InterContinental Hotels Group - Earnings Call - Q3 2020 TU

Transcript

Speaker 0

Ladies and gentlemen, welcome to the IHG Third Quarter Trading Update Call. My name is Ruby, and I will be your moderator for today's call. I will now hand over to your host, Stuart Ford, Head of Investor Relations to begin. Stuart, please go ahead.

Speaker 1

Thanks, Ruby, and good morning, everyone. Welcome to IHG's twenty twenty Third Quarter Trading Update Conference Call. I'm Stuart Paul, Head of Investor Relations at IHG, and I'm joined this morning by Paul Edgars Johnson, our Chief Financial Officer. As in previous quarters, we won't be holding a separate call for U. S.

Investors, but we will be making the replay of this call available on our website. Unless I need to remind you that in discussions today, the company may make certain forward looking statements as defined under U. S. Law. Please refer to this morning's announcement and the company's SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward looking statements.

With that, I will now hand over to Paul.

Speaker 2

Well, thanks, Stuart, and good morning, everyone. I'll begin with a review of our trading performance before providing you with an update on our cost actions, liquidity and financing. Starting with our comparable RevPAR, which, as a reminder, includes the adverse impact from hotels that have temporarily closed. Global RevPAR fell by 53%, a sequential improvement from the 75% decline we reported in quarter two. July and August continued the pattern of monthly improvements seen since the April low.

The RevPAR decline in September was broadly the same as August as the benefit of the summer leisure demand dissipated and a number of markets saw the impact of the reintroduction of social distancing measures and travel restrictions. Occupancy was down 30 percentage points, but rate was held at around 80% of last year's level. Absolute occupancy levels at our hotels improved to 44%, up from 25% in the prior quarter. Our net system size grew 2.9% year on year with 11,000 rooms opened. As we continue to focus on the long term health and quality of our estate, we removed 5,000 rooms.

Development activity continued with 43 ground breaks and 82 signings, 27% of which were conversions versus 20% last year. Turning now to our regional performance. RevPAR fell 50% in The Americas. In The U. S, RevPAR fell by 47% with September improving to a 44% decline.

There was sequential improvement in each month, although the pace slowed. We have continued to outperform the overall industry, driven by our weighting and market leading position in the mainstream segment by our distribution predominantly in non urban drive to locations and by our skew towards transient business and leisure demand as opposed to group business. We continued to see a divergence in performance between our franchise and managed estate. Our franchise hotels, which are largely in the mainstream segment and in nonurban locations, saw RevPAR fall 43%. This contrasts with our managed estate, which is weighted towards luxury and upper upscale hotels in urban markets, where demand is weaker and a higher proportion of hotels still remain closed.

RevPAR at managed hotels fell 71%. Occupancy across the region improved 46% in the third quarter and reached nearly 70% on the Saturday of Labor Day weekend. We opened 6,000 rooms, over 80% of which were for our mainstream brands, taking our net rooms growth to 1.7%. We signed a further 2,005 rooms, taking our Americas pipeline to 109,000 rooms or over 1,000 hotels. This included nine hotels signed across the Holiday Inn brand family.

Momentum continues to build for both since the brand launched in the region earlier this year, with the third conversion signed in recent months and multiple other deals under discussion. Good progress continues with our other new brands. Avid is now open in Mexico and had the first groundbreaking in Canada. And there were two further signings for Atrox, please. Moving now to our Europe, Middle East, Asia and Africa, where RevPAR was down 70%.

There's some good progress made in July and August, but the reintroduction of travel restrictions led to RevPAR weakening back to a 70% decline in September. In The UK, RevPAR was down 68%. London saw RevPAR continue to be down by over 80%, while the rest of The UK was down 58% as a result of some better leisure demand in the summer months. Germany saw RevPAR down 67% as the region continued to be impacted by trade fare cancellations and travel restrictions. As a reminder, The UK and Continental Europe business represents less than 15% of our Jaguar space.

Middle East saw a decline of 65%, while lower levels of both international and domestic travel across Southeast Asia and Australasia led to RevPAR declines in Japan and Australia of 7066% respectively. Performance in the Managed Estates continued to be challenging as it was in our own lease and managed lease properties where six hotels or one third of its portfolio remains closed. In total, at the September, 105 hotels or 9% of the region's estate remained temporarily closed. We opened 2,700 rooms, including two Voce properties in InterContinental and a 600 hotel and removed 1,400 rooms. We timed a further 3,000 rooms into our pipeline, including a six henseless property in Amala, Saudi Arabia.

Conversions increased to represent onethree of the signings in the period. Turning to Greater China. Well, the trend of improvement each month since February continued, with RevPAR down 23% in the third quarter overall. The decline was 36% in July, 20% in August and just 11% in September. Across Mainland China, Tier one cities continue to see a greater level of RevPAR decline, around 32%, given their weighting to international inbound travel.

By contrast, RevPAR in periods two to four, which are more weighted to domestic and leisure demand declined 12%. Over 20% of our China hotels achieved positive RevPAR growth through the third quarter, which included the resort destinations benefiting from vacation demand and family travel over the summer months. This includes locations such as Shanghai Wonderland and in particular beach resorts such as Sanya, where occupancy was up versus last year and average daily rates up even more so. Net system size in the region increased by 8.1% year on year with 2,200 room values, including the opening of the first Voce property in the region. We signed over 8,000 rooms in the quarter, which was an increase on the level of signings in 2019.

This included 24 franchised hotels across the Holiday Inn Express, Holiday Inn and Crown Plaza brands and 13 manifold contracts. Moving now to a brief update on our cost actions, liquidity and financing. We remain on track to achieve our target of $150,000,000 of fee business cost savings this year. And as previously described, we have plans in place that will result in around 75,000,000 of savings being sustainable into next year and beyond. As also mentioned previously, we expect our growth CapEx to be around $100,000,000 lower than last year, with reductions across all of our main bucket systems.

Turning now to cash flow. Improved occupancy levels for our owners has meant we are now collecting around 90% of our Americas filling within ninety days of inventory, which is up from around 80% in our last update due in August. Our continued focus on working capital, disciplined cost control and cash preservation resulted in positive free cash flow in the third quarter. We expect our total available liquidity position increasing to $2,100,000,000 having been broadly unchanged at $2,000,000,000 between April and July. Taking into account the bonds that we've issued and repaid in October, on a pro form a basis, our total available liquidity increased further to $2,900,000,000 The bond issuance we undertook is very well received and has enabled us to optimize our bond maturity profile.

We issued a €500,000,000 bond and a €400,000,000 sterling bond maturing in 2024 and 2028, respectively, at a blended debt cost of 3%. This lowers the overall blended cost of our bond to 3.13%. At the same time, we undertook a tender offer, which is also very successful, resulting in us being able to repay early two twenty seven million of our £400,000,000 sterling November 2022 bonds. This means we now have only £173,000,000 left to be repaid in November 2022 and then a staggered bond maturity profile each year from October 2024 onwards. So sticking to it.

First and foremost, I just want to recognize once again the efforts of our colleagues across the whole company for working so hard to support one another, our guests, trainees and our community on so many different levels. In particular, the dedication and commitment being shown to ensure every single IHG hotel offers a clean and safe stay is very incredibly important right now and is clearly key to building confidence in travel. In terms of our third quarter performance, it is fair that our weighting to domestic demand and mainstream distribution saw us continue our industry outperformance across the market. We've seen monthly improvements in group RevPAR since the drop in April, but uncertainty remains regarding the potential for further improvements in the short term. While it will take time for our industry to fully recover, we remain confident that SG will emerge strongly, and we are focused on leveraging our brand, scale and market positioning and delivering on the relative resilience of our fee based model.

With that, Ruvi, I think we can open up the call for questions. Thanks.

Speaker 0

Thank you very much. Our first question is from Vicki Stern of Barclays. Your line is now open. Please go ahead.

Speaker 3

Morning. I've got three questions, please. Just firstly, on RevPAR, you talked about the regional performance. Could you flesh out a little bit what trends you're seeing within the headline RevPAR coming from business versus leisure? And to what extent at this stage, do think it's fair to assume Q4 trends somewhat resemble Q3 to the extent that you can predict everything right now?

And around pricing, just the price drops that you're seeing still mostly about that mix shift to leisure? Or are you actually seeing now any price discounting coming through in the market and any sense on where that's headed? And then just finally, on the drop through, if you can sort of flesh out whether the GBP 15,000,000 guidance for a 1% change in RevPAR is still relevant in light of some softer UK performance, given you've obviously got higher operating leverage in that market and both whether that's relevant for this year and then into next year as well? Thanks,

Speaker 2

Vicki. So in terms of the mix of business between business and leisure, so we've actually seen that stay pretty constant through the year in terms of the balance between the two. It does, the summer months, get a little bit more weighted towards leisure and then tends to revert back to our normal mix in the fourth quarter. And we did see that, as you would expect, but nothing really significant to pull out there. In terms of Q4 versus Q3, think I the commentary that we've made is that uncertainty remains regarding the potential further improvement in the short term.

A few sort of aspects of that that I'd pull out. I guess if we look at the sequential improvement, there has been improvements by month, really, since the April low. And if you look across each of the markets, then that's been the case really until September, where we saw some quite significant improvements and then we saw some declines as well. So I'll just go through those. If we think about China, China has been progressing very nicely, and we saw August in 20% negative after July being 36% negative and June 49% and then September coming at minus 11%.

I would point out, though, that although it's difficult to be precise in our analytics, when we look at September 2019 for the China industry as a whole, in that month, there was the seventieth anniversary of the ban in the PLC, and that did depress hotel business in the month. So it's a very weak comparable. I think if you look through that, then I think that the underlying performance in China for September is probably closer to August's performance. And then as you look out into the fourth quarter, I can not sure I see a stimulus for continued significant improvement from that. If you look at the EMEA business, which improved through some months, in August, it was at negative 66%.

September went to negative 70 And I think, again, quite tough in EMEA with the restrictions that we're obviously all seeing. In The Americas, the August performance was negative, with 48.6. And September, it's negative 46.4%. S.

Performance has been that a little stronger again. In September, of course, we do have Labor Day, and that's what we're seeing is the demand. So again, we may see some further strengthening as we go through fourth quarter in The U. S, but I don't think we're getting at the same level. We saw a strength in the period from April through September.

So whilst we're not necessarily setting any deterioration, I think the pace of any further increase for the next few months seems likely to be a little bit more muted. In terms of the second question around the mix versus price falls on the ADR, well, right about each of that ADR at 80% of last year. And with most of the change that you're seeing there is mix, I think that it's pretty evident to hoteliers that this drop in price won't necessarily stimulate demand. So I think that the revenue management discipline has been pretty good. In terms of the sensitivity to a 1% fall in RevPAR then, Pretty much what we talked about before with the normal RevPAR sensitivity and then the addition because of the discount that we offered to owners earlier in the year, which is now from their full term and were very well received.

And then the additional sensitivity because of the operating leverage in the owned and leased hotels is very similar to what we saw before. We might see a slight notch up in the owned and leased in the fourth quarter depending on how The UK trades. We have a portfolio of leased hotels in The UK. So I don't think we're going to see anything material, perhaps a few million dollars, not referring to RevPAR, but a few million dollars of additional loss there in aggregate. Hope that comes Yes, out with

Speaker 3

very helpful. Thank you.

Speaker 0

Thank you, Vicki. Our next question is from Jamie Rodow of Morgan Stanley. Your line is now open. Please go ahead.

Speaker 1

Thanks. Good morning, everyone. First question is just on the outlook for unit growth. I mean the old target, I guess, is 5% to 6% down. But I mean, in the new world, just if you could maybe update us on that because the signings were down quite sharply in Q3.

You've got the SPC loss in Q4. I appreciate minimal revenue impact there. But maybe sort of looking forwards, where do you see the sort of boundaries of net unit growth in the new world, please? Secondly, I think you're still expecting a little bit of cash burn for the full year, which will be sitting in Q4. I'm just wondering what causes that.

Is that system fund? Is that working capital? If you need to get a little bit conservative. And then finally, just a minor one, but just on credit card fees. I know those go to your owners, to IHG, but could you maybe quantify that?

Is that something you could push more to help clear this out? Thank you.

Speaker 2

Thanks, Jamie, and good morning. So in terms of unit growth, we're pleased with the continued signings that we're seeing. That stepped up a little in the first quarter and with the ground breaks in the opening. So we have a lot of our hotels that are already under construction, and that will underpin the growth that we're going to see over the next few years. So obviously, it's a very large pipeline.

And those that are under construction, they will get opened. Those that are financed, owners are pushing ahead. The unknown is the availability of bank financing. If only we signed contracts or we're on the verge of signing contracts and, are not able to get bank financing, then that may have some sort of an implication. It's very hard to assess that right now, frankly.

What we know is that our brands are preferred, and then we'd like to lend to the strongest brands and the brands with the strongest cash and cash returns. And certainly, what we're seeing is continued strong outperformance from our brands in the mainstream, which does tend then to garner the greatest proportion of the lending that is available in the market. And what we've said historically is that our aim is to have market leading net system sales growth. And yes, back in the days of 2018, 2019, that was around the five to 6% level. If it does diminish somewhat in the coming years, then we'll be targeting that performance.

And then if it goes back up again, it does affect the way in due course, and we'll be targeting that performance. So it's not an absolute, it's more a relative measure that we want to be evaluated against and that we evaluate ourselves against. In terms of SEC, yes, I think SEC will go out in the fourth quarter, which will have a onetime impact. So we'll manage through that, and as you say, very low profit impact. And in terms of cash burn, so we're pleased with the cash performance year to date.

I've built our focus on that. And in third quarter, we did generate more than $100,000,000 of free cash flow.

Speaker 1

The full year as a whole, I

Speaker 2

think what we'll end up is the operating business ending up broadly cash flow neutral and the system fund are going to effectively inject about $100,000,000 into the system fund. This will get back over time, so that's in the temporary, effectively, from us through the system fund. But that would take the business overall to around $100,000,000 cash flow negative. Some of that went out in the first quarter, some of that will go out in the fourth quarter. Fourth quarter will receive a little bit more fee money go out and pay some taxes, interest charges, etcetera.

So those sorts of factors, all combining, will take us to that year end endpoint. And in terms of credit card fees, we have a very successful credit card program in place, and probably will continue to monitor and, of course, got the right approach with that.

Speaker 1

Could you please quantify the credit card revenues and quantify the percent of the pipeline that's both under construction and funded?

Speaker 2

Yes. In terms of the credit card fees, we it's a complicated area, I guess, I'd say, in that we have a very large program. We don't take at the moment any income from the credit card onto our P and L, which is a different approach to helping them and merits, etcetera. So in terms of revenues for us, there aren't any. And in terms of the pipeline under construction, there's 40% under construction, which really hasn't changed since we have talked about that.

Speaker 1

I appreciate the company doesn't take the credit card revenues, but just to quantify the revenues to the system fund, would be helpful, if you're able to.

Speaker 2

Okay. So it's just about something around CHF100 million. Okay. Thanks a lot. Thank you.

Speaker 0

Thank you, Jamie. We have a question from Jarrod Castle of UBS. Your line is now open. Please go ahead.

Speaker 1

Thank you and good morning, Paul. Three as well. Can you give a little bit more color for some of the exits? Is this just normal course of business? Or are there any things which are specific to the prices?

I guess you've got pretty much most of your estates open. I think you said 3% at the moment is not open. Is that by choice, by the owners? Or is it due to government restrictions? If you could give any color on that.

And then there's been some comments from OTAs and the likes in terms of distribution and downsizing, etcetera. Can you just give any color in terms of how your distribution channels are working and where the customer is getting to you from?

Speaker 2

Hi, Jared. Good morning. Thanks for the questions. So in terms of the exit, there's actually nothing as we interrogate the numbers that's unusual compared to prior years. We took out 4,600 rooms in the third quarter, which compares to 4,000 in the 2019.

The September year to date run rate is around 2%, which is in line with what we've done for recent years. But that obviously excludes FCC's start in the fourth quarter, which will not set up, but that's a rather unusual situation, and we have no other portfolios that are anywhere near that size. And the next biggest owner, we have about 10 hotels. So there's nothing else that we would expect that could have that sort of an implication on us. In terms of the estate, yes, as you say, it's 97 percent open.

Where hotels are closed, they tend to be the big urban hotels, urban possibly unionized hotels where the level of demand doesn't make it sensible for the owner to open it. And we remain in close communication with all of our owners as to how we help them run their business most effectively. And that would include looking at the businesses available in the market to help them understand if it makes sense for them to open or not. There are some, where there are still restrictions in various markets, although restrictions on the inbound business. So in parts of EMEA, maybe there's some hotels which are more reliant on international inbound, so it doesn't make sense to have no hotel right now.

But that's very much in the minority. And then in terms of OTAs, have well, we saw OTA contribution fall earlier in the year, but and then it's it's been declined back towards its normal level. We have seen a lot of people who will book direct at the hotel. The booking window is very short at the moment. You're seeing the vast majority of bookings coming in within two days of the stay.

And so you'll have more walking than you would normally on a road trip or better season to leisure, just coming into the hotel, expecting that they will be able to find a room in busier times if we would have done free work. You tend to see more OTA business coming through on the leisure side than the business side, so I'm sure that will continue. But nothing that really changes on the underlying trend there.

Speaker 1

Okay. Thanks very much, Paul. Thanks, Joerg.

Speaker 0

Our next question is from Monique Pollard of Citi. Your line is now open. Please go ahead.

Speaker 3

Morning, Paul. Three questions from me as well, if I can. The first one was just specifically on the working capital benefit. Obviously, you saw, like you said, over CHF 100,000,000 cash inflow in the third quarter. Just wondering specifically how much working capital benefit you saw given you went from 80% to 90% of American donors paying within ninety days and what we should expect basically for the working capital for the full year.

The second question was just on signings in particular in The Americas. If I look at the pace of the pipeline signings in the third quarter, it's the lowest level we've seen in quite a few years. Just trying to understand what we should expect on the pace of Americas signings from here over the next few quarters? And then finally, a question just on Greater China performance. Obviously, if you say September had a bit of a benefit from a weaker comp, but when I think about October, there probably was some benefit from the golden week.

So just wondering if you can give us any update on the trading you saw there, particularly given you mentioned in your comments that the resort locations have seen a boost to RevPAR because of staycation over the summer.

Speaker 2

Thanks, Monique. Yes, absolutely. So in terms of working capital, we saw working capital outflow in the first half of the year. We have been managing the working capital very carefully. And as you'll remember earlier in the year, put in some discounts for our news, and we we tried were to help them as much as possible with their cash flows.

And I think that the approach that we've taken has resonated with them. They've appreciated that we've treated them as well as we possibly can. And that, I think, is why we are being paid the vast majority of the fees pretty much on time. So this is, as you say, stepped up from actually saving 80% of the fees that we billed within ninety days to now 90%, which we're pleased with. And so if you think of third quarter, the amount that we billed to our own, we paid that we were paid by our own was basically in line.

So we're pleased with working capital. There will probably be still an outflow for the year, but it's under tight control. In terms of signings in The Americas, I think that a lot of the owners who would normally perhaps have signed a deal with us, let's say, far this year, have been working on their existing hotels optimizing the cash flow there. And we have to pay a little bit more attention on to their existing business and, others who are just waiting to see what the lending environment is going to be. There's a lot of interest.

So our hotel owners and members of that community want to build hotels, but obviously building a hotel does require financing. They want to understand whether they're going get that financing. So I think once we've got clarity on that, then we'll see more of the signing coming through. In terms of Greater China, yes, as you say, a strong performance. If you look at the sequence of improvement that we've seen, it's been really strong and our China business is outperforming.

September, as you said, we have the weak comp. October, you have Golden Week, which is our fixed stimulus for demand. I think if you look at the September business, we ship out the weak comp. It's hard to be precise, as I said. My guess is the underlying there is closer to the August performance.

And as we look forward over the next few months, my guess is it's probably somewhere in line with that August performance. So this sort of resonates back to the point I made earlier as to I think there's uncertainty as to how much short term further improvement there is from what was the exit rate, I guess, you could say for the third quarter result.

Speaker 3

Understood. Very helpful. Thank you.

Speaker 0

Thanks, Dominik. Our next question is from Jaafar Mestari of Exane BNP. Your line is now open. Please go ahead.

Speaker 4

Hi, good morning. Three quick questions for me, please. So firstly, on the regions, you've talked in detail about what the September underlying trends could be for China and Americas. EMEA, on the other hand, has deteriorated in September. Is there anything to call out there?

Or is this the underlying? The second question, just on the cost savings. So the €75,000,000 that are becoming more permanent. How should we look at it? Is this going to improve on?

Or is this simply going to back the existing EBIT sensitivity? And lastly, on cash burn, you've given some overall guidance. Could you maybe just break down what you call the operating business between, I guess, operations themselves? Are they generating cash? And then separately, have you quantified things like cash tax payments, interest payments that fall into Q4?

And I'm going to take you back in cash burn territory in Q4, please.

Speaker 2

Okay. Thanks, Jipal. Yes. So you're actually correct in pointing out that for September, the RevPAR was at negative 69.9% compared to the 66.3 that we saw in July. That July performance was quite a significant step up from the August performance versus the July performance, which was negative 24.7%.

And I think you'll appreciate there was a lot

Speaker 1

of leisure demand in August.

Speaker 2

So everyone wants to get away, right, after this past few months. So that did stimulate the demand. I think you're then seeing it's coming back on to more than normal run rate in think that's that has the explanation of that rather than anything else that I can call out. And we're in the collection of quite a few markets. So it's always hard to get into the precise buying In terms of the cost savings, well, I guess there's a few things to point out.

One is that a few years ago, we did get to a quite good reorganization. So we took a lot of cost out of the business then, and we started ourselves. But we didn't pay any dividend for us. We moved to a market model, and so we put a lot more resources in the business close to market, and that's really helped our teams be very responsive for our owners. And we also put some investment behind new brand initiatives, and ensuring that we have that market leading that system, as said, that we've talked about.

And having got the organization fit for the future, I think it's always helped and it's continuing to help. So it helps the Board, it's helping now. The sale of the 150 savings we've made this year, we will keep 75 of that next year. We're trying to get the balance between the cost savings and continue to invest in the business. So the investment that we've put behind the new brands will continue in 2021 because they are a big part of our future growth.

So we're not stripping the business back to its own, but we have been able to take out some of that cost, which is included. And in terms of the cash, then yes, in the fourth quarter, we will have interest payments. We'll have some tax payments. We'll have some other payments. The operating business, I guess, is when I refer to that, I think, that, that is opposed to our system funds.

So the system funds will consume something of the order of $100,000,000 of deposits. We'll get back in due course, especially with loans. That's really the result of by the time of pandemic hit, there are quite a lot of commitments made in the system's own world. You have to agree to sponsor the the U. S.

Open, for example, which is a sponsor of Unites Fire Media, etcetera, etcetera. So it wasn't possible to pull back the cash deployment fast enough in 2020. 2021, as I've mentioned before, I just set the system plan to be broadly cash flow neutral. So strong control there. Thanks, Scott.

Speaker 0

Thank you, Geoffroy. Our next question is from Leo Carrington of Credit Suisse.

Speaker 1

Just very quickly, a follow-up on that on the cash flow question. It looks I was reading between the lines, it looks like you broke even on a cash basis in July and then generated cash in August and September. Can you break out whether that would primarily due to the stronger RevPAR, seven percentage points stronger RevPAR in August, September or more of the kind of operational improvements, working capital that you've mentioned already?

Speaker 2

Leo, a combination, actually. Yes, as you said, some stronger trading, which did help a little bit. And, we got a small tax refund in the course as it came through and then in part, the timing of payments on of interest on our bonds and tight working capital control. Plus our earnings are continuing to pay us, as we've talked about. A number of factors will contribute to the strong cash flow performance that we saw in the quarter.

Speaker 1

Okay. And then just last question from me. A follow-up question on the closures in your system. Do you have a sense of owner's health and ability to hold out until demand returns and whether this is sort of whether it differs significantly by region, do think? And to what extent does that continuity of specific owners, Matthew, in this kind of worst case foreclosure situation, do you have a kind of preferred ability to be the franchise brand for a new owner?

Speaker 2

Thanks, Iain. So I guess the first thing on that is that we are in partnership with our owners. And so it's hugely important to us, our only succeed. And many of them have been in partnership with for decades. So we do everything we can to bring business insights.

So that's the most important thing that we can do right now. We can help them think about their mining models and how to reduce costs. We can help them with the information they might need for refinancing, etcetera. But the greatest benefit we can do is deploy our systems and our outperformance to drive the greatest possible level of revenue to their hotels. That said, as you note, it's very unfortunate an owner does own its financial debt because the contract will normally continue.

The lender will want to keep franchise contract on it while they find a new owner for the for the hotel. We're not seeing an elevated level of exits from from the system. It's in line with what we've seen. You always see some hotels that leave the system and generally, it is that we've we've asked the hotel to move for quality reasons that come in the context and they just don't have the hotel that is right to move forward. Not that we work with the online new hotel.

So we do everything we can with the owners to help reduce their costs and also many of these owners are SMEs and we've been working with governments all around the world to get as much support as we can. And in The U. S. In the last PPP program, a very large proportion of our owners in The U. Are able to take advantage of that.

And if they're the new stimulus package agreed, then our own will be able to take advantage of that. So we never we not beyond on their behalf to get as much support for an industry that is critical for the world economy and provides huge employment. And I think governments recognize the importance that there is in the number of jobs they're expecting and listening to the lobbying and still the way to go in some cases, but some positive responses so far. Thank you. Thank you.

Speaker 0

Our next question is from Tim Barnett of Numis. Your line is now open. Please go ahead.

Speaker 5

Hi, Paul. It's Tim. I have two areas that will cover, please, with other people who are asked on. One is a very good picture question. I think if I understood you rightly, could use that to monitor it probably gently in The US next couple of quarters.

And just looking at how flat occupancy is through the weekly travel data, I just wondered sort of what was backing that up and whether you think it will be transient demand on the business and leisure side? And then second question, looking at the pipeline, about 5,000 rooms are still exiting quarter to be, which seems remarkably consistent. Does that tell us that the pipeline is still fresh? Or is there a period where you'll where you review it and and look to take out some of the rooms that might not open in in fullness of time? Thanks very much.

Speaker 2

Thanks, Jim. Good morning. So I think the sentiment that I'm trying to convey is that there is uncertainty. I think if you look at the exit rate from the third quarter, I there is a possibility that we do continue to see the same sequential improvement. And The U.

S. Has improved month by month, and September will be pretty strong. September, of course, had that Memorial Day business. And in The U. People are continuing to travel.

Yes, we're seeing good levels of changing measures. We're seeing good levels of business changing. What we're not seeing is group business coming back. That's a small part of our business. But many of the other guests are still there and are still valid.

So it's just an element of uncertainty. So I can't be certain as to exactly how the fourth quarter is going to look. I have to guess now I'd see probably a small sequential improvement to flat to what we saw at the end of that third quarter.

Speaker 1

In terms of the pipeline,

Speaker 2

we do, as you note, always trying to keep it fresh and we take some hotel concept out when we decide that it's just not going to get built because then that frees up that location for us to to sign with another owner. It's not to our advantage to keep hotels in that are not actually gonna get built. It's brings I mean, is it six or seven months into this new situation? If

Speaker 4

they

Speaker 2

only turn around and say, of course, you know, that they're going to focus on that existing business or they can't get to financing, then we'll take appropriate action. But it's certainly not something for now, but it's certainly something we will keep under review in the future.

Speaker 5

Okay, got it. Thank you very much. Our

Speaker 0

next question is from Alex Sprigle of Redburn. Your line is now open. Please go

Speaker 1

Yeah. Good morning. Thanks for taking the questions. I've I've got a couple. So on signings, you've given some good, commentary on how your own signs are progressing.

In the SDR data, there's been a very material increase in deferrals and cancellations of hotel projects in August and September. I appreciate that's market data. So it seems like offices are sitting on their hands for a while. Some people are getting out of projects. Could you just talk about, obviously, what you're seeing in the most recent months, but also whether you're seeing that amongst investors or kind of some of the other participants?

And then secondly, it sounds like for 2021, you're guiding to sort of materially lower profitability than what consensus currently is that somewhere sort of low 400 or something around that level, which kind of implies 12% or so less than the RevPAR less than consensus we're expecting and it's broadly consistent with sort of flattening in the RevPAR trajectory. Could you just help to explain what might get us to that level kind of from a starting point of 200,000,000 in 2020? Thank you very much.

Speaker 2

Thanks, Alex. So in terms of the STR data, I think what you'll see is I only want to have the most preferred brands. The most preferred brands are in the midscale, certainly, there are. So Holiday Inn Express is the number one brand in that segment, obviously. Holiday Inn Express is the largest brand in the world, large hotel brand in the world.

So the brand is performing very strongly. And some of our other brands, Candle and Twigs, have gone with the best performing brand in the industry this year. That's a very low level of the RevPAR. So a number of our brands have already performed very strongly, and owners are very anxious to build new versions of those when they can. But it does, as I referenced before, come down to being able get financing.

Members do want to lend to those, higher quality brands, so we're doing better, than the industry there. I think you will see a bit of a shakeout, so the weaker brands will struggle. This is what we saw in each of the prior downturns. The strongest brands came through this and increasing their market share. I have very little doubt that that will be the same this time around.

I think you'll also see more conversions coming through, so more of our growth will come through than historically in the case from hotels converting from weaker brands into our brands when the quality is good enough. In terms of outlook, think I've really only guided to fourth quarter and said that there's an element of uncertainty. I think that as we look forward, we said a full industry recovery will take time, but we feel confident from the steps we've taken to protect and support our owners. So I think it's very much dependent on the macro. It's not possible for me to precisely guide you on the fourth quarter.

So I certainly can't be out for 2021 a very wide range of expectations out It will depend on the therapeutics, it will depend on the availability of vaccine and it will depend on when people just decide to start traveling again, so they're irrespective. So we continue to monitor all of those. But if my comments have been taken by you as an indication of 2021 diesel growth, weren't intended to be.

Speaker 1

Okay. Thank you very much.

Speaker 0

Our next question is from Richard Clarke of AB Bernstein. Your line is now open. Please go ahead.

Speaker 6

Hi. Good morning. Three questions, if I may. Just the first one, I know you made a few comments about the system fund, but just wanted to just dig into are you getting closer to breakeven on the system funds? And are you still happy to keep the losses you're making from the system funds outside of the underlying earnings, I.

E, you're still describing those as a timing difference? Second question, when I look in your pipeline, the three vocals you've got in The U. S. And the three Six Senses you've got in China are all very small. They're about 50 rooms.

Normally, you kind of describe your minimum room size as around 75. So is there some sort of widening of the opportunity you're looking at there? Does that affect the contribution margin you get from those hotels? And maybe you can put anything on that. And then third question, apologies if it's a bit boring, but just tax.

Obviously, we've got the US election coming up next week. Biden wants to put The US corporation tax rate up. Anything you could you could do to to offset that? That does happen. And it's been put to me that there could be some advantage of you restructuring to not have other countries being consolidated into The U.

S. Given the fact that he wants to put up foreign earnings income. Anything you would look at in terms of restructuring the Americas portfolio to maybe consolidate non U. S. Income into The U.

K?

Speaker 2

Thanks, Richard. So in terms of system funds, the balance there is always making sure that we're investing to make our own hotels absolutely successful if they can to drive revenue for them versus also being mindful of cash cost. So at a time when the owners are right they're not driving revenues for them, we want to do the right thing. So we have allowed that to run to a cash deficit for 2020. So I think for 2021, my expectation is that we'll bring that back and manage that to neutral.

And then over time, the cash that we've deployed there will come back. Realistically, But we wouldn't be trying to do that until the industry was in fact in full swing, so that we can continue to support our owners as well as possible. In terms of pipeline in the very good in Six Senses, the size of hotels, it really comes down to revenues. What we don't want is a very small hotel with a low room rate because then the cost to support it and the revenues out there just don't justify it. Six Senses, the average room rates can be very, very high.

These are very high luxury, very sought after properties. And you never make about $1,000 So a 30 room consensus can work and seven or 50 room consensus can work and generate very good fees. The growth in Sun State of New America has been in fantastic locations. Actually, the first class assets with high ADRs and they'll generate good fees for us. And where that is the case, then yes, you can have them with a smaller key count than would normally be the case.

No real difference to what the average rate would be though. This happened to have managed to secure some real market utilization to begin with. Then the tax, all in complex area, the tax reform, brought in a few years ago did reduce the corporate tax rate. Quite complicated because of the reductions in to the headline rate, but also some restrictions of what you can take in terms of interest deductions, etcetera. And so we have to wait and see what might happen in the election, whether administration, what that fiscal policy is and how that manifests.

I think probably early too early to talk about any sort of restructuring that might occur, but, you know, it's one that certainly will keep under review.

Speaker 6

Great. Wonderful. Thanks very much.

Speaker 2

Thanks, Richard. We

Speaker 0

do have one question remaining, but I will take this opportunity to reiterate that our Our question is from Ivor Jones of Peel Hunt. I

Speaker 5

was thinking about the improved state of the balance sheet since the half.

Speaker 2

Could you talk about the factors that will feed into

Speaker 5

the Board's discussion about paying a final dividend?

Speaker 2

And along with the CCFF in The U. K, what else is there that sort of government support or quasi government support through COVID that you might, choose to repay? And then second thing was, should we expect more material impairments at the year end? And would they more importantly, would they be enough such that depreciation charges would fill amortization charges would fall in 2021 to optically improve the reported level of profit? Or will they be trivial in total?

Thanks, Ivan. So in terms of balance sheet, yes, I guess, could say the balance sheet has improved given the cash generation. I think by the end of the year, we will go back to the nonsystem fund side of the business being about cash neutral and system funds have assumed about $120,000,000 And I think that the board would consider the net debt to EBITDA of the business. We'll continue the cash generation. So actually, these will be the factors that, as always, are taken into account when considering such matters as a dividend.

In terms of government support, we have not taken advantage of the furlough payments in our operating business. Some of our owners have likely been able to access that in The UK, but we didn't take that money in The UK. We did access to CCFS as we previously talked about, and that will run through till next March, and then we'll have to make a decision as to whether we want to do that again. In terms of the gross impairments, we look very closely at all our assets at the half year, and we did have pretty good visibility on trading, etcetera. So we marked them down appropriately.

We wouldn't necessarily expect any further impairments at the full year. We never say never, but I think we were pretty conservative at the half year in terms of the markdowns we took in.

Speaker 6

Great. Thank you very much.

Speaker 1

Thanks, Alex.

Speaker 0

We have no further questions, so I will hand back to your host.

Speaker 2

Very good. Well, thank you, everybody. Thank you for listening, and thank you for your continued support. And it's very good to talk to everybody. And for those of you that we don't speak to in the meantime, the results will be in February.

So we look forward to talking with you all then. Thanks, everybody. Have a great day. Bye for now.

Speaker 0

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.