damages, and at constant currency, we grew revenue by 6%. Underlying revenue and operating profit from the fee business grew 7%. This resulted in our fee margin being up 10 basis points year-on-year at constant currency. I'll come back to the drivers of this shortly. Underlying interest increased by $15 million, reflecting the impact of higher U.S. dollar interest rates on bank borrowings and balances with the system fund, along with finance charges related to deferred and contingent consideration on acquisitions. For 2019, I expect our underlying interest charge will be higher, partly due to $20 million of interest on the €500 million bond we raised in November. 2019 interest will also include around $30 million of charges relating to the adoption of IFRS 16 and finance charges on acquisitions. Two-thirds of which has a corresponding benefit to operating profit, and so will not impact net income. Our reported tax rate fell to 22%, in line with guidance, predominantly due to U.S. tax reform. In aggregate, this performance enabled us to increase our underlying earnings per share by 19% and gave the board confidence to raise the total dividend by 10%. Looking now at our levers of growth. We added 56,000 new rooms to the system, which is the highest level of openings we've had since 2009. At the same time, we remain focused on removing underperforming properties, exiting 18,000 rooms. At 2.2% of our net system size, this was lower than I had previously guided for 2018, largely due to timing. As a result, for 2019, I anticipate removals will be in the top half of our 2%-3% point range, which I still expect towards the lower end of this range over the medium term. This brought net system size growth to 4.8%, or 4.3% on a purely organic basis. We also achieved our strongest ever signings in a decade. 99,000 rooms entered our pipeline, which leaves us well positioned for a further acceleration in net rooms growth. Net system size growth, combined with RevPAR growth of 2.5%, brought total underlying fee revenue up 7%, with around 40% of this growth coming from new and ramping up hotels. When looking at fee revenue, year-on-year rooms growth and comparable RevPAR are good proxies to understand how growing our net system size and revenue per available room translates into incremental fee revenue over time. However, they do not reflect several factors that impact in the year fee growth, the phasing of openings and removals, changes in relative brand and geographical mix, and the ramp-up of newly opened hotels. I have therefore also shown the total rooms available and total RevPAR growth, as these have a much more linear relationship with fee revenue growth in the year. As we open more hotels and markets where the demand drivers are still being built, lower levels of absolute RevPAR in the early years dilute our overall RevPAR growth. In the longer term, as these markets mature, they will support sustained RevPAR growth. Of course, the fees which we generate there are incremental to those we receive in established markets. So this will continue to be positive for our top line. All the details of this at a regional level, which I have shown previously, can be found in the appendix. I will now take you through our 2018 performance in each of our regions in more detail. Starting first with the Americas, where U.S. industry demand remains at record level. As a result, our hotels in the region are continuing to drive record occupancies of nearly 70%. This meant predominantly rate-driven RevPAR increases, with the Americas up 1.9% and the U.S. up 1.3%. In the fourth quarter, the U.S. was up 0.6%, a good performance, bearing in mind the drag from hurricane-related demand in the back half of 2017. Elsewhere in the region, Canada had another strong year, up 5%, driven by demand across most urban markets. Underlying profit in the Americas grew 4%, with fee business profit also up 4%. This was largely driven by growth in fee revenue from incremental rooms and RevPAR, and a $4 million non-recurring benefit from a payroll tax credit. Against this was a $6 million negative impact from lower hotel termination fees and from the financial incentives we have provided for our Crowne Plaza Accelerate program. We opened 22,000 rooms during the year, 60% of which were for the Holiday Inn brand family, and signed a further 43,000 rooms into our pipeline, including 12,000 rooms for our new brand, Avid Hotels. Using available industry data, it is clear that we have grown our share of signings in the U.S. through 2018. The investments we're making to optimize our brand portfolio, make our brands increasingly attractive to owners, and expand the number of opportunities that they have to work with us, is paying off. Moving now to our Europe, Middle East, Asia, and Africa region, where RevPAR was up 2.7% for the year. In the U.K., RevPAR was up 1%, with nearly 3% growth in London, whilst the provinces were flat. In the fourth quarter, we saw a 10% RevPAR growth in the capital, principally due to strong leisure demand. Continental Europe was up over 5%, with strong performances in France and Belgium. Coupled with strong net rooms growth, this performance translated into fee revenue growth of 5%. Fee operating profit growth of 16% benefited from savings generated by our group efficiency program. We opened 15,000 rooms in the region and signed a further 27,000 rooms into our pipeline, our fastest pace for 10 years. This strong momentum is a direct result of our increased focus on aligning our resources in the highest opportunity segments and markets across the region. Finally, moving to Greater China, where we continued to outperform the industry. RevPAR across the region grew 7%, with growth moderating in the second half of the year due to the lapping of stronger comparables. In mainland China, RevPAR was up 6% for the year, benefiting from strong transient meetings and corporate demand in Tier 1 and Tier 2 cities. Tier 3 and 4 cities saw broadly flat RevPAR due to new supply coming into Sanya and difficult trading conditions in Changbaishan. Excluding these locations, RevPAR in these cities would have been up mid-single digits. The combination of strong RevPAR performance and a 14% increase in net rooms delivered underlying revenue growth of 15%. Underlying profit was up 19%, as we continue to leverage the scale of the operational platform we have built in Greater China. We opened 19,000 rooms, including nearly 40 Holiday Inn Express hotels. A further 29,000 rooms entered our pipeline, providing a clear runway for future growth. This was our best performance on record and included 71 franchise plus hotel signings for Holiday Inn Express. Altogether, this underlines the strength of our position and owner offer in Greater China. We have seen great potential in China since we opened our first hotel there in 1984. Since then, population growth, urbanization, and rising wealth for an emerging middle class have been driving solid demand for hotel rooms across the region. Significant investments in road, rail, and air infrastructure, and tourism being one of the strategic pillars of the Chinese economy, means the long-term tailwinds for our industry are strong. Against this backdrop, our deliberate strategy to grow a sustainable domestic business as our second home market is delivering results. We were early to identify the potential to expand outside of Tier 1 cities and have been adding hotels in these areas whilst the demand drivers are being built. As demand outpaces supply, this will provide a long runway for faster RevPAR growth compared to a more mature market. With three-quarters of our open hotels and nearly 90% of our pipeline in Tier 2 to 4 locations, we are well-positioned to capture future growth in these markets. We are also adapting our model to take the maximum share of owner demand. In 2016, we launched our tailored franchising solution for Holiday Inn Express, and have since opened 29 hotels with a further 117 in the pipeline. Whereas other players are using master franchise agreements, we are able to retain the full economic benefit of the fee stream. We have further optimized this offer for our owners by taking our highly successful franchise performance support model from the U.S. and adapting it for the Chinese market. This new offer is providing us with access to a broader and deeper pool of capital amongst the China owner community. Three-quarters of our signings in the year came from private hotel investors and unlisted real estate companies, compared to less than half of the existing system. We are also seeing the benefits of increasing scale in our financial results. Whilst building out our system and pipeline in China to nearly 200,000 rooms in over 100 cities, we have consistently invested ahead of the curve to build a scalable infrastructure to support growth, and our business there is now delivering sustainable growth and margins. Turning now to fee margins and our group-wide efficiency program. As Keith mentioned in his introduction, our new strategic initiatives are designed to deliver industry-leading net rooms growth over the medium term. However, as I have said before, in our business, there's a requirement to invest ahead of profit delivery. It takes time to generate meaningful new fee streams. To that end, we have identified $125 million of efficiency savings, which we are delivering through simplifying our organizational structure, making it leaner and flatter, outsourcing more non-core activities, and introducing increased levels of automation. These savings provide additional capacity for reinvestment into our strategic initiatives. This will drive industry-leading net system-wide growth, fueling future revenue growth and future margin accretion. Our plan is that on an annual basis, the delivery of these savings matches the ramp-up of spend on new initiatives. As a result, on a full year group-wide basis, the net impact of new investments and of the savings overall should be minimal. That was the case in 2018, where we invested all the savings back into the business, along with an additional $5 million. This time last year, I said that fee margin would be lumpy as we work through this efficiency program and the reinvestment into strategic initiatives. Excluding the impact of two one-off items, group fee margin increased 80 basis points on a constant currency basis. Over time, the benefit of growth from the investments we're making and ongoing disciplined cost management should result in fee margin progression being broadly in line with our historic average. Moving on now to cash flow. Our business model continues to generate significant free cash flow, which increased in 2018 to $609 million for the benefit of owners in 2018, which resulted in a $146 million system fund deficit in the group income statement after $47 million of costs relating to our group efficiency program. On this cash flow slide, we present the system fund's results before this cost, resulting in a $99 million outflow before adjustments for deferred revenue on the loyalty program, presented here within working capital. We will continue to manage the system fund on a cash basis to ensure we deploy receipts in the year they are received. For 2019, we expect this will result in a system fund deficit on the group income statement of a similar level to 2018. Our gross CapEx was covered 2.9 times by our underlying operating cash flows, whilst our permanently invested maintenance capital and key money was covered nearly 7 times. The overall net cash movement resulted in a $321 million reduction in net debt to $1.5 billion. I've talked on many occasions about our priorities for uses of cash. Our first focus is to reinvest capital to drive growth. During the year, we spent gross CapEx of $245 million and net CapEx of $158 million. This was in line with our medium-term guidance of around $150 million per annum. For the year, maintenance and key money capital expenditure totaled $108 million, and recyclable investments were offset by disposals. Gross system fund capital expenditure totaled $99 million. But after $45 million of system fund depreciation and amortization, the net cash flow impact was $54 million. As well as using cash to reinvest behind our long-term growth, we continue to generate sufficient funds to support growth in the ordinary dividend. We have announced today that the 2018 total dividend will increase by 10%. Combined with the $500 million special dividend we paid in January, this takes the total amount returned to shareholders since 2003 to $13.6 billion, which is around 1.5 times our current market cap. Looking ahead, our long-term funding sources are secure. In November last year, we issued an eight-and-a-half year, €500 million euro bond, giving us a staggered maturity profile with our first bond not due until 2022. We also have access to a $1.4 billion revolving credit facility for additional cash requirements. I would now like to take a moment to talk through the impact of IFRS 16, which rules interest. At this stage, we estimate that applying the standard to our 2019 results will result in EBIT increasing by around $12 million and a reduction to net profit in the region of $5 million-$7 million after a full year impact of the U.K. portfolio deal. The capitalized leases lead to a mechanical increase in our year-end net debt of $431 million. This has no impact on cash, financial capacity, banking covenants, or our investment-grade credit rating. In fact, credit rating agencies were already making similar adjustments. We finished the year at 1.7 times net debt to EBITDA, including the payment of the $500 million special dividend, the acquisition of Six Senses, and the adoption of IFRS 16. Our trailing pro forma net debt to EBITDA will be 2.9 times. As you know, we remain committed to an investment-grade credit rating. The best external proxy for this following the accounting change is 2.5 to 3 times net debt to EBITDA. In that context, our financial capacity and our strategy for uses of cash remain unchanged. Our first focus is to reinvest capital to drive growth. Second, we want to generate sufficient funds to support growth in the ordinary dividend. Lastly, where there is further cash available which is truly surplus, we will return this to shareholders, as we have demonstrated over the last 15 years. The efficiency program we are undertaking is freeing up capacity to reinvest to drive sustained growth, and we remain committed to returning surplus funds to shareholders in the future. Thank you. I will now hand back to Keith. Thanks, Paul. You will recognize our strategic model on this slide. I am going to talk today about the progress we are making against the strategic initiatives designed to make this model work harder. We are successfully redeploying resources across our business to better leverage our scale and drive an acceleration in growth. IHG Rewards Club loyalty program is a key part of our owner value proposition. We have seen the member contribution grow by 4 percentage points over the past four years, and we are enhancing the program to drive even greater levels of member engagement. We have continued to strengthen our enterprise and enhance revenue delivery with our new Guest Reservation System now fully rolled out across our entire estate. GRS will allow us to maximize revenue delivery for our owners, and it forms a key component of our cloud-based technology platform, IHG Concerto. In short, IHG Concerto will increase efficiency in hotels and help future-proof our business, and both IHG and our owners are rightly very excited about it. When it comes to our owners more broadly, the investments we are making in our development capabilities and our existing relationships are driving an increase in signing space. Our franchise products in Greater China are helping us broaden our owner base, and we continue to invest across the hotel life cycle to help make sure we are turning our signings into openings at a faster pace. We continue to make significant progress in strengthening our established brands and further enhancing our offer through targeted acquisitions and new brand launches. I am going to spend a bit of time now looking at how we are enhancing our loyalty and digital proposition and some of the specific actions we have taken in 2018. Our revenue delivery enterprise supports the 5,600 hotels in our system, and we continue to innovate to ensure that we have a best-in-class owner offer. We have continued to grow the percentage of revenue generated by our most loyal guests. We are enriching the value proposition for members by introducing variable pricing on reward night redemptions. Downloads of our mobile apps have continued to grow and is delivering increasingly more revenue into our business as a booking platform. IHG Connect, our seamless Wi-Fi guest login, is now live across more than 4,000 hotels, driving tangible improvements to the guest experience. IHG Connect provides a platform for the future introduction of greater connectivity across the guest stay, such as the ability to stream content to in-room smart TVs or to order room service through the IHG app. Following our global agreement with Alipay, we have now signed an agreement with WeChat Pay, bringing more payment options for our Chinese guests across our online and mobile channels. WeChat Pay is China's second-largest mobile payment platform with over 800 million users. With functionality now scaling at pace across our Greater China region, this demonstrates our commitment to building a sustainable domestic business in our second home market. Looking now at IHG Concerto, I am delighted to say that initial functionality is fully rolled out to all hotels across our estate. Today, IHG Concerto hosts our new guest reservation system and our price optimization software, replacing the green screen of Holidex with a more intuitive dashboard design. IHG Concerto is more than just a user-friendly dashboard. It lays a foundation for the next stage of technology investment. The flexible infrastructure is designed to future-proof our technology platform, creating efficiencies when we want to upgrade or add new systems and providing the scalability to grow in line with our business. When coupled with the ability to optimize pricing and drive greater levels of guest satisfaction, IHG Concerto enhances our owner offer and delivers a clear competitive advantage for IHG. An integral part of IHG Concerto is our new guest reservation system. With the successful rollout of the initial phase now completed, we can look ahead to the next phase, the development and piloting of attribute pricing. Once completed, this will offer guests a much greater degree of customization over their stay, as they will be able to book a room based on the specific attributes that matter most to them. It will also offer owners greater flexibility in how they sell their rooms, creating opportunities for more sophisticated yield management and price optimization. Finally, it will enhance our book direct proposition, as this functionality will only be available to IHG Rewards Club members who come through our direct channels. With development already underway, we will be running extensive piloting through 2019 and expect to be able to start rolling out this functionality to a select number of hotels towards the end of the year. Turning now to look at the steps we are taking to enhance our strong and differentiated brand portfolio. In the last year, we have talked a lot about the new brands we have added, which are, of course, important. We are going to start with our established brands, which have driven the bulk of our 4.8% net system size growth. As you can see on the slide, we have a commanding position in the mainstream category, with an industry-leading share of both the system and the pipeline. In the upscale segment, the pace of growth of our brands has increased over the last three years, positioning us well in a segment that is set to see revenue increase by 50% in the coming years. In luxury, InterContinental, the largest luxury brand in the world, has continued to drive our growth. We have also seen a real acceleration in the international expansion of Kimpton. All of our existing brands are crucial to our sustained growth, so we continue to invest in ensuring they remain fresh, successful, and competitive. The rollout of Formula Blue hotel designs for Holiday Inn Express has continued at pace. Almost 1,400 open and pipeline hotels now have the new room and public space designs. We are bringing them to our European estate, too. Breakfast is a key differentiator in this market. We have been transforming our U.S. estate this year, rolling out a new offer that has proved very successful in the U.K. The new Holiday Inn Express Breakfast is providing a higher quality experience that is driving an increase in guest satisfaction. In less than a year, this offer is now in more than three-quarters of our U.S. hotels, with the rest committed to implementing in the near future. We are seeing immediate results, with Guest Love Scores up 3 percentage points on average. We see similar progress with our rollout of new guest rooms for Holiday Inn, which is bringing fresh and modern designs to our hotels across the Americas. Closely following this are new public space designs for the region, which builds on an open lobby product that is now in almost 100 properties across Europe. This is driving impressive results, with hotels seeing a meaningful uplift in guest satisfaction and owners benefiting from increased food and beverage revenue. We have started rolling out new guest room designs in Europe, too, with the initial feedback again showing a significant uplift in the guest experience. Turning now to Crowne Plaza and our Accelerate program in the Americas, which started in 2016. With an increased focus on quality, we have removed 26 hotels over the past three years, and we have been working with existing owners to drive improvements in the guest experience. This includes rolling out refreshed guest rooms that have been designed to create a modern, unique space for guests to work, socialize, and rest. We have now renovated 6,000 rooms across the Americas, with another 9,000 rooms committed. Our focus on public space design has seen our new Plaza Workspace installed in 16 hotels, with another 12 expected during the first quarter of this year. Outside of the Americas, we are taking some of this innovation to Europe, with properties in London, Paris, and Hamburg set to showcase our new room and public space designs. Our boutique brand, Hotel Indigo, has seen an acceleration of growth in 2018. We celebrated the opening of our 100th property, and the brand has enjoyed its best year ever for signings and openings. We continue to see increasing guests and owner appetite for reliable, yet individual boutique hotels. Hotel Indigo is ideally positioned to take advantage, providing a successful mix of a locally inspired, design-led approach with the reassurance of a consistent upscale experience. With nearly 100 hotels in the pipeline, we are set to double the presence of the brand over the next five years. 2018 was also a big year for the InterContinental brand, which marked the opening of its 200th property with the spectacular Shanghai Wonderland. If you have not seen it until now, let me quickly describe it. This unique hotel is built into the side of a disused quarry. It has two floors above ground and 16 floors below, including two floors underwater. It is probably one of the most talked about hotels we have ever had, which is no surprise. It is something of an architectural and experiential masterpiece. Highlighting the brand's appeal in Greater China, the property was one of eight InterContinental openings in the region in 2018. Illustrating the brand's appeal more globally, InterContinental was named the world's leading hotel brand for the 12th time at the World Travel Awards in 2018. This is a remarkable achievement and one that demonstrates the consistent high-quality guest experience InterContinental provides. When it comes to adding to our portfolio, we have talked about the strategic approach we take when assessing the opportunities out there. In short, we focus on high-value markets where we can tap into deep pools of unmet demand to create scale positions, and on developing a differentiated guest and owner offer. With these two things, we can determine the optimum positioning for a new brand. This highly targeted, rigorous, and insights-driven approach has guided our decision-making for Avid, voco, and Regent. Avid capitalizes on a $20 billion segment of the industry where guests are feeling underserved by the existing midscale brands at a price point below Holiday Inn Express. voco targets owners of high-quality individual assets who see the benefits of being part of IHG's system, and the brand appeals to guests who are looking for more differentiated upscale experiences. Regent helps build out our luxury portfolio, creating opportunities to unlock the potential of a well-respected brand and work with new and existing owners in the top tier of this segment. Building on this approach, you will have seen the news of our $300 million acquisition of Six Senses, and I will come on how this fits into our overall luxury strategy shortly. But first, I want to touch on another opportunity we identified within our mainstream portfolio. Our decision to launch a new all-suite brand in the upper midscale segment this year. The all-suite segment of the Americas' upper midscale market has grown in scale by around 70% over the last four years, which speaks for itself in terms of the clear demand from both guests and owners. Appealing to travelers looking for design-led, authentic experience on what are typically longer stays than your normal transient guest, we estimate there to be an $18 billion pool of guests in this segment. When you take into account our track record with established mainstream brands and of delivering operational excellence and high returns for our owners through our extended stay brands, this represents a significant opportunity for IHG. Let me now just spend a few minutes looking at the progress we are making with these new brands, starting with Avid. We have continued to see strong demand from owners, with more than 170 properties signed since launching the brand 18 months ago. As anticipated, our signing pace has now normalized, and we expect that the 22 properties we signed during the fourth quarter will be more representative of our longer-term run rate for the brand. We opened our first property during the second half of the year in Oklahoma City, and it is already proving a hit with guests, receiving great reviews across the hotel's website and other media. With planning approvals obtained and/or ground broken on a further 27 hotels, we expect to have our next property open this summer. Following launches in Mexico and Canada, we are also bringing Avid to Europe with the signing of a multiple development agreement with an existing partner for 15 hotels in Germany. Since launching voco 8 months since we acquired the brand in 2015, international expansion is at the heart of this growth, and our rebranding of a portfolio of upscale and luxury hotels in the U.K. means we opened our first property in this important market, the Kimpton Fitzroy, in London. In total, we now have a presence secured for the brand in 14 countries around the world, including signings in Frankfurt, Barcelona, and Tokyo. A key part of our success in accelerating the growth of Kimpton has been preserving the brand's DNA, the distinctive approach and values that have made it so loved by guests, employees, and owners alike. We are therefore delighted that Kimpton was again recognized on Fortune's 100 Best Companies to Work For list in 2018 and also named the top brand in its category by J.D. Power. Last February, we talked about our desire to round out our brand portfolio by adding one or two asset-light luxury brands that we could incubate and grow. Following our acquisition of Regent in July, we have moved at pace to integrate the brand into our business. Building on the deep brand heritage of Regent, we have repositioned it with new hallmarks, service ethos, and updated design philosophy and have signed three properties since acquisition. Alongside the planned refurbishment of the InterContinental Hong Kong and the subsequent rebranding back to Regent, we are on track to grow to more than 40 properties over the long term. Turning now to last week's announcement of our $300 million acquisition of Six Senses. As one of the world's leading operators of luxury hotels, resorts, and spas, this is a fantastic addition to our brand portfolio. Six Senses has a world-renowned positioning around sustainability and wellness, which is consistently executed through the hallmarks of its brand. With hotels in some of the leading resort destinations around the world, Six Senses strengthens IHG guest and owner offer at the top end of the luxury segment. The Six Senses management team brings a wealth of knowledge and experience of the luxury market to IHG and will remain in place as we look to grow the brand. Six Senses will add 16 high-quality hotels to our system in locations such as the Maldives, Seychelles, and Portugal's Douro Valley, with a further 18 management contracts signed into the pipeline and more than 50 deals under active discussion. We expect to accelerate Six Senses growth to more than 60 hotels over the long term. Looking again at an overview of our brand portfolio, you can see how our strategic approach has targeted new brands in the areas where we see the greatest potential for growth. We are focused on adding greater depth whilst maintaining a balance across the segments and geographies. The four new brands we added over the past 18 months and the new brand we'll be launching later this year are all focused on meeting significant guest and owner demand. This ensures that we have the right brands in the right markets to set ourselves up for continued growth. To sum it up, we have delivered strong financial results whilst executing against the strategic initiatives we outlined last year. We are investing in our business to make our strategic model work harder, strengthening our established brands, adding new brands targeted at high-value opportunities, and optimizing our owner proposition and revenue delivery enterprise. We are already seeing positive results, and we are confident that the steps we are now taking will drive industry-leading net rooms growth over the medium term. Our approach to capital allocation remains unchanged, and our business model continues to drive high-quality, sustainable growth in free cash flow. The fundamentals of our business remain strong. While there are macroeconomic and geopolitical uncertainties in some markets, we are confident for the year ahead. With that, Paul and I are happy to take your questions. Press star one to ask a question. One sec, Jamie. Good morning. Hey, Jamie. Good morning. Jamie Wood from Morgan Stanley. Three questions on room openings, please. First, what's happening in China? Because the signings fell by about a quarter in the fourth quarter, and the removals doubled in the year. Is that a sign of just weaker owner confidence, or is that just the timing? Secondly, again, what's happening with Avid? 20-ish signings in the fourth quarter, another sequential slowdown. If that's the sort of run rate going forward, is that not a bit disappointing? Then finally, if we look at the bigger picture at the group level for net openings, this year. I know you're talking about 6-ish% medium-term, but it sounds like with removals going up again this year and the exit rate of signings weaker, are we looking at another year of under 5%? Thank you. Richard, do you want to take China piece? Sure. When you're opening up as many hotels as we are in China and signing as many, it will vary a little bit quarter by quarter. There's no underlying drop-off in the level of interest in signing the brand. We had a very strong first 9 months of signings, and there may have been a few deals that the team could have got over the year in the fourth quarter, but didn't quite get there, so they'll come in the first quarter of the year. You tend to see that a little bit after a very strong first 9 months of the year. The same with openings, really. We did have two large unbranded hotels that we took out in China in the fourth quarter, which we'd signed a few years ago. The owner was going to put CapEx in and bring them into the brands as the representation that we wanted them to be of one of our brands. In the end, we couldn't make that work with them, so we exited those. That's part of the reason for the high level of removals there. Jamie, on your other questions, when you think about Avid, the way that we launched that brand to the market, to the owning community, is we built up significant pent-up demand for Avid before we were able to sign it because we didn't have the FDD available for a period of time. That led to the acceleration of signings and getting to 170 plus signs to date. We think the run rate of 20 to 25 per quarter going forward is about the right run rate for the brand. We're quite happy to see that because that will continue to have it grow at pace. Secondly, thinking into next year, are there any additional investments you're making that means you can't get back up to that sort of 100 basis points or even the 80 basis point number? Then the last question on Six Senses. By my maths, you're paying about five times per room what you paid for Regent. Just thinking about how you can think about getting a return on that $300 million compared to what you paid for Regent. Thanks. Why don't I take these ones? Six Senses is more, if you like, evolved. With the acquisition of Regent, we bought an IP shell, almost, which we're then having to invest significantly behind to build that back out. Six Senses, we're buying a big pipeline in that. It's not a particularly easy comparison. With Six Senses, of course, you also have to take off the tax advantage that we get in looking at the price there. It will grow over time from the open hotels and the pipeline to a business that will be making us better than $50 million of fee income over time. That's really how we think about the business. What's the opportunity in the longer term? Thanks, Richard. Morning. It's Alex Boulden from Redburn. Three questions, please. The first one on Concerto. You've talked about the increased ability to manage pricing for owners. Could you talk a little bit about what we might expect to see on numbers that we can look at within our model, so call it RevPAR or revenue or overall pricing? That'd be great. Thank you. On luxury, how much of that growth in that as an area of focus is to do with some of the pressures that we've seen structural pressures within the industry on distribution or on other new entrants? Then thirdly, this is extremely boring, but on interest costs, they were higher this year, and I don't think all the bond was in there. So could you just guide as to where that might be for next year, please? Thank you very much. I'll let Paul pick up the very exciting topic of interest. So starting on Concerto. So when we rolled out the program, we talked about the initial phase being the foundational component to it and us rolling out additional functionality. So in 2019, we'll be piloting attribute pricing effectively and then begin rolling it out across different regions and different brands over time, and then having more functionality every year thereafter. We're not going to provide specific guidance on every single piece of functionality we roll out because it will be like an app update. It'll be 2 to 4 times a year, we'll be rolling out some new functionality. But we're doing it because fundamentally, we believe it's going to do a few things. One is we'll increase overall pricing ability at the hotels. Now we're principally a franchised state, so it's a question of how do the franchisees take advantage of it? But we've got robust training around that. We also think, though, it's going to help us on the conversion side, too, by us being able to package up and serve content and pricing and products differently across our brands, to be much more relevant, too. So clearly, we're making the investment in there because we believe it will drive incremental revenues to our hotels. But we're not going to guide on specifically any uplift in RevPAR by functionality. The reasons for luxury. When we sat there a few years ago and looked at our portfolio saying, "We've got a great brand with InterContinental, now 200 hotels." Let's be candid about it. There are some markets where we have reached Scale, where there's no more InterContinental support in that market. What other opportunities could we access if we had a different brand? In Shanghai now, we have six in Shanghai, I believe. It is three different. So for another InterContinental there, but we could put a Regent in there, so it is accessing that opportunity. Then we looked at the acquisition of Kimpton in the lifestyle luxury boutique space, very different profile of asset and customer base as well, and with Six Senses. If you look at those four brands, they are very differently and uniquely positioned against one another, both in price point and customer experience. So there is no cannibalization, but there is synergies across them in terms of customer stay. It also does strengthen the overall loyalty proposition for the company in terms of redemptions for that premium customer. We think there is both the benefit economically in terms of the fee income that Paul mentioned, but the strategic benefit of big strength in the overall enterprise. Interesting enough, a lot of commonality in those owners, too. We have some owners today, one this weekend I was talking to, owns a Crowne Plaza, owns a Six Senses, and is building a Regent right now. Our ability to have a greater share of wallet from one customer base will be really important for us. Interest is complicated at the moment with IFRS 16. I guess the simpler piece is the EUR bond, because we have put out what the interest cost on that was, and we brought it out in November, so you will have the full year impact of that. IFRS 16 is fiendishly complicated, if I am honest, in that it brings in additional income into EBIT, and then you have additional interest charges coming through, together with some interest charges that relate to the deferred consideration on the Regent acquisition as that is then amortized over time. The IR team, very happy to spend lots of time talking through all the moving parts on that to help you get your numbers to the right place. But the easiest part of it, as I say, is the bond. The other pieces will probably take a little bit of just talking through factor by factor. Thanks. It's Jarrod Castle from UBS. Also three, if I may, please. There's been a little bit of, I guess, cautious comments from the likes of Hilton and Choice in terms of their RevPAR guidance. It would be interesting just to get your thoughts. Secondly, when you spoke a little bit about, a bit more about the luxury segment, but how do you approach the build versus buy question, given that building new brands is part of your DNA? Then just coming back to the fee margin progression, how many years do you think you could keep pushing within that 80 to 120 basis point range? Thanks. You want to take one or two? So in terms of Hilton and Choice, I think that Hilton's guidance was pretty much what people had expected, actually. I think they narrowed down their range, but you're better off talking to Chris as to what he's expecting there. Typically, we don't perform materially differently to Hilton. They have a slightly greater weighting into the upscale. A few more hotels up there. We're actually really pleased with our fourth quarter numbers. Outperforming the midscale segment is not easy, but we did outperform. We're hoping that that will continue. There's a few things we're doing differently, which we think is giving us some assistance there. We'll continue to track that. If you look at the U.S. longer term, the supply-demand dynamics still look pretty good. We've built a business there with very preferred brands. If you look at China, our business continues to perform well there. We've got a very broadly spread business right across all the different tiers of the market, and demand continues to be very strong there. It's a domestic business, which does advantage us. In terms of the margin progression, I guess if you'd asked me back in 2004, I think that over the next 15 years, we could sort of average up 135 basis points of margin progression, I might not have been that confident. I guess that we have, and there's a lot that we've done over that time. Partly, it is aided, as you know, by the fact that some of our franchise income in the U.S. comes through at very high margins because we do have a large overhead base there already. If you think about, say, China, where we've got a very strong infrastructure there, and we're now starting to see more of the growth coming through there without having to add much more cost, that's helping us. As I say, we're also very focused on procurement cost efficiency and continuing to drive up the margin in the business. I wouldn't put an upper level on it. We still think there's lots of opportunity. In terms of luxury and build versus buy, I think it goes back to thinking about our overall strategy about how do we build out our brand portfolio and really using our strategic analysis to understand where are the pools of demand that are out there that we can access, in what segments, and then what's our ability to really win against those segments. If we're in mainstream, we're going to build it organically. We effectively can go. It just falls into what we do better than anyone else in the industry, is build mainstream brands and scale them up quickly in the most important markets. We wouldn't need to go buy that. I think voco was another good example of in the upscale segment, recognize we could build that brand out. When you move into luxury, I don't think anyone out there in the industry has proven to be successful without investing either quite a bit in physical assets, going out, investing a lot of capital in a lot of hotels, position them well over time in luxury, then to create a brand. That's just expensive and takes a lot of time. It is not our strategy in terms of how we want to use our capital. So going out and finding, honestly, companies that have been built over time by other individuals that are still asset-light that we can then scale up in luxury was what we said we would do. I think Regent and Six Senses are bang-on strategy, both in terms of where they fall in the segments and also how we acquire them. That's what we'll continue to consider to do going forward, both organically and inorganically, where we see a big enough demand and a gap in our portfolio. Hi, morning. It's Jaafar Mestari from Exane BNP Paribas. Two questions for me, please. Firstly, on the new Studio brand, can you tell us a little bit more about the price points compared to Candlewood, Staybridge, and a little bit more about the launch strategy, who's the target audience there? If we compare it to, say, Avid, where you built a lot of pent-up demand or you signed mostly with your existing owners, is it something similar here? Then second question related, but on the strategy you've unveiled 18 months ago now, if I remember correctly, it was one angle which was adding new brands. I'm not saying it's done, but I think we've seen many examples of that. What about the second pillar, which I think you described as evolving the owner proposition? Is it going to be continuous small tweaks to GRS functionalities, et cetera, or is there a big reveal where we wake up one day and you say, "We add 150 management personnel in the U.S.," or something like that, more of a step change? Excellent. Again, in regards to the new Studio brand, I think in terms of we've made the announcement today that we're moving into the space, which is similarly what we've done in the past with voco. Our intention will be to, later on this year, do a scale launch to our owning community, talking about the brand positioning, the proposition, the name, the visual identity, the design, and then having an FDD available later on this year to then be able to sell it effectively. It is kind of a very similar path to what we were able to do with voco and with Avid as well. Our intention is to be able to be selling this brand in 2019 to our core owners in the U.S. In terms of the price point, it's going to be upper mid-scale, so it's going to be sitting from a price point below where Staybridge Suites is going to be currently today. Upper mid-scale is where Holiday Inn, Holiday Inn Express are basically positioned. Again, it will be an opportunity for both a new build, principally, but also a conversion play for appropriate high-quality, upper mid-scale assets that have the right physical design too. Whereas Avid was pure play new build, this will be principally new build, but with some conversion opportunities. We did lean into saying we're going to be launching new brands to fill customer needs and owner needs. We'll continue to look at that. I think right now we've done a fair bit in a short period of time, and so we want to make sure that we continue to scale and execute those. We've done a lot on the enterprise as well too. Concerto is a key component of that in our technology and digital platform, so continuing to upweight our investment there. We also do have quite a bit of work happening on the owner proposition in terms of how we engage with owners. It's really around how do we go faster from signings to ground breaks to openings, providing more value through procurement to make our properties even more high value in terms of returns to owner, and then how do they ramp up those hotels faster. So we're making significant investment in those areas as well too. So, it is kind of the holistic approach of having the right brands in the right markets and then continuing to enhancing our revenue delivery and services, is the way that we're going to continue to create more value. We will be quite balanced about it. We have talked a lot about brands, but there is a lot happening behind the scenes in those other areas. Thank you very much. It is Julian Heato from RBC. Three quick questions for me. First one, in terms of your ability to make any further acquisitions now, your 2.9x pro forma in terms of your net debt to EBITDA, and you have got a limit of 2.5x-3x, or at least a target. I just wondered how far you would be happy to bridge that, if anything else further came up. Are you limited on acquisitions now? Secondly, probably the weakest spot at the moment is Middle East in terms of the performance. That appears to be as much supply-driven as it is anything else. I just wonder what your thoughts are as to how the Middle East is likely to progress from a supply point of view. Finally, this sort of nerdy question.