IHG

Business Context and Reporting Period

Company: InterContinental Hotels Group PLC (IHG)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Model: IHG operates a fee-based, asset-light model focused on franchising and managing hotels rather than owning them. As of December 31, 2009, the Group operated 4,438 hotels with 646,679 rooms across over 100 countries. The portfolio includes brands such as InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites, and Hotel Indigo. The Group also manages the Priority Club Rewards loyalty program.

Key Financial Metrics

Note: All figures are in US dollars. The 2009 Profit for the Year includes a significant tax credit of $272 million related to the release of prior year tax provisions.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by 18.9% to $1,538 million, driven by a 14.7% decline in global RevPAR (Revenue Per Available Room) due to the global economic downturn affecting both occupancy and room rates.
• Operating Profit Compression: Operating profit before exceptional items fell 33.9% to $363 million. The Americas region saw the largest decline in operating profit (38.1%), followed by EMEA (25.7%) and Asia Pacific (23.5%).
• Exceptional Items: The Group recorded a net exceptional operating charge of $373 million in 2009 (compared to $132 million in 2008). Key components included:
  • $91 million provision for onerous management contracts (performance guarantees).
  • $197 million in non-cash impairment charges across property, goodwill, and intangible assets.
  • $43 million in restructuring and severance costs.
• Net Debt Reduction: Net debt decreased by $191 million to $1,082 million, aided by the issuance of £250 million (approx. $415 million) in bonds in December 2009 to refinance a portion of the bank term loan.
• Asset Dispositions: The Group continued its asset-light strategy, disposing of the InterContinental Sao Paulo for $22 million in 2009. Subsequent to year-end, the Holiday Inn Lexington was sold for $5.5 million.

Guidance, Outlook, and Risks

• Outlook: Management noted signs of stabilizing occupancy levels in the fourth quarter of 2009, with RevPAR declines narrowing to 10.9% compared to the prior year's fourth quarter. The Group expects a slow recovery in consumer demand and business travel.
• Strategic Focus: IHG continues to focus on the "Great Hotels Guests Love" strategy, with significant progress in the Holiday Inn brand relaunch (1,697 hotels converted by year-end). The Group aims to grow through franchising and management agreements rather than ownership.
• Key Risks:
  • Economic Uncertainty: Continued global recession risks falling consumer demand and restrictions on financing for hotel owners.
  • Performance Guarantees: The Group faces exposure from performance guarantees provided to third-party owners, highlighted by the $91 million onerous contract provision recognized in 2009.
  • Brand Reputation: Reliance on brand reputation and intellectual property protection remains critical.
  • Debt Covenants: While currently compliant, the Group must maintain financial covenants (interest cover and net debt/EBITDA) to access its $1.6 billion revolving credit facility.

Investor Verification Checklist

• Exceptional Tax Credit: Verify the sustainability of the $272 million tax credit, which significantly boosted net profit despite an operating loss before tax. This was largely due to the release of provisions for settled tax matters.
• Onerous Contract Provision: Assess the future cash outflow implications of the $65 million provision for performance guarantees related to US hotel owners.
• Impairment Charges: Review the assumptions used for the $197 million impairment charge, particularly regarding the Americas managed operations goodwill and specific hotel assets.
• Debt Refinancing: Confirm the terms and maturity profile of the new £250 million bond issuance and the remaining $85 million term loan expiring in November 2010.
• RevPAR Recovery: Monitor fourth-quarter and subsequent RevPAR trends to validate management's assertion of a stabilizing market environment.