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, 2010
Business Overview: IHG is a global hotel company operating a portfolio of brands including InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites, and Hotel Indigo. As of December 31, 2010, the Group operated 4,437 hotels with 647,161 rooms across 100 countries. The business model relies heavily on franchising and management contracts, with only 15 hotels owned or leased by the Group.

Key Financial Metrics

Earnings Per Share (Basic): 97.2 cents (2010) vs. 74.7 cents (2009).
Adjusted Earnings Per Share (Basic): 98.6 cents (2010) vs. 102.8 cents (2009).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 5.9% to $1,628 million, driven by a 6.2% increase in global RevPAR (Revenue Per Available Room), primarily led by occupancy gains.
• Profitability Recovery: Operating profit before exceptional items rose 22.3% to $444 million. The Group returned to profitability from a loss in 2009, aided by the absence of significant impairment charges that impacted the prior year.
• Asset Disposals: The Group sold two hotels in 2010 (InterContinental Buckhead, Atlanta and Holiday Inn Lexington) for $110 million, with proceeds used to reduce net debt. This resulted in a $27 million gain on disposal.
• Debt Reduction: Net debt decreased by $349 million to $743 million due to improved trading, asset disposals, and cash management.
• Exceptional Items: Exceptional operating items were a net charge of $7 million in 2010, a significant improvement from the $373 million charge in 2009. The 2010 charge included a $22 million litigation provision and $7 million impairment, offset by disposal gains.

Guidance, Outlook, and Risks

Management Commentary: Management views 2010 as a turnaround year with the global recession easing. The Group expects the recovery to continue, driven by global economic growth, rising travel volumes, and increasing demand for branded hotels. The $1 billion Holiday Inn brand relaunch is substantially complete (89% of hotels converted).

Outlook: The Group anticipates continued growth in system size and RevPAR. It plans to recruit approximately 160,000 people over the next few years to support new hotel openings. The pipeline stands at 1,275 hotels (204,859 rooms).

Risks and Contingencies:

• Legal Proceedings: A $22 million litigation provision was recorded following an unfavorable court judgment on February 23, 2011, regarding a prior year claim. The final outcome remains uncertain.
• Pension Obligations: The UK pension plan had a deficit of $34 million (IAS 19 basis) and a funding deficit of £129 million. The Group has agreed to additional contributions of up to £100 million to eliminate the funding deficit by 2017.
• Market Risks: Exposure to global economic downturns, currency fluctuations (hedged via swaps), and interest rate changes (100% of borrowings fixed or swapped at year-end).
• Brand Reputation: Reliance on brand reputation and the ability to enforce quality standards across franchisees.

Key Facts for Investor Verification

• Post-Balance Sheet Event: Verify the status of the litigation provision ($22 million) recorded after the balance sheet date due to a February 2011 court judgment.
• Pension Funding: Confirm the schedule and sufficiency of the £100 million recovery plan for the UK pension deficit.
• Asset Pipeline: Assess the conversion rate of the 204,859 rooms in the development pipeline, noting that construction and financing risks may prevent all from opening.
• Executive Transition: Note the announced leadership change where Andrew Cosslett steps down as CEO on June 30, 2011, succeeded by Richard Solomons.
• Dividend Proposal: Verify shareholder approval of the proposed final dividend of 22.0 pence per share (totaling 30.0 pence for the year) at the May 2011 AGM.