Earnings Call: H2 2016

Feb 21, 2017

Good morning, everyone. Flickering into the sound of a school bell, which I thought was a rather nice touch. Thanks for joining us today, and welcome to our 2016 full year results presentation. In a moment, Paul will talk you through our financial performance. First, let me share some highlights from the year. 2016 has been an unsettled year for the global economy, and particularly the travel and leisure sector. Through the year, we saw multiple terrorist incidents impact travel in Europe, as well as two major political events in the U.K. and U.S., the full implications of which are unclear. Sorry, sir. I didn't understand you. Despite this backdrop of considerable economic and political uncertainty, our resilient asset light business delivered strong results. Solid RevPAR increases and 3% net system growth drove underlying fee revenues up 4%. By leveraging our global scale, we once again expanded our fee-based margin. In our first year as a fully asset-light company, our low capital intensity and high-quality fee streams continued to generate significant levels of cash flow. In line with our stated strategy of returning surplus cash and maintaining an efficient balance sheet, we've announced today a $400 million special dividend. Reflecting our confidence in the future, we've also increased our total ordinary annual dividend by 11%. Our last major disposal was in September 2015, and so this means we'll return over half a billion dollars to shareholders in the first half of 2017, completely funded from underlying operations. At our interim results announcement in August, I spoke to you about the journey we've been on. We sold the majority of our owned hotels, focusing on becoming an asset-light company, and this created the resilience needed to weather the global recession of 2008 to 2010. In 2011, I introduced our winning strategy. Most, if not all of you, will have seen this model before, but its importance to IHG cannot be overstated, particularly its enduring consistency over the past five years. I just wanted to show it briefly here to remind you of the context of how we think about the business and drive performance. Through disciplined application of our strategy, we make considered long-term sustainable investments across our business, each building on the growth platform that we've created over the past 13 years as a standalone company. In 2016, the five elements of our winning model remain the same. We regularly refine our execution to meet ever-changing consumer trends and industry dynamics. This consistent incremental approach means we stay resolutely focused on doing what we do best, creating preferred brands and delivering operational excellence, which we believe is the best way to drive industry-leading returns for our shareholders. I will now hand over to Paul, who will talk in more detail about our financial performance in 2016, after which I will return to discuss progress against our winning strategy in more detail. Thank you, Richard, and good morning, everyone. We are pleased to report another year of strong financial performance. On a reported basis, revenue declined 5% and operating profit increased 4%. These reported results do not give the clearest explanation of our financial performance due to the disposal of the InterContinental Hong Kong and the impact of foreign exchange. I will therefore focus my commentary on our underlying performance. On that basis, we translated 4.6% revenue growth into a 9.5% operating profit increase by leveraging the scalability of our asset-light business and by managing our cost base. This has allowed us to increase our fee margin by 250 basis points whilst continuing to invest for future growth. Interest charges were flat on last year, and our reported tax rate remained at 30%. We expect our tax rate to stay in the low 30s for the next few years. Weighted average shares decreased following the share consolidation relating to the special dividend in mid-2016. In aggregate, this enabled us to increase our underlying earnings per share by 23.1%. Looking now at our levers of growth. We added 40,000 rooms to the system. At the same time as adding these new high-quality representations of our brands, we remain focused on removing underperforming hotels, exiting 17,000 rooms in the year. This took net system size growth to 3.1%, which combined with RevPAR growth of 1.8%, drove total underlying fee revenue up 4.4%. Turning now to our four regions. We saw strong growth in fee revenues in the Americas and Greater China. Growth in Europe and in AMEA was held back by the impact of a very small number of hotels. To give you some more color, I will now take you through the performance in each of our regions in more detail. Firstly, the Americas region, where U.S. industry demand has been at record levels for 69 of the last 70 months, and supply remains slightly below the long-term average. Consequently, our hotels in the region are continuing to drive record occupancies of nearly 70%. In this environment, RevPAR was predominantly rate driven, with Americas RevPAR up 2.1% and U.S. RevPAR up 1.8%. We continue to be impacted by our higher weighting towards the underperforming oil markets, which I will return to discuss in more detail shortly. Underlying revenue was up 6% and profit was up 8%. Franchise profit grew 5%, driven by strong RevPAR and rooms growth, which more than funded our additional investment in development resources. Managed profit was flattered by an unusually high number of small liquidated damage receipts totaling $4 million in the second half of the year. This was offset by $8 million of costs relating to our 20% interest in the InterContinental New York Barclay, and the impact of high supply growth on RevPAR in New York City, something we expect to continue to affect trading in this market in 2017. The Barclay continues to ramp up after its successful renovation and repositioning, which means in 2017, we expect our joint venture costs will be broadly offset by growth in management fees. Regional overheads were $11 million lower than last year, predominantly due to lower costs associated with our U.S. healthcare scheme. We now have stop loss insurance in place to minimize future fluctuation. We signed 37,000 rooms in the year and opened 24,000, our fastest opening pace since 2011, with more than half of these coming from the Holiday Inn brand family. Looking now at the impact we continue to see from the oil markets, where 14% of our rooms are located compared to the industry's 11%. RevPAR in oil markets declined almost 8% in the year and over 6% in the fourth quarter, compared to 2.2% growth in non-oil markets. We had expected to see a lower rate of decline in the fourth quarter, given the easier comparable, but the high rate of supply in the market led to a continued decline in occupancy. In 2017, we expect ongoing elevated levels of new supply in these oil markets to continue to hold back their RevPAR growth. In Europe, RevPAR growth accelerated towards the end of the year. Fourth quarter growth of 3.1% drove full year growth of 1.7%. Our performance in France, Belgium, and Turkey continued to be impacted by security concerns. Excluding those markets, RevPAR in Europe grew 4%. On a relative RevPAR basis, we performed well, outpacing industry growth in our priority markets. U.K. RevPAR grew 2.6%, led by the provinces, up 4.5%. Fourth quarter RevPAR was particularly strong, growing almost 5% with the weaker pound boosting tourist arrivals. In Germany, RevPAR grew 6.8%, benefiting from a favorable trade fair calendar. Franchise profit grew 8% while managed profit declined due to the impact of two hotel exits and a refurbishment, along with weak trading in Paris following the terror attack in November 2015. This led to underlying profits for the region as a whole being flat on 2015. We signed 10,000 rooms in the year, our best performance since 2007. This included nearly 3,000 rooms in Germany, Europe's second largest lodging market, where we now have more than 100 hotels open or in the pipeline. Moving now to AMEA, where comparable RevPAR was broadly flat. Oil markets continued to have an impact on overall trading, with RevPAR for the Middle East falling 7%. Excluding the Middle East, RevPAR grew 3.7%. Underlying revenue and profit were both down 4%, impacted by our disposal of an equity stake and the renewal of three hotels onto standard market terms. During the year, we opened 4,000 rooms, 60% of which were in developing markets. These markets, while profitable, still trade at a sizable RevPAR discount. We are purposefully expanding into these developing markets where the long-term demand drivers are favorable to build a scale position which will drive strong future fee growth. This, combined with a number of other individually insignificant items, means we expect 2017 managed profits in EMEA to be in line with 2016. Turning now to Greater China, where we continue to outperform the industry. Comparable RevPAR increased 2.2%, with mainland China growing almost 4% and Tier 1 cities over 6%, driven by strong corporate demand. In Hong Kong, the market remained tough for much of 2016, but we are encouraged by the near 3% growth in the fourth quarter, the first growth we have seen there since 2014. The combination of our strong RevPAR and net rooms growth increased underlying fee revenue by 13%, after the 8% increase in 2015. Our ongoing investment behind strengthening our deal-signing capabilities was more than offset by scale benefits and cost efficiencies, driving underlying profit up 15%. Our strong performance in Greater China is a result of the strategic choices we have made to position us to take full advantage of the long-term opportunity. We invested early to build the operational infrastructure needed to support rapid growth in what has become our second largest market. In 2011, we established Greater China as a standalone region to ensure it received the focus and resources it needed to secure IHG's position as the country's leading international hotel company. This was a clear signal to our owners and external stakeholders of the importance we placed on this priority market. We now have a network of support offices with over 500 people fully integrated locally. We have built long-standing relationships with key owners, and we have recruited predominantly local talent. In the last five years, we have opened almost 40,000 rooms, taken our total hotels open in the region to almost 300, and become the most broadly penetrated international hotel company in the country. At $2.6 billion, China now delivers almost 10% of our global gross revenue and the same proportion of our fee revenue. We have continued to evolve our cost base as the business matures, investing in strengthening our operational capabilities whilst finding efficiencies through scale and still increasing our profit by 50% since 2011. This has all been done without the need for gross capital investment. Looking ahead, we already have a pipeline of 239 hotels with 70% under construction. We continue to see long-term demand for hotels increasing in Greater China, much of which will be in the mid-scale segment as rapid urbanization spreads from Tier 1 into Tier 2 and Tier 3 cities. To ensure we take the maximum share of this growth, we launched in 2016 our tailored franchising solution for Holiday Inn Express. Our scale and our deep market knowledge makes us confident we can develop this successfully in a region where franchising is a less mature concept. Under this model, we are able to capitalize on the benefits of franchising, namely more rapid growth and access to a new owner base, but also protect against the risks. We support our owners in delivering against our brand standards by appointing a general manager and by mandating that hotels utilize our performance support tools. We considered other options such as master franchising, but our model allows us to keep control of who we work with, where our hotels are located, and the pace with which we grow while still retaining the full economic benefit of the fee stream. We believe this is the most value-enhancing business model. We've seen immediate success with this approach. Since May, we've signed 20 Holiday Inn Express franchise contracts, all with new owners. We expect signings under the Franchise Plus model to continue to accelerate in 2017 and beyond. Moving back to the group level, I will spend some time now on our disciplined approach to both costs and capital. Since 2013, we've been able to hold overheads broadly flat as we have offset inflation in our cost base and investments behind growth initiatives with a rigorous focus on procurement and cost efficiencies. Through strategic management of our costs and our targeted approach to expansion, we improved our fee margin by 250 basis points in 2016 and some 500 basis points across the last three years. We will continue to focus on efficiency improvements whilst investing behind our operational capabilities, which will enable us to continue to grow margin in 2017, albeit at a slower rate than the last few years. We have once again generated significant cash from operations with underlying free cash flow of $551 million. Our gross CapEx was covered three times by our underlying operating cash flows, with our firmly invested maintenance capital and key money covered almost seven times. After payment of ordinary dividends and the $1.5 billion special dividend, and taking into account a $200 million currency translation benefit, net debt increased $977 million to $1.5 billion. We've talked before about our priorities for the uses of cash. Our first focus is to reinvest capital into the business to drive growth. Over the past three years, I've set out our strategy and have shared medium-term guidance across our three categories of capital spend. In 2016, we spent gross CapEx of $241 million and net CapEx of $185 million. Maintenance and key money capital was below our guidance of $150 million. We expect that key money will fluctuate from year to year and that 2017 spend will be closer to our $75 million guidance. Recyclable CapEx of $40 million was partly offset by an inflow of recycled capital. System-funded capital investments of $105 million included $68 million on GRS. This is expected to rise to around $90 million in 2017 as we enter the testing and rollout phase. Our overall growth CapEx remains unchanged at up to $350 million per annum. We expect our recyclable and system-funded investments to be net neutral over time as we dispose of investments and depreciation is charged on capital invested on behalf of the system fund. This takes our net CapEx guidance to $150 million per annum. As well as using cash to reinvest behind our long-term growth, we continue to generate sufficient funds to support sustainable growth in the ordinary dividend. For 2016, we're proposing an 11% increase to $0.94 per share. Where there is further cash available which is deemed truly surplus, we have said before we will return to shareholders. The $400 million special dividend we have announced today takes the total return to some $12.8 billion, almost $5 billion of which has been generated from operational cash flows. Looking forward, our long-term funding sources are secure with our first bond debt maturity not for another five years. We also have access to a $1.35 billion revolving credit facility for additional cash requirements. Every year, our fee-based business model generates strong cash flows independent of asset sales. Excluding the contribution from owned hotels, our free cash flow has grown on average 14% per year since 2013. By leveraging the scale benefits of our business model and managing our costs to drive further fee margin growth, we will continue to generate significant levels of cash from operations, creating substantial funds for reinvestment or for future returns to shareholders. I will now hand back to Richard, who will talk more about our strategic progress this year. Owner and industry insights. We invest behind our brands, technology, and people to drive long-term sustainable growth. Since becoming a standalone company, we have continued to build our clearly differentiated portfolio of preferred brands. We do this by enhancing our established brands, launching new ones, and expanding our presence in new markets. We strengthened our industry-leading loyalty program, underpinned by our innovations in digital marketing and technology, which is driving an ever-increasing number of member bookings through our low-cost direct channels. We are reinforcing our owner proposition with leading operational support. I will now focus on some of our successes from 2016 and how these continue to build our competitive advantage. Firstly, focus on our brands. Understanding travelers through extensive consumer research gives us the insights we need to accurately target our brands against specific guest needs. This helps us to make them genuinely distinctive and relevant, and enables them to compete well against other hotels and of course, other accommodation types. Business travel contributes over 60% of our revenues and continues to be highly profitable. Our differentiated portfolio allows us to meet a very broad range of business travelers' needs, from a simple, smart solution at Holiday Inn Express hotels, through to a luxury meetings experience at InterContinental. For longer trips, our extended stay options, Staybridge Suites and Candlewood Suites, provide a self-catered experience with the service elements that only a hotel can offer and the added benefits of loyalty rewards. In the leisure space, our boutique brands such as Kimpton and Hotel Indigo have strengthened our portfolio for guests on shorter trips. Holiday Inn Resort and Club Vacations provide a great opportunity for our guests to experience longer holidays with their families. At our full year results last year, I spoke about the wider industry landscape and how branded hotels continue to be a large and rapidly growing segment of a diverse hospitality accommodation market. Many of our brands have some overlap with non-hotel products in terms of stay occasion. Fundamentally, they are a different product in many ways, including length of stay. While serviced apartments cater to some corporate travelers and short-term home rentals play primarily in the leisure space, they continue to be focused on longer stays and do not offer the consistency, safety, convenience, and range of services that our branded hotels provide. Creating and delivering a consistent experience through our preferred brands is at the heart of our commercial strategy. All consumer brands need to be refreshed and honed over time, and the hotel sector is no exception. Innovation is one important way we ensure they stay relevant and continue to gain share. Let me give you the highlights of the progress we made in 2016, starting with InterContinental, which celebrated its 70th anniversary last year. We've continued to aggressively expand the brand globally, keeping it relevant to the modern luxury traveler and consolidating the InterContinental's position as the largest luxury hotel brand in the world. With nearly twice as many open rooms as our nearest luxury competitor, we've leveraged this leadership position to drive guest satisfaction and RevPAR outperformance over the past five years, resulting in over 20% growth in total gross revenue. The quality of the brand is recognized externally, winning multiple industry accolades, including Leading Hotel Brand at the World Travel Awards for the eighth year running. Our AMEA region is leading our global initiative to embed and enhance our service standards called True Luxury. We know that InterContinental guests appreciate an understated, discreet luxury experience. By concentrating on the highest impact interactions with guests, such as the arrival and departure experience, we create a memorable stay and increase their likelihood to return and recommend to others. We've also enhanced our Club InterContinental offer. By considering both the needs of our guests and the inevitably varying facilities available at each location, we can deliver a consistent experience even where we don't have a traditional club lounge offering at the property. Building on our learnings, we'll be rolling these approaches out globally later this year. We continue to strengthen our leading position, signing 18 hotels around the world in 2016, our best performance in eight years. In the U.S., where we've been historically underrepresented, we signed four hotels, including landmark properties in San Diego and Houston. In 2017, we'll expand our estate further with 12 openings, including hotels in Los Angeles, Washington, D.C., and Singapore, being in each case, the second InterContinental in these cities. As Paul detailed, our early investment in China is now delivering impressive results. Illustrating the vast scale of some Chinese cities, we opened our fifth InterContinental in Shanghai last year, the most hotels for the brand in any city globally. Our relentless focus on service quality and guest experience means that InterContinental is now recognized as the number one luxury hotel brand in China, overtaking Shangri-La. We support this leading position with targeted localized campaigns, such as our celebrity affiliations on social media site Weibo, which enhance the credibility of the brand while providing us with a highly effective platform to access a wider target market. Moving now to our Holiday Inn brand family, the engine of our business. Leveraging the multi-year refresh program we launched in 2007, we've had much success in recent years, improving guest satisfaction and driving revenue growth. The power of the Holiday Inn brand family cannot be overstated. At more than twice the scale of its nearest global competitor, it's a clear leader in the upper mid-scale segment, representing a quarter of all open rooms and a third of the global pipeline. This segment remains a highly attractive market, representing about 45% of future U.S. industry room revenue growth over the next decade. Following the successful refresh of Holiday Inn, we are delivering the next stage of the brand's transformation through three key initiatives. Firstly, the continuing evolution of our room and public space designs, enhancing the overall guest experience and driving satisfaction scores up. This is supported by localized multimedia campaigns targeting quality family time. Finally, we sharpened our service delivery for key elements of the stay experience, including uplifting our breakfast offer and providing our franchisees with profitable high-return restaurant solutions. Taking each of these in turn, I will start with the physical transformation of our Holiday Inn brand family estate. On screen is an example of our Holiday Inn Open Lobby, which is now in place in 50 Holiday Inn hotels in Europe, a number we expect to double by the end of 2017. By creating areas that enable more dwell time, we are changing how guests use our hotels, enhancing the enjoyment of their stay, and encouraging them to spend more time and money with us, which is leading to increased guest satisfaction and higher hotel revenues. We continue to roll out our Formula Blue designs, now in place at 175 Holiday Inn Express hotels in the U.S., which is driving meaningful incremental RevPAR and improved guest satisfaction. By 2020, we expect two-thirds of our open and pipeline Holiday Inn Express estate in the U.S. to have these designs in place. Family time is a core proposition of the Holiday Inn brand. So in April last year, we launched a branded family experience in 80 of our China hotels, a great example of a localized multimedia campaign. Bumi is a popular children's cartoon character in China, and kids receive a welcome gift and get to stay in a themed room that helps create lasting memories. Our owners are reaping the rewards of this campaign as well, which is driving 22% incremental room rates, rapidly paying back the initial operating expenses. Holiday Inn Express continues to grow share in the limited service segment, giving guests more of what they need and less of what they do not. To support this in Europe and the Americas, we are improving our breakfast offering, one of the highest impact customer touchpoints. By creating an efficient, cost-effective solution that aligns the breakfast operation and delivery with the lean staffing model of the brand, we have seen satisfaction scores increase by 15 points in our Europe trials. Moving now to Crowne Plaza, where outside of the Americas, open rooms have grown by 26% and guest satisfaction is up six points over the past five years. This progress continues to be recognized externally with the brand winning multiple prestigious awards in Asia and Europe, including the world's best airport hotel at Changi in Singapore. We are making good progress on our plans in North America, which will see us invest $200 million in marketing and capital over the next three years, which are designed to bring the quality of the estate up to the standard we see in the rest of the world. Half of this will be system-funded marketing, which by 2018 will represent a 200% increase on historic levels of spend and be supported by a dedicated commercial team. This capitalizes on the work we've done in cleaning up the estate to date, one factor in the four-point guest satisfaction increase that we've seen since 2012. We're also increasing the minimum quality threshold for the remaining estate by four points. The required changes will be supported by incentives for early adopters of the new brand essentials, including new uniforms, bedding, and frontline training together with enhanced connectivity. We'll invest up to $100 million on refurbishments and halo signings funded out of our existing CapEx budget. We know this approach works. Where we've deployed capital to support refurbishments in recent years, post-renovation satisfaction scores have increased by eight points more than the rest of the estate. Although it takes time to reposition brands, we're already seeing the results of these initiatives. In 2016, we were delighted that Crowne Plaza was awarded best upscale hotel brand in North America by Business Travel News, up from eighth the previous year. Moving now to our boutique and lifestyle brands. In 2016, we saw momentum building with each of the brands, taking them into new markets and growing traction with owners as we continue to demonstrate strong performance and guest preference. Firstly, Hotel Indigo. We've grown our open rooms by 14% annually since 2011, reaching our 75th open property this year, including iconic locations in Bangkok and Singapore. We continue to expand into new markets, signing hotels in Australia and Japan, and look forward to opening our first Hotel Indigo Resort in Bali, expected in the first half of this year. In 2012, we launched EVEN Hotels, our wellness-focused brand. Last year, we opened three properties, including our third-owned asset located in Brooklyn and our first franchise hotel in Omaha. As an example of the almost universally positive guest feedback for the brand, the EVEN Hotel New York – Times Square South was named one of TripAdvisor's top 25 hotels in the U.S. in 2016. Building on this appeal, we signed a deal with our long-term partner, Pro-Invest, to develop a portfolio of EVEN Hotels in Australia and New Zealand. Traction for the brand continues to grow in the U.S., with around 15 projects either in the pipeline or advanced negotiations. Last year, we opened our fourth HUALUXE Hotel, the first international hotel brand designed specifically for Chinese travelers. Demonstrating the strength of the brand proposition, the entire portfolio is already achieving top 10 TripAdvisor rankings in their respective markets. Its impressive performance is converting to demand from new owners, with our pipeline now standing at more than 20 hotels, with three key openings expected in 2017. In early 2015, we acquired Kimpton Hotels and Restaurants to fill a gap in our portfolio at the upper end of the boutique space. Delivering on our aim of growing the brand internationally, we opened our first hotel outside of North America, the stunning Kimpton Seafire Resort + Spa in Grand Cayman, which you can see on the screen. We also signed two Kimpton hotels in Paris and Amsterdam in 2016, the latter of which will open later this year. We have around 30 deals in the pipeline or under active negotiation globally, a record level for the brand. A core element of our winning model is having a superior owner proposition. We deliver this through an unrelenting focus on operational excellence, underpinned by extensive owner support programs and industry-leading revenue management tools, which together drive the high ROI that most owners are seeking. A great example of our owner value proposition is our expertise in restaurants and bars. We have not talked much about this in the past, so I thought I would update you on this today given that it is becoming an ever more important element of the overall branded hotel guest experience. This is a significant and growing part of our business, with nearly 9,000 outlets across our global estate. In our managed business alone, restaurants, bars, and banqueting contributed over $3 billion in 2016, with a similar amount generated in our franchise estate. Given the breadth of our brand portfolio, our approach to restaurants and bars is tailored to our guests' and owners' needs. For our luxury and lifestyle brands, we take a bespoke approach at the hotel level to create dining solutions that optimize guest experience and owner return. We currently have around 20 celebrity chef partnerships in our InterContinental estate, concentrated in gateway cities in Europe, the Middle East, and Asia. By partnering with iconic chefs, we create a halo effect for the brand. For example, at InterContinental Bordeaux, our Gordon Ramsay restaurant, Le Pressoir d'Argent, was recently awarded its second Michelin star just 18 months after opening. This approach is also driving incremental revenues at the hotel level. In Europe, for example, checks at celebrity chef-affiliated restaurants are on average 60% higher than the remainder of the estate. In our mainstream brands, our owners have a different need. We create a library of franchise restaurant concepts, allowing them to choose from a range of options that best fit their hotel and location. On screen, you can see an example of our Stock Burger concept at Holiday Inn Brighton. Previously, the space was underutilized despite its seafront location, with many guests opting to eat outside of the hotel. Since implementation, revenues grew almost 50% and profits are up nearly 30%. Building on this successful pilot, we are already in advanced discussions to roll out the concept in around 10 key European cities. We have grown these concepts across our regions and brands with more than 80 open or pipeline locations globally. The largest of these, Burger Theory in the U.S., is already driving five-point increases in satisfaction scores. Embedding into the wider estate the authentic restaurateur mindset, which Kimpton do so well, has allowed us to drive not just owner ROI across our brand portfolio, but also guest satisfaction. In building on this success, we have up-weighted our operational support for restaurants and bars at a corporate level and continue to share best practice across our regions and brands. That is an overview of some of the actions we have been taking to enhance guest preference, one pillar of our commercial strategy. Many of you attended our capital markets event in September when Keith Barr and I covered the two other pillars of our commercial strategy, lifetime relationships and strong direct channels. Given the importance of these, I will just touch on some of the highlights from the full year. We've made major enhancements to our loyalty program, creating a new elite top tier for our most loyal guests who stay more than 75 nights a year in IHG hotels and introducing Your Rate by IHG Rewards Club in 2016, our preferential member pricing structure. We've seen very encouraging early results. Since launch, the relative change in our retail channel growth rates has outstripped that of the OTAs, demonstrating the shift in behavior as guests recognize the advantage to them of booking direct with us. This has also driven increased IHG Rewards Club enrollments, which are up 16% year-on-year. As well as growing our loyalty base, our existing members are staying with us more often and redeeming more points for their reward club stays. All of this has increased our loyalty contribution by over three points since 2014, delivering low cost, high-quality revenue to owners. Our direct digital channels remain one of the fastest-growing across our system, and we continue to innovate and update them. Recognizing guests' desire for transparency, our websites now have over 2 million verified reviews from IHG hotel stays. We now offer 87 brand and language combinations, delivering over $4 billion of room revenues to owners. We continue to innovate through our partnerships with Alipay, China's leading third-party online payment solution, which will be rolling out globally in 2017. Mobile continues to be the driver of growth, with bookings reaching $1.6 billion in 2016, up by a third on 2015. Recognizing the increasing importance of mobile devices in consumers' lives and using it where we can to enhance the guest experience, we now offer mobile checkout at 1,800 of our hotels. Powering this growth in mobile is our award-winning app, which has now been downloaded over 2 million times. Year-on-year, app bookings are up 50%, with Chinese guests the fastest adopters for this channel. In fact, 19 of our 20 highest app-booked hotels are located in Greater China. Altogether, our investments aim to increase the proportion of revenues delivered through our most cost-effective channels. With our strength and loyalty proposition, we've increased our system contribution by three points since 2014. Finally, I wanted to touch on the continuing technological innovations that underpin our commercial strategy. We've now implemented or are installing IHG Connect in over 1,800 hotels in the U.S., giving guests a seamless Wi-Fi login across our estate using their IHG Rewards Club credentials. Hotels that have adopted the system have seen Wi-Fi related scores increase by five points since implementation. Ensuring our hotels adopt the most sophisticated revenue management practices will maximize our revenues and owners' returns. In an approach fully endorsed by our owners' association, we've mandated either the appointment of a certified revenue manager or subscription to our industry-leading Revenue Management for Hire program. This approach continues to drive out performance, and hotels signing up to our services in 2016 saw a six-point uplift in RevPAR index post-implementation. We talked at length at our September event about our next-generation Guest Reservation System that we're developing with Amadeus and the benefits that this will bring to owners, guests, and IHG. This multi-year transformational project is now nearing the end of its development phase, and we're entering an intensive testing period. The project remains on budget and on track to begin piloting hotels this summer, with rollout beginning late this year. Finally, our digital marketing continues to utilize social media platforms to both target and interact with guests. In 2016, we were one of the first companies in any industry to trial an automated bot accessed through Facebook Messenger to help guests with pre-stay management. Building on this personalized approach, we're continuing to update the bot's natural language processing capabilities to be able to answer an even wider range of guest queries. To summarize, we have a clear strategy guided by our winning model. This has allowed us to make consistent strategic choices and considered long-term investments, which have delivered outperformance in the past and will continue to generate sustainable growth into the future. Through disciplined execution of this strategy, we're driving operational excellence through our franchise performance support and management capabilities. By focusing on what we do best, creating preferred brands, and delivering operational excellence, we've improved guest satisfaction and owner returns. We continue to enhance our established brands and expand our boutique and lifestyle portfolio into high-demand markets. This is underpinned by our innovative digital marketing and technology strategy, protecting and strengthening our competitive advantage. These investments will continue to support our asset-light, highly cash generative model, which will allow us to drive superior shareholder returns. Though we recognize there remains uncertainty in some markets, we're confident in the outlook for the rest of the year, as well as our ability to continue delivering long-term sustainable growth. Thank you. With that, Paul and I will be happy to take your questions. Jamie. Sorry. Good morning. Jamie Waller from Morgan Stanley. Three questions, please. First, just starting with the net rooms growth of about 3%, which is a bit lower than the prior year. Excuse me. Why has that been so low given your pipeline signings are so strong and the removal rate is relatively low? Secondly, if we look at the fee income growth in both AMEA and Europe, it was sort of flat to down for both regions. On slides 10 and 11, you show that both RevPAR and net rooms added together are more like +5%. How lucrative, how profitable are these quite small number of lost hotels? Are there any more of these contract losses that could come up over the next couple of years? Then finally on M&A, really just wondering what your views are, Richard, there. Clearly, both Hilton and Accor have gone or are about to go pure asset-light. What's your view on taking part in any sort of further big scale M&A? Thank you. Well, on M&A, you talking about the Chinese taking controlling stakes in those two companies or the other way around? I think it's that as well. I wasn't sure which way you were going. Look, I think on M&A, we kicked off the M&A round, as it were, with Kimpton in 2015. I think the interesting thing about our industry is that much of the growth has come organically. So we have 5% of the world's rooms, 15% of the active pipeline stats we talk about regularly, and I don't see any benefit in being big for the sake of being big. Indeed, what I've been talking about today is what matters is having brands that attract guests and running hotels extremely well, which is frankly what we've been talking about. So that's our focus. If another brand comes along that's interesting, that fits our portfolio, that can be acquired for a sensible price, then we'll clearly look at it, as we've done in the past. But right now, we're very focused on just running a great business and not just trying to be bigger than the next guy. In terms of the net rooms growth, I'll let Paul maybe give a little bit of detail. Just I think the important thing, and again, I'd be boring repeating ourselves, but having quality brands and driving sustainable growth is what's really important to us. It's easy to add properties to a portfolio, but actually making sure that they're the right location, the right owners with the right quality, and maintaining the quality of what you've got is fundamentally what we've been about. I think that is really at the core of the business. So actually, our growth was a little higher than last year. There were some big chunks last year, Paul would give you. I'm no longer finance. I can't do it anymore. But I think we are pleased with the level of growth and the level of signings. Paul, do you want to pick up the rooms and then the fee margin piece? Yeah, sure, will do. In terms of the net rooms, I think what I'd look at is the growth and then the removals to give us the net. On a growth basis, we opened about 5.6% increase in the system size. Then we took out 2.5%. If you look at where we took out the rooms, I think that's an important statistic. Almost all of the rooms exiting this year were in the Americas. If you look at the rooms that we added in the Americas, it's almost 5% of the American system. We opened more hotels in the Americas in 2016 than we have for a very long time. There's good growth coming through there, and we started signing a lot more rooms in the Americas, and that will continue to grow. In terms of those removals, we've said 2%-3% is the range that we'll be in for a few years. I would expect it will come down. 2.5% is a little lower than we've been for some years, and it's got potential to come down closer to the lower end of the range. I would hope that the openings will start to step up a little bit as well as the increase in signings from 2011 and onwards come through. A lot of those signings that we've made are new build rather than conversions, so they just take longer to come through. In terms of your question around fee income, this is why I sort of pulled it out in my prepared remarks, that there's just a few hotels that are distorting the impact there. Some business in Paris, a few hotels in Paris that are hurting us there. We sold a stake in a hotel in AMEA, and we had a few contracts that we renegotiated. The EMEA renegotiation of contracts is something we've seen for a number of years, and it really stems from the fact we had such a strong position there going, as we built that business out, and as contracts are renewed, we typically get more standard market terms. That's why we provided some guidance on the EMEA managed profit line in 2017 being flat for 2016. Thanks, Paul. Tim. Thanks. Good morning, Tim Ramskill from Credit Suisse. Three questions as well, please. The first is around system funds, which increased a very healthy 10% in the year. Maybe just some senses as to what that is enabling you to do with that incremental sort of headroom. Second question, you talked, Richard, about the sort of Revenue Management for Hire and the benefits of that. Maybe just in terms of helping us understand how that might flow through, what proportion of the estate in the U.S. could shift onto that sort of solution? Then the third question is around your financing. Obviously, you carry a lot of your debts here in the U.K., and there is obviously tax differentials in the U.K. and the U.S. Maybe just some background as to why you have made that choice in the past, given there is potentially a greater tax shield if you carried more U.S. debt. Thanks. Okay, thanks, Tim. Look, you asked about system funds, growing at 10%. System funds tend to grow faster than revenues because of the aspect of Rewards Club in there and the growing percentage of rewards, and obviously that builds up the funds. I think, what can we do more of everything? Without being flippant, I talk about investment in Crowne Plaza, think about investment we are putting into our new reservation systems. There are always more demands than you have revenue, but obviously that growing capacity really just increases the competitive advantage we have in the markets against the smaller players or the unbranded players and against the barriers to entry for new brands coming into markets, just because of the scale of these funds that the big players have. It is a very important piece of what we do. When Paul talked about strategic cost management, which is another important piece, we have been taking a lot of costs out of overheads and back office, and that is exactly the same in the system funds. So effectively, the operating cost of all our marketing sales and so on, we are as rigorous on that to release funds for revenue generation. In terms of Revenue Management for Hire and the impact of that, Revenue Management for Hire, for those who do not know, is effectively for smaller hotels or unsophisticated owners. We do revenue management for them, and that is quite a sophisticated job. If you think about how you plan ahead, how you think about how you charge your rooms on all the different channels, it takes a rather skill because we can often do that better than individual hotels. It is something we have offered for some years. We are ramping it up now quite significantly, and obviously the mandating is designed to make sure that they either have their own skills or they buy them from us. Effectively, the way to think about it is that which enables us to continue driving our RevPAR. So it does not happen overnight because it takes time for hotels to get in there, it takes time for us to recruit people. But it is just one of the tools that enables us to continue to drive our RGI and continue to gain revenue share. You should think about it as an underpin confidence we can continue to do that. Paul, do you want to pick up the financing piece? Sure. I guess there is two component parts to it. One is we tend to issue bonds in the sterling market because that is where the demand is deepest. We tend to get very good rates. The last bond that we did there, we got away at 208, the lowest ever financing we have had, and actually pretty much cuts in half the interest cost on that money replacing the previous bond. So great terms there. But then intercompany lending is put in place. So there is no disadvantage in not having, say, bonds issued in the U.K. market. There is exactly the same tax treatment. Hi. Vicky Barclay from Barclays. Just while we are on tax, can you comment just on the potential U.S. tax reforms? Clearly, there are a lot of unknowns, but how should we think about some of the proposals that are out there in the context of your tax rate? Thanks. So I guess the first obvious point to make is we do not know what the tax reforms might be. That said, the vast majority of the tax we pay is based off our U.S. earnings. If there is a reduction in the headline rate there, then that will be potentially beneficial to us. It really depends on what are the component parts of the entire package. There is an expectation it may be reduction to the headline rate, but also perhaps a restriction on the deductibility of interest. We have to see how those two things come together. But we would expect to see some sort of benefit from it. Yeah, James. James Ainley from Citi. Three questions, please. The first one is, I guess- I have got to congratulate Vicky on one. Yes. I guess there's been some interesting indications that small business optimism is picking up in the U.S. I wondered how the attitude of your owners has changed since the election. If you can comment on that, please. Secondly, a few of your competitors talking more and more about millennial travel, investing in brands behind that. Could you talk about what your attitude and approach is to that segment? Then thirdly, could you update us on what your RevPAR index is for the Holiday Inn brand in North America, please? Yeah. So I think it's about attitude of small business owners in the U.S. Yeah. Yeah. There've been various surveys suggesting small businesses are more optimistic in the U.S. Yeah. Look, I think Paul said, we've had more signings in the U.S. in 2016, the highest level since 2008, I think, which is sort of the pre-Lehman boom. So I don't see anything in terms of if it's like a post-Trump effect or anything like that or in the very short term. But clearly optimism and confidence in the long term of the industry is very strong in the U.S. If you think about when somebody signing a license with us is they're making a big commitment. They're paying an upfront fee, and they're making a long-term commitment. Nobody makes really short-term commitments in the hotel industry. So these short-term vagaries in the market, you just look through. So at the moment, I think there is financing available, particularly for the stronger brands, and we've got a level of optimism in the marketplace. Interestingly, I think that back to this point about the pipeline is the signings are growing in the market, but they're really going with the big brand players. We're obviously benefiting very strongly from that. In terms of millennial travel, I've said before, I think trying to create a millennial brand is pretty patronizing from old guys in gray suits about younger travelers. We have a focus on understanding our guests across the portfolio, across the world, and actually there's changes in all types of travelers, and the evolution of digital helping drive the guest experience is not just for millennials, it's across the piece. Certainly, if you look at the boutique businesses we have, if you look at EVEN Hotels, if you look at Express, those are very attractive to millennial travelers because of the type of experience they want. Indeed, the Holiday Inn Open Lobby, and two weekends ago, I was up at the new Holiday Inn in Manchester, and with an open lobby, it was buzzing all weekend. Full of young people, full of older people, but it's a lifestyle change, and you see this in other parts of the consumer world as well. I think what's important, actually, the real trick is being able to manage different generations in the same space. If people want personal human interaction, give them that. If they want to do everything digital, enable them to do that. Personalization, in our view, is much more important than trying to demarcate around ill-defined generational terms. Paul, do you want to pick up on our- Yeah. So both Holiday Inn Express and Holiday Inn to the premiums, to the upper midscale and across the Holiday Inn brand family is 8% premium. So actually seen some really good performances in the fourth quarter there. So Express in the fourth quarter at 1.5% RevPAR growth beat Hampton and Fairfield. Holiday Inn at 1.8% beats Garden Inn at 0.8 and Courtyard at 0.6. So continuing to take share there. Yeah. Good. Yeah, Tim. Hi, Tim Barrett, Numis. Could you talk a bit about cash flow and working capital? Quite a material input this year. What do you expect for 2017? Around China, your comments on franchising in China were really interesting. I think you have signed 4,000 rooms. Can you talk about where that could get to in the medium term? Thanks. You want to pick up both of those, Paul? Sure. In terms of the cash flow, we did see a benefit in 2016 from the inflow from a deal that we signed up with our loyalty card provider, which will come in, which it will be some years before we see that come back. So we get the cash up front and effectively amortize it over time. This is a very cash-generative business, as I have shown. You have seen the increase in the cash flow over the last three years at 14%. Model works that way. So I would expect to see that continue. We will see a bit more CapEx go out in 2017 around the GRS program. That will probably be the high watermark in terms of investment behind that. That will start to come back, and we will see that come back as it gets. As GRS is operational, starts to get depreciated, and that will come back through the working capital line. In terms of the signings, we have had the Holiday Inn Express in China. We only launched that in May. So in that eight-month period, we had 20 signings. It is still ramping up. I think the opportunity there is very significant. I will just add to that. I think, Paul, you touched on it in your talk, that I think a lot of people have gone the master franchising route in China. Because a couple of things, we have much bigger scale already with Express, which has been there many years, and we are very focused on quality and also retaining the income stream. The master franchising is very marginal from a revenue perspective. We see it as, we might grow in absolute system size a little bit slower, but economically and from a quality and long-term perspective, it is much the best route. As Paul said, we are very pleased with the take-up so quickly. Yeah. Morning, it is Alex Brignall from Redburn. Please, just three questions again, I am afraid. On the fee margin, you obviously did very well this year. Is there any sort of feeling that we should think about of what costs you have in there? Obviously, you guided to what it should do in the future, but do you lose that over the next three years or how could that move? On the distribution, you have obviously done well on the direct web growing faster than OTA. Could you guide about what has happened with web versus indirect? Maybe a little bit more granularity if you have it or doing its way through the annual report. Thirdly, you talked about your share of rooms being 5% and 15% of the pipeline. That clearly does not include small hotels, where there is another big chunk that we can now find on TripAdvisor. Is there any potential, do you think, for franchises to add franchise light options that could enable you to access a hotel, say, less than 75 rooms in it or something like that? Is that somewhere you could find more organic growth? Thank you very much. Okay, thanks, Alex. Why don't I take the last one and Paul pick up the first two. Look, I think, in terms of the I'm not sure what stats you're particularly focusing on, but I think there are different types of franchising now. There are licensing. If you think about what Best Western does, maybe at one end, and we're probably at the high cost, high value add end of franchising. We have heavy support. We do charge quite a lot, but we have heavy support. We generate high revenues, and we generate high ROI. That does come about from really that focus on quality and consistency and proper brand management. I think, the likelihood of us getting into brands or on a licensing approach where we don't have that control is highly unlikely. The problem with small hotels is we do have some small hotels. We have the InterContinental Amstel Amsterdam as well. That's about 70 rooms. Yeah, 70 rooms. But the small hotels with low RevPAR, the fees that you get are so marginal, you just can't justify the support that we need to drive the business. We have a lot of Expresses below 100 rooms. In fact, the average size is probably 75 or something, is it? Look, there is, but U.S. versus obviously much bigger outside the U.S., yeah. I think we're sort of are where we want to be. There is opportunity, without question, particularly in the U.S., given now the scale of Holiday Inn to have one or more other brands alongside it. But I don't see them being a million miles away in terms of business model or type than we have today in the mid-market. The budget doesn't really fit our model. In terms of the fee margin, the growth that we saw in 2016 was frankly a bit more than we would normally target. If you go back over the last 13 years, it'd be about 125 basis points on average. Obviously, there's two components to it, the top line growing and what happens to the cost. We have been very focused on cost management. We also saw a few benefits this year from foreign exchange. Then we saw some good growth in our central revenues, which are technology fees. And in the U.S., we saw a swing back from the costs that we had last year in our healthcare costs. They went from a 7% negative to a 3% positive. We put in place some stop loss insurance, which should mean we don't get into negative territory again. So it may end up around neutral next year. There's a few benefits going on there. Frankly, what happens going forward? We want to continue to add margins. There'll be a question as to what happens to the top line, how much that grows. In years where it's growing more, we'll add more margins. In terms of what's been happening to channels, consumers, I think, understand more and more the benefits of going direct. We are just seeing that if you look across all our different channels, and I can take you through the different statistics by channel. I'm not sure you want to go through that now, but you're seeing that people understand our proposition, which is come direct to us, you'll get the best rates. And as GRS comes in and we can offer more to people who are coming through GRS in terms of room choices, et cetera, I think that'll only add to that. Cool. Thanks very much. Thanks. Yes. Hi, good morning. Richard Clarke from Bernstein. One quick follow-up from the previous questions and then two new ones. Just obviously, you are winning back from OTAs, it seems. How are the OTAs fighting back? What can they do? What actions are you anticipating from them? Any change in your conversation with them? Then two other questions. One on the EVEN and HUALUXE brands, hopefully, I've pronounced that correctly. The pipeline on HUALUXE is up only one compared to the end of 2015, and the EVEN pipeline is down slightly. Are those ramping up as quickly as you expected? Any plans to invest further to get those up to some critical mass? Then lastly, on your breaking the habit of a lifetime and provide a little bit of guidance on the AMEA profits. I know you've explained why, but is there any precedent we can read into that in the situations where you now will provide guidance when the people in this room are far enough away from your numbers, or is it just a one-off? It's a one-off. Where maybe people haven't quite got it right, and we think they need to understand it really, and we want to get them in the right place. Look, in terms of winning from the OTAs and fighting back, we look at it slightly differently. I think there has been talk about a battle with the OTAs. It really isn't. The reality is that for price-sensitive leisure travelers, the OTAs are a very effective way for us to target those type of travelers. It's a good route to market. But it's very expensive because you're not creating brand loyal customers by definition. So we want to minimize that, and our position has been, if it's profitable and incremental business, we'll go with the OTAs. The hotel industry's always had intermediaries, whether it was the old-line travel agents or meeting planners or whatever it might be. But of course, the cost of the OTAs makes them very unattractive unless it is truly incremental. The whole book direct push has been around benefiting our owners. Again, I think one of those things that drives the organic share gain of the big players is that it is really attractive to owners to get this high ROI business coming through. If you can create brand loyalty, that is obviously beneficial. The data you get on customers is much richer. There is no question that travelers get confused by all these channels and all of these claims, and a very clear promise of cheap price and that connectivity and that inclusion with the brand is actually very attractive. As Paul said, we are seeing a lot of traction on that. OTAs are continuing to grow, but the point I suppose we should make is that our relative growth has grown significantly in terms of our direct channels. I think maybe we are more in equilibrium than we used to be. I think in terms of what OTAs are doing, I think they are having to sharpen their value proposition, both in terms to us, but also to guests. Ultimately, they are just an intermediary with very little value add. That is fine. We will use them where we can. In terms of EVEN and HUALUXE, the EVEN pipeline came down because we opened them. We are now, as I said, there is about 30 now we are negotiating with to add. I would say the growth has been a little bit slower than I might have liked, but we are definitely seeing a growth in momentum. The really important thing is, we talk to you about having brands that really appeal to guests, and you talk about how we segment our guests. Seeing the customer acceptance of our new brands is really encouraging. For literally every single new EVEN and new HUALUXE to be in the top 10 in its market from the beginning, and EVEN, not even being open a year, to be one of the top 25 hotels in the whole of the U.S., really validates what we are doing. It takes time to get awareness amongst owners and awareness amongst guests to drive that momentum, but we are starting to see it now. Thanks very much. Good. Thank you. Time for one more? No? Good. Well, thank you very much, and appreciate you listening, and look forward to seeing you all over the coming weeks and months.