Earnings Call: H2 2011

Feb 14, 2012

Morning, everyone. Last few seats. Capacity crowd. Thanks for joining us this morning, and welcome to our 2011 full year results presentation. I suspect this won't be the most romantic Valentine's morning that you've had, but hopefully, we can make it interesting and worthwhile. Tom will take you through the financial results in detail. First, I'll just cover the highlights of what has been another strong year for IHG. At the top line, our global RevPAR grew 6.2% in the year, which was primarily driven by growing preference for our brands. We're pleased to report that this resulted in good growth in both profits and earnings. In fact, 130.4 cents is the highest adjusted earnings per share IHG has ever reported. It's exciting for us that notwithstanding IHG's already strong position, we see substantial growth and value-creating opportunities in most parts of the world for our existing brands and indeed new brands, too. At the same time, we're living in challenging economic times. Throughout our business, there is a relentless focus on being effective and efficient, which you can see reflected in our ongoing margin progression. A feature of this business, and well demonstrated in these results, is our ability to generate powerful cash flows. This is the foundation of our financial strength, giving us useful financial flexibility and allowing us to reinvest in growth opportunities at the same time as being able to generate significant and consistent shareholder returns. I'm now going to hand you over to Tom, who'll talk in more detail about the financial progress IHG's achieved in 2011, and I'll return later to look a little into the future and discuss our strategy and business development. Tom. Well, thank you, Richard, and good morning, everybody. Firstly, let me say how nice it is to be here, and, as I look out into the audience, it's nice to see a few familiar faces. Let me start by highlighting the key financial headlines, all of which show significant improvement year on year. Turnover and operating profits were up 9% and 26% respectively, and operating profits were up 21% at constant currency and excluding the impact of $16 million of liquidated damages received in the year. The interest charge at $62 million was in line with last year, as higher borrowing margins on our new bank facility and the write-off of unamortized fees on the old facility offsets the impact of lower levels of net debt. The effective tax rate reduced by 2 percentage points to 24% and is expected to increase to the high 20s in 2012 and low 30s in the medium term. Profits after tax grew 33% to $377 million, and earnings per share increased 32% to 130.4 cents. This is the first set of results in which we've reported under the four-region structure, bringing our external disclosure in line with the organizational changes we announced last August. Last month, we issued comparative historic data restated under this new structure, which you can find on our website. As you can see from these charts, IHG has a broad geographic spread, with the Americas being our most significant region, contributing around two-thirds of our profits. However, Greater China and EMEA are becoming increasingly important, with 28% and 16% of the pipeline respectively. We continue to have a leading position in Greater China, with over 55,000 open rooms and 50,000 rooms in our development pipeline, representing 16.5% of the industry's active pipeline in the region. Asia, Middle East, and Africa extends from Japan to the South Pacific and from India to the Middle East and Africa. We created this region in order to derive scale benefits from the predominantly managed upscale hotels we operate in these geographies. Over 80% of EMEA's profits before overheads come from the managed business, with all but four out of 122 hotels in the regional pipeline under management contracts. Europe comprises some 15% of the group's open rooms and contributes 14% to group profits, with just under half coming from our two owned InterContinental hotels in London and Paris. Let me now drill down on each region in turn, starting with the Americas, which remains unaffected as a result of the segmentation changes. RevPAR increased 7.5%, with the U.S. up 7.9%. Total U.S. RevPAR, which includes the benefit of new hotels, was up 9.5%. This figure is prepared on the same basis as the Smith Travel data and compares favorably to the industry growth in the U.S., which was up 8.2% for the same period. As you can see from the chart, the region saw progressive rate growth throughout the year, with 3.7% growth in rate in the fourth quarter. This strong RevPAR performance drove underlying revenue up 7%, and regional costs fell $8 million on 2010, mainly due to healthcare costs. As a result, underlying profit grew 18%, driven by good performance in both the franchised and managed estates. Turning to Europe, RevPAR was up 4.7%, with a 0.2% decline in the fourth quarter, reflecting the deterioration in macroeconomic conditions across the region. RevPAR performance was mixed from month to month throughout the fourth quarter but was broadly flat against strong comparatives due to the snowstorms in late 2010. At our two owned hotels, occupancy levels continued to be strong in the quarter at 81.5%, albeit there was some moderation in rate growth. In spite of the weaker fourth quarter, for the year as a whole, underlying revenue and profits grew 10% and 34% respectively. Our two owned hotels increased RevPAR by 10.9% and we saw good growth in franchise royalties due to a combination of strong RevPAR performance and an increase in the number of rooms in the system. Turning to Asia, Middle East, and Africa, RevPAR was up 0.9% in the year, and up 5.5% excluding Egypt, Bahrain, and Japan, where political unrest and natural disasters negatively impacted growth. The charts here show the quarterly RevPAR excluding these countries. Other parts of the region continued to see strong trading with RevPAR up 8.9% in Saudi Arabia, 5.6% in the UAE, and 12.9% in Southeast Asia. Underlying revenue and operating profits were up 4% and 9% respectively due to strong RevPAR growth across the managed business, partly offset by $4 million from the renegotiation of certain terms on management contracts and a 1% reduction in the region's net rooms. This small decline in system size was due to some lower quality hotels exiting, plus three hotels in New Zealand closing after the earthquake. Last but definitely not least, let's turn to Greater China, where total gross hotel revenues, including food and beverage at the hotels we own and manage, reached $1.9 billion in 2011, representing an almost doubling of gross revenues in the last two years. RevPAR was up 10.7%, significantly outperforming the industry, which was up 2.7%. If you exclude the impact of Shanghai on our results, which had a very tough set of comparatives due to the Expo in 2010, RevPAR was up an impressive 17.4%. Revenue and operating profits were up 15% and 24% respectively due to $13 million growth in managed profits and a 14% increase in room counts. We're now seeing the benefit coming through from the ramp-up of the 16,500 net rooms that we've added to the region over the past three years. Let me turn briefly now to each of our operating models, starting with the franchised estate. Our total gross franchise revenues increased 8% to $11.3 billion. Average rooms were down 1.6%, predominantly due to Holiday Inn exits at the end of 2010 in connection with the brand relaunch. However, 6.5% RevPAR growth across the franchise business, a $10 million benefit due to an increase in the effective royalty rate in the Americas, and contribution from new rooms combined to increase royalty fees by 8%. Total reported franchise fees grew 9% to $609 million, translating into growth in franchise operating profits of 12% to $511 million, with margins up two percentage points to 84%. Moving to our managed business, total gross revenues increased 8% to $8.3 billion. Our underlying management fees increased 5% to $349 million, reflecting the strong RevPAR performance across much of the estate, and in particular, China. Increasing efficiencies resulted in growth in operating profit of 23% to $191 million, with a corresponding margin improvement of eight percentage points. 56% of our managed hotels worldwide are now earning incentive fees. That's up three percentage points from 2010. Outside the Americas, this percentage now is around 75%. Turning lastly to our owned hotels, RevPAR across the estate grew 10.9%, driving revenues up 8% with the majority of this coming through rates. This performance, combined with good cost control measures, boosted operating profits by 28% to $106 million, with a corresponding three percentage point increase in margin. I want to comment briefly on some key financial metrics, margins, system size, pipeline, and cash flow. Starting with margins, our ability to leverage our scale to drive margin improvements is clearly an important aspect of our business model. We grew margins in our core fee business, both franchised and managed, by 4.9 percentage points in 2011. On an underlying basis, this improvement was closer to one percentage point after excluding a number of one-off benefits in the year. As we deliver top-line growth, our increasing scale allows us to drive efficiencies and create capacity to reinvest in the business while still improving margins. In 2012, we're looking to invest in supporting the launch of two new brands, expanding our infrastructure in China, and brand innovation. This investment will not be at the expense of margins, which we'll look to continue to grow on a sustainable basis from the reported base of 40.6%. Turning to net system growth, we opened over 44,000 rooms in the year. Which is in line with the 2010 levels, once you take into account the two big tranches of rooms opened in relation to the first InterContinental Alliance Resorts in Vegas and those on U.S. Army bases. Removals of 33,000 rooms included 16,000 in relation to some of the last hotels exiting as a result of the Holiday Inn brand relaunch, and 7,000 rooms that were scheduled to leave as part of the contract renegotiation with Hospitality Properties Trust. Net system growth of 2% was led by Greater China, where we opened 26 hotels in the year, our best ever year for openings in that region. Going forwards, we'll continue to see good system growth outside the U.S., and in particular, in emerging markets. However, in the U.S., the pace of ground breaks remained low throughout 2011 due to the general lack of available financing for new construction. Now that means that in 2012, we currently expect to achieve around 2% to 3% of growth in net system size for the group as a whole, which is in line with the previous guidance given to the market. Our pipeline remains strong with more than 55,000 rooms signed in the year, in line with 2010 levels, taking the total pipeline to 180,000 rooms. We've taken a number of actions during the year to manage the pipeline and remove deals that were not progressing at the required pace, including a number in the Middle East, which we had forecast to lose following the Arab Spring uprisings. By applying strict criteria before taking a deal into the pipeline, and by actively managing out deals that have little prospect of progressing, we ensure the quality of the pipeline and free ourselves to sign new deals. We consider our pipeline to be of the highest quality. 40% of it is under construction, and we estimate that around 70% of it is financed. Over half the pipeline is now outside the Americas, including 28% in China, of which almost 70% is currently under construction. We continue to have a leading 13% share of the active global hotel pipeline and are confident that it is of high quality and will convert into open rooms, enabling us to grow our share of industry revenues. This slide gives a high-level summary of our cash flows with the detail contained in our supplementary information. EBITDA was up 19% at $658 million, which translated into free cash flow of $422 million. This was lower than last year due to a return to more normal levels of working capital and higher outflows in respect of tax and maintenance CapEx. At $101 million, maintenance CapEx was broadly in line with depreciation, albeit higher than levels in 2009 and 2010 due to measures taken to preserve cash through that downturn. In 2012, we expect maintenance CapEx to be in the region of $150 million due to investments in a number of IT projects and high levels of investment in our own hotels. Net debt decreased by $205 million to $538 million, which puts us in a very strong position at the year-end with net debt to EBITDA ratio of 0.8 times and a new five-year bank facility of just over $1 billion, which is substantially undrawn as of the year-end. You will be familiar with this slide, which explains how we prioritize the uses of our free cash flow to drive growth and maximize value for shareholders. I will discuss each of the boxes at the bottom in turn. In recent years, in addition to investing in maintenance CapEx, we have invested in growing the business using limited amounts of cash, in part funded by the recycling of capital as we disposed of assets. We will continue to use capital selectively to accelerate growth or to take us into new markets which would otherwise be difficult to enter, or to cement key owner relationships. In 2011, we invested $93 million in a number of strategic growth initiatives and released $142 million from asset disposals, representing a 22% premium to net book value. We have a strong track record of using our own capital to build brands, including our two extended stay brands and the rollout of Hotel Indigo in the U.S. These brands today contribute over $1.2 billion to gross revenues and account for over 750 opened and planned hotels. With the exception of the Candlewood brand investment, which remains on the balance sheet, these investments have all since been recycled. We are looking to invest capital to drive growth in existing and new brands. However, such investments must meet both strategic and financial criteria. Richard will talk about the strategic rationale later on. Regarding financial criteria, in general, we are looking for a project to generate returns above its risk-adjusted cost of capital by its third year. The group's post-tax cost of capital is between 8% and 10%, but we will flex the return target to reflect factors such as the ownership model and currency risks. In the medium term, our investment in growth CapEx is likely to be in the range of $100 million-$200 million per annum, in addition to the maintenance CapEx of $150 million referred to earlier. In 2012, we will be investing for growth behind our new U.S. brands and in the repositioning of Crowne Plaza. Much of this investment will be recycled back again over the medium term. Of course, our strong balance sheet also provides us with additional scope for value-adding acquisitions should the right opportunities arise. Turning to the second part of our priorities for free cash flow, we are committed to grow the dividend in real terms. We are recommending a 15% increase in the 2011 dividend to $0.55, which reflects our confidence in IHG's prospects. This payout maintains our track record of increasing distributions to shareholders, and our financial strength and resilient business model have allowed us to maintain or grow dividends in every single year since demerger. We have returned over $1 billion to shareholders over this time period just through the ordinary dividend alone. Our current level of gearing at 0.8 times net debt to EBITDA does give us the financial capacity we need to be able to take full advantage of the investment opportunities we see to grow the business. It also gives us a prudent degree of flexibility given the current uncertain economic outlook. You should expect us to continue to prioritize this combination of growth and flexibility over the coming months. In this regard, I've already spoken of the increased level of maintenance CapEx that we expect for 2012, with a further $100 million-$200 million of growth CapEx per annum in the medium term. We also continue to look at a range of inorganic opportunities to grow our business and thereby enhance shareholder value. You will hear more from Richard later on as to the nature of these growth opportunities that we see for the business. We do, however, remain committed to additional cash returns to shareholders, and we have a very good record in this regard. Since IHG was formed in 2003, in addition to the billion of ordinary dividends, we have returned $3.3 billion in special dividends and have bought back 1.6 billion of shares at an average cost of just over £7. This amounts to almost £6 billion in total shareholder returns. Whilst prioritizing growth and flexibility, we will continue to review the potential for further capital returns within the context of maintaining an investment-grade credit rating, and in particular, in the event of a future one-off inflow of cash, such as a major hotel disposal. As of today, the group owns 11 hotels with a combined net book value of $1.4 billion. Some 80% of this value is represented by our four InterContinental hotels in New York, London, Paris, and Hong Kong. We remain committed to the asset-light model and will continue to reduce the capital intensity of the business over time. The disposal process is progressing with the InterContinental Barclay in New York, and we will update you when we have more specific news. Before handing back to Richard, I want to update you on current trading and the immediate outlook. Our January RevPAR grew 6%, driven predominantly by rates, which was up 3.5%. The Americas and EMEA showed an improvement on Q4 at 7.7% and 4.2%, respectively. Growth of 3% in Europe reversed the negative trends seen at the end of 2011, driven by good trading in some of our key markets, such as the U.K., France, and Germany, only slightly offset by some softness in Southern Europe. At 1.2% growth, China was clearly impacted by Chinese New Year being a month earlier in 2012, and we would expect to see a corresponding boost to February data. I must stress that January is a small month for hotel revenues, and it is just one month of data, so it is important not to infer too much from these results. Looking at forward data points, booking pace is up in most of our key markets, and travel intentions remain firm. Our corporate rate negotiation process for 2012 has not quite finished as yet, but we are confident that we will achieve mid-single-digit rate growth. It is important to remember that our forward visibility is short, and the hotel industry tends to lag the wider economy, so it remains possible that the Eurozone uncertainty could affect demand going forwards, though there are no signs of this as yet. Sentiment for the year ahead does still remain positive. Global industry demand is at record levels, and supply growth is expected to stay below historic levels in many markets for the next few years. This will help support RevPAR, which U.S. industry experts are expecting to grow between 4% and 6.5% for the current year. Our revenues are based on total industry revenues, and total industry revenues are driven by the level of demand, which remains at a record high. As long as we are growing our RevPAR and system size faster than the industry, we will capture a greater proportion of available revenues, and so outperform even when market conditions are challenging. We remain confident in IHG's ability to drive strong results based on our preferred brands, our high-quality pipeline, and our attractive business model. On that positive note, let me hand back to Richard. Thanks, Tom. I have to say that I'm very pleased to have Tom here with me today. He's made a great start at IHG, and I'm impressed with just how quickly he's got himself around the world and got up to speed with the business. You've heard from Tom why IHG is well-placed to withstand any short-term headwinds. Now I'd like to take some time to remind you of the long-term opportunities for growth and value creation that we see in the branded hotel industry, our plans to exploit them, and why we have the confidence that IHG is and stays well-placed to win. I'll recap on our IHG strong performance to date and the journey we've been on since becoming a standalone company in 2003, and I'll finish by taking you through our three priorities for ongoing high-quality growth. Strengthening our brands, launching new brands, harnessing the power of our people who help deliver our outperformance, and leveraging the innovation in our delivery systems that we've become known for. Getting this right is what will deliver high-quality growth into the future through market share and margin gains. Turning first to the reasons why we have such confidence in the outlook for the hotel industry as a whole. There are several tailwinds that will continue to drive up demand for hotels over the next few decades. These center around the positive population and demographic trends around the world, which will mean record numbers of people joining the travel market every year, primarily from emerging economies. I'll briefly go through these, starting with the growth of the global middle class. Growing GDP, especially in the BRIC and emerging economies, will lead to increasing levels of disposable income, which is a key driver of hotel demand, especially for mid-scale brands. Airline capacity and demand is forecast to continue to grow, and the low-cost airline model helps mid-scale hotel growth as it makes business and leisure travel more affordable. Developed market populations that continue to age will continue the trend of higher disposable incomes and more leisure time, driving higher levels of hotel demand. Leisure travel accounts for up to 50% of hotel room nights. International tourist arrivals are forecast to reach over 1.3 billion by 2020. Much of the demand is coming from and heading to less traditional locations, which will favor IHG, given our broad geographic footprint. The number of global internet users is expected to increase to 3 billion by 2020, making online booking more accessible to a much larger market. This, in turn, will benefit the bigger global players such as IHG, who can manage and exploit the vast number of alternative distribution channels now available. We know that there are pretty solid drivers that will ensure that demand for hotel rooms is likely to continue to grow for some time into the future. Another key trend that IHG is both causing and benefiting from is the growing penetration of branded hotels across the world. We know that branded hotels appeal to guests, as they are more confident of the experience they'll receive and the value they'll get. They appeal to owners due to the higher returns achievable and the relative ease of obtaining debt and equity finance. This is why big branded players like IHG have been winning and will continue to win market share. The global hotel industry today comprises some 20 million hotel rooms. We expect 5 million more rooms will be added in the next 10 years, and an additional 12 million over the next 20, driven by the trends I've just discussed. Over this period, we expect the proportion of branded rooms to rise from 38% today to 50%, which will mean some 4 million additional branded rooms over the next 10 years, and potentially up to 9 million over the next 20. IHG's share of global branded room supplies today is around 8%, and as Tom showed you, our share of the active total hotel pipeline is 13%. With the growth strategy we're pursuing, our broad portfolio of brands, and our geographic mix, IHG will, without question, be one of the key beneficiaries of this shift to branding. Before I go on to discuss how we take further advantage of the positive trends I've just outlined, I wanted to remind you of what we've already achieved since becoming a standalone business in 2003. Since 2003, our first period as an independent company, saw us make the move to an asset-light business model, disposing, as many of you will remember, of almost 200 hotels and returning significant amounts to shareholders. We went through a major reorganization of the business, aligning ourselves to deliver better, and we cut costs. We demonstrated our potential for growth by exceeding the target we set in 2005 of 60,000 net rooms growth over 3 years. In more recent years, we proved the resilience of the business through the recession, relaunching Holiday Inn and maintaining the dividend whilst continuing to invest in the business. This period proved the case that IHG has one of the highest quality income streams in the industry. The next phase of our journey will be characterized, as you heard us say a couple of times this morning, by high quality growth. We talk about high quality growth as it's not adding rooms for the sake of it or driving short-term numbers at the expense of long-term value. It's about generating steady, sustainable growth in market share through driving RevPAR and adding the right hotels in the right locations with the right owners. We will make this happen through our clearly stated priorities of growing our preferred brands, attracting and retaining talented people, and ensuring we have best-in-class delivery systems underpinned, as they have to be, by responsible business practices. As Tom mentioned, where appropriate and as opportunities arise, we will invest in the business to further accelerate our growth, and our performance will be measured by gains in market share and margins. Let's go through each priority, starting with brands. We have talked a lot about brands and branding, so I want to show you what we at IHG believe is necessary to create a genuine brand. Preferred brands are critical to our success and our ability to drive growth in market share. Internally, we describe our commitment to our brands as being brand-hearted, and we take a lot of time to ensure that all of our people in corporate offices and hotels understand what our brands mean to our guests, and therefore, how they support their success. Hotel brands are no different in many respects to other consumer brands. All great brands, hotel or otherwise, share four important qualities. First, they all stand for something. Something simple and powerful that meets a specific need, something that other options don't currently provide or don't provide so well. Second, great brands connect with people emotionally and make them feel good about that brand. This is something the hospitality industry has not been very good at, with a lack of emotional connection and limited, if any, differentiation. The third quality all great brands share is consistency. They deliver the brand promise every time, and they don't let you down. Finally, great brands are famous, or in other words, awareness and recognition is high in the markets they serve with the customers they are targeting. The reality of many hotel brands is that they are just a name on a building with no real customer value proposition. It is undifferentiated hotel brands that have led to some commoditization and the ability for non-value-adding intermediaries, such as the online travel agencies, to gain a foothold. On the other hand, strong brands, such as those we own, enable us to create a loyal customer base and keep more control of our own guests and generate revenue for our owners more cheaply. Our focus is therefore on creating genuinely preferred consumer brands, which are at the heart of driving meaningful share gains. It's a simple concept, but one that is hard to deliver unless you have the brands, the scale, and the expertise that IHG has. We have demonstrated our credentials in this area through the creation of several successful brands, and most recently, I would argue, the Holiday Inn relaunch. With Holiday Inn, we started out by carrying out the largest piece of research in the history of the industry. This highlighted three changing insights for Holiday Inn. That we were no longer perceived as different from other hotel brands. Although we had strong emotional connections with our guests, there was evidence that this was waning. We had an aging estate with guest satisfaction that varied from property to property. As a result, we decided to relaunch our estate of Holiday Inn and Holiday Inn Express hotels around the world, which cost our owners some $1 billion. To address those issues, we focused on five key actions. To date, we have removed over 1,300 hotels that did not meet the brand promise and replaced them with almost 1,700 new ones. We raised quality thresholds and enforced compliance, we implemented a new guest service training program, and we installed four differentiating hallmarks designed to address the needs of our target guest. The results of these actions continue to speak for themselves. The Holiday Inn relaunch delivered great results for both IHG and our owners. Holiday Inn in the U.S. was named the 2011 J.D. Power Award winner for best guest satisfaction in the midscale full-service category for the first time, jumping up from sixth place. This is a coveted independent award that shows the impact the relaunch has had on our guest perception of Holiday Inn. We have made the link on several occasions in the past between guest satisfaction and RevPAR, and the chart on the left shows the significant increase in RevPAR premium the relaunch has driven, making Holiday Inn one of the most highly rated midscale brands. As our owners get improved returns, we are seeing the benefit in new hotel signings, which is especially gratifying considering the current financing environment. We are now using the same approach that we used with Holiday Inn on the repositioning of Crowne Plaza. Crowne Plaza is today our highest brand priority, especially in the Americas. The brand generates almost $4 billion of gross revenues globally, and in less than 30 years, we have grown it to become the fifth largest upscale hotel brand in the world. It has been successful and has a solid foundation for future growth. However, there remains a significant underperformance between the brand in the Americas and the rest of the world in terms of guest satisfaction, pipeline, and RevPAR, which highlights the opportunity as we close the performance gap. I am conscious that we announced the repositioning of this brand some time ago, but in the middle of 2011, it became clear that the initial changes to the guest experience that we were piloting had not gone far enough to deliver the desired result. We reassessed what needed to be done and created a new plan, which you can see here on the screen. Phase one has already commenced, and I will talk about the two components of this in a moment. Phase two will see us using our own capital, if necessary, to make sure we get Crowne Plaza into the right locations with the right assets to build brand awareness and showcase it properly. Phase three involves developing the new brand hallmarks, which we will reveal to owners by the end of this year and start to roll them out next year. We expect this process to be largely complete by the end of 2015. The work that we began in the second half of last year has already started to improve the performance of the brand in the U.S. We put in place a short-term revenue enhancement plan, which delivered strong results in the fourth quarter when Crowne Plaza in the U.S. outperformed the upscale segment for the first time in several quarters. We also started to tackle the variability in brand quality and consistency by removing 11 hotels that were below the required standards. We will remove around another 30 hotels over the next couple of years. We now have a very clear brand proposition for Crowne Plaza and are well underway developing the new brand hallmarks. We see significant growth opportunities with our existing brands, both in their current and new markets, demonstrated, of course, by our 180,000-room pipeline. To maintain organic growth over the longer term, we also need to innovate and add new brands to our portfolio, as we've done in the past. New brands allow us to tap into the growing global demand for hotels that I spoke about earlier, and to cater to the rising consumer trend for better segmentation and differentiation. As we've disclosed already, we have two brands under development, one for the upper upscale segment in China and one for the midscale segment in the U.S. We will be launching both of these in the first half of 2012. I can't tell you too much in advance of the official launches, but I can give you a little bit of color. Our Chinese brand will fill a gap we've identified for an international quality five-star hotel tailored for the domestic Chinese customer, who wants an environment to conduct business effectively, as well as the reassurance of quality and consistency that only an international hotel company can provide. As many meetings in China are conducted over meals, food and beverage will be key to the guest experience. Our U.S. brand will also meet an unsatisfied consumer need and as such, has been carefully positioned to drive minimal cannibalization of our other midscale brands. We think this concept will work particularly well as a conversion brand, which makes sense at a time of reduced new build activity. Given the nature of the U.S. market, we've earmarked up to $150 million of capital investment over a three-year period in order to establish the brand, perhaps through buying the first sites with a view to recycling them in later years, exactly as we did when launching Staybridge Suites. As Tom and I have both said, we will drive the growth of our brands through selective investment. Tom talked about the strict financial criteria we use to assess projects. I'll now discuss the strategic criteria that we also apply. We've five main distribution priorities we consider when making the decision whether to use our own capital. Firstly, we may use it to accelerate growth in a scale market, such as the small joint venture we entered into in China in 2006 to develop Holiday Inn Express. Secondly, small payments might allow us to secure a hotel with significant network benefits that make a statement about our brands, such as the InterContinental in Times Square. Our capital may allow us to enter a new market, which would otherwise be difficult or too slow for us to enter alone, such as India, where our joint venture with Duet will launch Holiday Inn Express. It may also be helpful to invest behind the launch of a new brand in order to get some traction until the brand is proven. As I have just mentioned, we did this with Staybridge Suites, and we will also look to do the same with our new U.S. brand. Finally, we will invest capital where we want to build a strategic relationship with important owners. We did this early in 2011 with Summit Hotel Properties in the U.S., taking a small equity stake in exchange for the exclusive right to manage or franchise any unbranded hotel they buy for a period of five years. As you can see, the decisions we make to invest are based on a number of factors, but always a combination of financial and strategic criteria. We will only invest where we see the opportunity to create value for shareholders through driving growth in our brands and having the ability to recycle that capital in the future. That covers the brands. I will now talk briefly about our second priority, our people. Over the years, we have proven a strong correlation between employee engagement, guest satisfaction, and RevPAR. Put very simply, engaged employees create satisfied guests who then pay more and stay more. Employee engagement has become an essential area of focus for us, and we improved this measure by 2 percentage points in 2011. Our efforts were recognized externally with IHG listed for the first time in Fortune's 100 Best Companies to Work For in the U.S. Ensuring our people deliver consistent brand experiences to our guests, irrespective of ownership model, requires significant effort and innovation and the engagement of our third-party hotel owners. This is a big task, and we have made great progress over the past few years with an innovative and effective approach. Last year, we launched our unique suite of people tools, which help our owners to hire, train, involve, and recognize the right employees for their brands. To further boost recruitment and retention, we have a scheme to foster talent through a global network of IHG Academy. These are public-private partnerships which provide education and hospitality and fulfill one of our important corporate and social responsibility goals. We now have 36 of these in place spanning all regions, including 27 in China and a further 10 in the pipeline, with 5,600 students now participating. With our sheer people scale, we are turning the work we are doing in this area into a differentiator for IHG and a tremendous competitive advantage. Which brings me to the third and final priority for delivering high-quality growth. This slide is familiar to you from prior presentations, and it is important because it illustrates how we leverage our scale to deliver revenue so effectively into our hotels, the core value proposition for our owners. In 2011, 69% of total rooms revenue was booked through IHG's channels or direct to our hotels by our 63 million Priority Club Rewards members. Our innovations in relation to our revenue delivery continue to lead the industry. A key and growing part of revenues come from the web and mobile environment. We have taken an industry lead here, and in 2011, drove $3 billion of revenues through our websites, which to put that number into perspective, would put IHG among the top 10 online retailers in the U.S. This does not happen by chance. It has been an area of focus for many years now. The performance is partly driven by our strong conversion rates, which we know are among the highest of major online retailers, better than amazon.com and walmart.com. Our websites also support reservations in 11 languages, more than any other of our major global competitors. The web is a low cost and effective booking channel for our owners, driving double-digit rate premiums over those booking direct to hotel. During the year, we introduced another industry first, our best price guarantee, designed to drive more guests to book through our direct websites. We are also a founding member of roomkey.com, the first industry-owned online hotel search engine, launched in January of this year. Our mobile strategy is ahead of the industry. No other hotel company has apps on as many major platforms and as many languages as us. These generated close to $150 million in revenues in 2011 from a standing start two years ago. We have been recognized by respected third parties such as Travelcom for our work in this area. We will continue to invest to stay at the forefront of this technology. IHG also leads the way for innovation in the area of sales, driving a greater share of room nights. Our focus remains on growing our overall share of corporate business through our successful dynamic pricing initiative, which is based on customer impact, size, and spend. We now have 34% of our centrally negotiated rates on this system and are targeting over 40% by the end of 2012. This initiative is designed to better meet corporate customers' needs and increase our share of that market, driving revenues, not just rate. We are seeing significant success. In 2011, these accounts achieved a 15 percentage point increase in revenue and room nights, five points ahead of traditional accounts. Across our largest 25 strategic accounts, we saw a one percentage point share gain in 2011, a meaningful amount in such competitive markets. Another area where IHG is at the forefront of the industry and where we have a strong focus is revenue management. Our goal is to make sure we fill our hotels with the most profitable revenue possible, taking full advantage of the wide variety of customer types and demand. The two obvious components of revenue management are the inventory we have available to sell and pricing, which has become more complex due to the transparency of the internet. The component where we can innovate and gain competitive advantage is yield management, which is when and how we make our inventory and prices available for sale. This is critical to make sure we capture the most profitable demand to fill our hotels and requires a blend of technology and commercial acumen. IHG began developing hotel revenue management solutions in the early '90s. Our most recent innovation is our price optimization system, a first of its kind in the hotel industry. It calculates the best rates for each hotel by day for a full year into the future. The algorithms are complex, looking at demand, competitive pricing, and sensitivity. The system has been rolled out globally now to over 2,600 hotels. It is delivering, on average, a RevPAR uplift of 4.3 percentage points. It is IHG's scale, in this case, the firepower of our system funds and the expertise of our people, which allow us to continue to innovate to drive a greater share of demand to hotels in the most cost-effective way. That completes the strategy review. Just to sum up, the wider economy is uncertain, but we remain confident in our outlook. IHG has a resilient model, which has consistently delivered strong results and will continue to do so, even if times do become more challenging. The long-term outlook for the branded hotel industry remains very strong, driven by the positive population and demographic trends around the world. We will exploit this to continue to deliver high-quality growth. We are using better consumer insights to strengthen our existing brands and will launch new brands to capture the growing demand for hotels. We have a world-class people strategy, which is fundamental to the success of the company, and itself a meaningful differentiator relative to the competition. We will continue to invest in innovation, such as the web and yield management, to keep ahead of the competition and attract quality owners. We have an excellent record of driving superior returns for investors, and we are focused on continuing to do so into the future. Thank you. With that, Tom and I will be happy to take your questions. For those of you on the webcast, you can submit your questions online. Right. Okay, Vicky, first with your hand. Thank you. Yeah, morning. It is Vicky Lee from Barclays Capital. Just three questions. Firstly, on medium-term system growth guidance. Are we still in the 3%-5% bracket post-2012? I suppose to get there, is that going to require a final opening up of that financing market in the U.S.? Just any comments on if there has been any recent change there. Secondly, kind of related in terms of removals, just within that system growth guidance for 2012, just a bit of color about what is looking like removals versus gross additions. Then finally, just perhaps a bit more color on Europe, just sort of what you are seeing trends by country. Okay. Well, I will take the first two. Maybe you can talk a bit about Europe, Tom. Yeah, the guidance 3%-5% medium term is really about looking at what the overall supply growth in the industry is likely to be. Historically, we have seen 1%-2% supply growth, and we have always taken more than our fair share, and we are well-placed to do that, as I mentioned, with 8% of the world's rooms and 13% of the active pipeline. But as you point out, it really is dependent upon the financing markets in terms of new build coming through. So our growth is going to come from getting a bigger share of the new build that is there, continuing to look at conversions or rebrandings of hotels into our brands. But I think the balance of the equation, it is about total industry demand and then supplying that either in existing hotels or additional rooms. I think one of the reasons, clearly, that we're seeing strong RevPAR growth, which has continued through into this year, is because of the relatively low supply growth in that demand-supply balance. I think medium term, it's a good number. Shorter term, we will either get the growth through RevPAR, or we'll get it through additional rooms. As far as removals is concerned, Catherine, I think we're looking at around 20,000 in 2012, which includes the Crowne Plaza removals that we think we need to do. Tom, you all right? Sure. In terms of Europe, obviously, January, Europe, where it was up 3% in terms of overall RevPAR performance. In terms of some color on countries, U.K. was up 2%, France was up 4.9%, Germany up 2.7%, and those are really our major markets. Obviously, our owned hotels are in U.K. and France. A little bit of weakness around the southern periphery of Europe. Spain was negative in the month of January. That's a little bit of country color. Obviously, January's a relatively small month in terms of overall revenues of the year. Just a note of caution. Are there still thoughts there on outlook? Any views on corporate rate negotiations in Europe? Well, as I said, they haven't yet quite run their course in terms of the negotiation process, but we are expecting to see increases in the mid-single digits for the overall negotiation of corporate rates this year. In Europe as well as- Yeah, in Europe as well. Okay, thanks. Jamie. Thanks. Morning. Jamie Rollo from Morgan Stanley. First question, just in terms of what you are saying on returning cash, can we take it as read that if you do sell the Barclay, you return those proceeds but no more, given you are prioritizing growth and flexibility? Secondly, in terms of the pipeline in the U.S., I see you sort of scrubbed it by around 20% to 20,000 rooms it looks like. How confident are you in that pipeline? It seems like under 30% is financed, and I guess many rooms or hotels were signed up back in 2007, 2008, have not sort of still opened yet. Then finally, is there any guidance on sort of net central and regional costs this year, either an absolute number or a year-on-year growth rate? Thanks. Okay. In terms of cash returns, I think we, Tom talked about a trigger potentially through an asset disposal. I would not say anything more than that in terms of a trigger. So whether it would be that amount, more amount, less, will depend, I think, on the overall situation. I think the investing in the business is not new for us. It is something we have tried to be clear that we have always done, and the recycling is really important because any investment is targeted to be recycled. I think the flexibility point in this environment with the sort of economic uncertainty in the U.S. and the difficulties in some cases on the financing side just means I think it is prudent that we reserve our firepower to invest where we need to. Tom made it clear, and you have heard me say over the years, that returning surplus cash to shareholders is something we have done in the past and will continue to do. So we will just keep it under review as we go through the year. In terms of the pipeline and scrubbing the pipeline, again, I think it is something that we do as a matter of course. I think what you are highlighting is that as we went through in 2011, and particularly looking at the U.S., that we took out quite a number of hotels. What I would say is I think the quality of the pipeline is probably higher than it has ever been on the basis that when financing was easy, it was easy to sign. If you think that in 2011, we signed nearly a hotel a day throughout 2011. We are bringing into the pipeline hotels and new owners as well as existing owners who are very confident about their ability to open that hotel. So I think as we look at it, the pipeline is in good shape. Quite how long it takes to work through, particularly in the U.S., is a good question. So we are very much focused on conversions and rebrandings, and we have seen that percentage rise. As I mentioned, the new brand we are talking about launching is certainly will be an excellent new build, but we are also making sure that it works well for conversion. So I think with 40% of the pipeline in total under construction, we are in probably good shape relative to anybody else in the industry we might expect to be. Do you want to just touch on costs? Just on costs, I mean, the point I would make is that we have showed good improvements in year-on-year margins, 2010 into 2011. As I said, we will continue to expect to see further margin growth as we exploit scale economies in the business and across our business model. So we saw underlying improvements of 1 percentage point, 11 over 10. I would expect something of that order to be repeated 12 over 11. So we have this nice ability to continue to be able to invest in the business in support of our brands and at the same time grow margin. Tim here. Morning. Tim Barrett from Nomura. Two things, please. Can you talk about the maintenance CapEx, the $150 million, what the delta year-on-year is related to, and whether that includes any refurb at the Barclay, and where you are on that? Then a second thing, Tom mentioned the royalty rate improving in the U.S. Just wondering whether that's down to like-for-like improvements or maturing of hotels. Tom mentioned it. You can talk about it. Go on. Okay. I'll talk about that. Yeah, in terms of maintenance CapEx, we are talking about slightly elevated levels of maintenance CapEx for the next couple of years, around the $150 million mark, really because we're continuing to invest in our overall system. We've talked about the power of the system and its ability to deliver rooms and revenues to owners, and we need to continue to make sure that that remains at the forefront of the industry. Also, we have investment planned for some of our own assets, not just the Barclay in New York, but obviously the other remaining owned assets are going to need some money spent on them in the way of normal refurbishment. In terms of the royalty rate, the improvement is really as a function of better rates that we secured a number of years ago around some of our brands in the U.S. and effectively those kick in as franchise agreements come up for renewal, or as we sign new deals. That just progressively washes through year on year as more of that is represented across the wider estate. Okay. Just to be clear, is the Barclay refurb partially included in the guidance for 2012? Some element of it is. Not the total amount that we are likely to spend because we have not yet come to a firm view in terms of the phasing of that, but there is some element of that within the 150. Okay. Thanks a lot. Ian. Thank you. Ian Rennardson at Jefferies. Just one question, please. It is on the dividend. You have a 15% rise this year, but you are still looking at well over nearly 2.5 times covered on earnings. What is the policy in the context of all of the other stuff that you are talking about, please? Thanks. The policy is a progressive dividend, so we want to be able to continue to grow it in good times and bad times. As I think we mentioned, but we certainly talked about before, we did not cut our dividend post-Lehman's, which pretty much every other hotel company did, and we have continued to grow it since then. So I think it is not so much about cover, it is about progressive growth, which is what we have been doing. Thank you. Okay. Simon? Or was that Jason? Good morning. It's Simon Champion from Deutsche Bank. Three questions. Firstly, 0.8x net debt to EBITDA at year-end seems to give you a fair bit of firepower relative to the opportunities you've talked about. Should we think that you're thinking about slightly bigger acquisitions than perhaps you have been previously? The second question is, Tom, you talked about willing to accept different from 8%-10% cost of capital for different ownership models. What cost of capital would you apply to an asset-light income stream, and did you look at the Accor acquisition of Mirvac in Australia? The third question is, if somebody offered you $1 billion for the InterContinental in Hong Kong, would it be a straight no because you don't have another hotel there? Are you offering? Right. Just in terms of 0.8x net debt, does that mean bigger acquisitions? No, I think one of the beauties of this business and the model that you've seen is that we have an enormous number of opportunities organically, and 180,000 rooms in the pipeline. The level of signings we've got in the new brand launches demonstrate that. In the past, we have, I guess, Candlewood with the last acquisition, which was 20 odd million or so, of the Candlewood brand, which has proven to be very successful, as you saw on Tom's chart. So we're not in the market running around looking for big acquisitions. The real issue around the positioning around the balance sheet and investment is what we've said, which is investing in the business today and just retaining some flexibility in times when there's a lot of uncertainty. So don't read anything more into it than that. Do you want to take the- Sure. In terms of the way we think about capital investment, in terms of looking for a return on investment made, clearly, there is some greater risk in looking at owning hotels, as opposed to looking at franchise opportunities or opportunities to invest and expand the franchise network. And that's simply reflected in the return criteria that we set. So, it's one lens that we use to look at the different opportunities that come across the desk, and we look at any number of potential opportunities in the space of a year. And clearly, the central thing here is maintaining our discipline of always looking for returns that will exceed those financial criteria, coupled, again, with a strong strategic rationale that has to underpin any good acquisition proposal. Just in terms of, you asked about Mirvac in Australia. We never comment on particular individual transactions. What I would say that clearly our focus remains very much so on doing transactions where other people own the real estate and we brand it. I think that was where they bought it outright. As far as $1 billion for Hong Kong, I think better way to answer that rather than get into the valuation of Hong Kong would be that clearly it's almost trite to say it, but we're here to maximize shareholder value. We own the real estate, as we know, not as a permanent piece of the company, but important at the time to drive brands. I think if we got what we might consider to be, point of the question, sort of way above market or a very high offer for one of our hotels, we absolutely would consider it. I think the issue with a market like Hong Kong or like Paris, where we don't have other representation, which we've always said is important. It would mean it would drive a certain sort of deal. For example, an outright sale where you effectively had no control or no comeback and you might lose the contract, you would be very cautious about. But maybe a sale where you retained a stake or you had a way to ensure you retained your presence, then maybe you'd be able to consider that. But it really is horses for courses. Just to follow up on that sort of cost of capital point, it's slightly odd to have sort of a variable cost of capital depending on what acquisition you're I totally understand your point, but we can't pin you down on what your cost of capital might actually be for an asset-light income stream. I think you just have to look at each situation on its specifics. I don't think it would make sense to apply the same cost of capital to a deal in the U.S. as contrasted with a deal in India, or looking at the expansion of a franchise network as opposed to buying our owned assets. I think the risk profile is totally different, and the cost of capital has to reflect that. Yeah, can't quite see who. It's James Ainley from Citi. Yeah, two questions, please. In terms of the new China brand, are you expecting to invest any capital in that? Have you got any commitments already signed up for that new brand? Then secondly, I think in the statement you talked about $3 million reorganization costs on an owned asset in the Americas. Can you talk about what that was? Thank you. Okay. I'll do the second one. You take the first. Yeah, just on the China brand. No, we don't expect to put any capital behind the China brand in China. At some point, as we move it outside of China, then it might be different because you'll be looking at the specific markets. But certainly, no. We have an awful lot of interest in it. I won't talk any more specifics. We'll talk about that when we actually announce it. But we know there's a lot of demand for that asset, and we're very confident. Do you expect to launch that with commitments? We'll talk about that when we launch it. What I would say is an awful lot of interest in it. When you're getting close to launching a brand, then you're inevitably going to be talking to some of your good owners or people who you think might be genuinely interested. We'll have news on that first half of 2012. Do you want to pick up the second? Just on the second point. It relates to a single owned property in the States where we closed some of the capacity of a hotel, and we had a redundancy program that ran alongside that, and the $3 million costs simply relate to the closure costs coupled with some redundancy payments. It's just a one-off. Thanks. Good morning. It's Tim Abscam from Credit Suisse. I've got three questions, please. The first is on the U.S. mid-scale plans. The U.S. mid-scale seems to be in a relatively weak market during the last 12 months or so. Why is that you still think the most interesting incremental U.S. opportunity for you? A bit more color around that. Second one is just on the outlook for costs and specifically under your new sort of disclosure and how you've broken things out. Overhead costs in Europe look pretty high relative to the size of the business. I just wondered if you saw any opportunity to make some savings there. Then the third question was on your comments around the price optimization work you've been doing. The 4.3% looks a very healthy contribution. Is that over a phased period of time? Is there more of that to benefit the group? Just a bit of color around that. Okay. I'll take the first and last, and you can have Tom. In terms of U.S. mid-scale, I wouldn't say it's been a weak market. You have to look at a couple of things. One, you have to look at the performance of individual brands within those markets, and the Holiday Inn brand has continued to perform extremely well. The other thing you have to look at is how far it fell in 2009 and how far it's got to come back. You saw some very large falls in the upscale and luxury market in the U.S., and then some very big rises. But obviously, it's just much more volatile. I think that's if you actually look at where the core demand growth has been in the U.S., it's been in upscale, and there's been a lot in mid-scale, particularly mid-scale without food and beverage, where obviously Express has played so successfully, and we've even seen it coming back with food and beverage with the Holiday Inn relaunch. That's the reason why we look at it, and if you look at the size of the marketplace, the luxury is actually very small by revenues. Economy is small and declining, and the revenues are where we play, which is why we're looking at that. Second point on price optimization. It's a good question. I talked about the yield management work we've been doing really just to highlight that when we do drive RevPAR growth, it's not sort of happenstance, and there's a lot that we have to do in what is a competitive world to drive our RevPAR performance ahead of the market, and that's been one of the key things that we've done. As you can see at an individual hotel level, these things really do make a difference. To get to 4.3% is what you would see on a sort of fully ramped up basis of those hotels that are on. I think it's clearly over time, you'd look to get a bit better, but you're not going to be looking for another 4.3%. It's really all of the things combined that come together to drive that RevPAR outperformance and give us confidence that we can continue to drive that outperformance as we develop our systems and develop new systems going forward. Do you want to pick up the cost? Just on European cost, there are no obvious opportunities that we see to cut regional costs in Europe. I would simply make the point that it's a region where we've got two of our owned properties, and we've got a significant managed estate, and the costs are what they are relative to our hotels and the ownership mix within the region. Can I just follow up on the price optimization point? So the 4.3, over what sort of period of time has that been contributing? Well, that'll be over the last couple of years, I would guess. Thanks. Okay. Okay. It's Jeffrey Harwood from Oriel. Just in terms of the two new brands that are going to be launched this year, are there any P&L consequences that we should be factoring in terms of startups, marketing, et cetera? Yes. That's the sort of way the investment is. That's within the overall guidance that Tom's given talking about margin growth. I think that's an ordinary part of doing business for us, whether it's investing in new brands, whether it's supporting existing brands. So it's factored in. Okay, cool. Well, thank you very much.