InterContinental Hotels Focusing on the managed and franchised business 1
Objectives Explain why IHG s franchised and managed business is attractive to shareholders and why focusing on it plays to our strengths Explain the mechanics of how the franchised and managed businesses work Demonstrate IHG s track record and competitive advantage in this business Show why owners and franchisees are attracted by IHG s brands and management 2
Agenda Key messages and summary Richard Solomons Franchising Kirk Kinsell Q&A Break Management A. Patrick Imbardelli Q&A Economics of the business models Richard Solomons Q&A Drinks 3
Richard Solomons Key messages and summary 4
IHG is already a significant manager and franchiser of hotels IHG is the world s largest hotel operator, with 3,557 hotels and nearly 540,000 rooms Hotels Rooms % of Rooms % of Profit* Franchised 2,983 400,738 74% 53% Managed 408 99,896 19% 14% Owned & Leased 166 38,273 7% 33% One of the largest franchisors in EMEA and in America One of the world s largest management companies 67% of profits generated from management and franchising * Profit before regional and central overheads Source: IHG interims, June 2004 5
Focusing on managing and franchising makes sense for IHG Our strategy of focusing on management and franchising is based on our core strengths We see our core strengths as: World class family of brands Brand creation and development expertise Scale presence in the key global markets Franchise and management skills, infrastructure and relationships System delivery and loyalty scheme operation Enabling us to deliver a strong value proposition to franchisees and owners 6
The managed and franchised business has strong fundamentals Low impact from cycle High quality earnings Strong cash flow Low capital investment requirements High returns on capital employed Significant growth potential and opportunities for IHG 7
Kirk Kinsell Senior Vice President Franchising & Business Development, Americas In business for yourself, not by yourself 8
Roadmap for this session How How it it all all works works the the basics basics What What we we do do key key processes processes Our Our value value proposition proposition why why do do franchisees franchisees partner partner with with IHG IHG IHG IHG competitive competitive advantage advantage What is franchising? Owner base and profile Typical contracts System funds Key processes System growth Quality control Performance support Our value proposition ROI driving brand standards Franchisee relationships Portfolio of brands Competitive advantage 9
Franchising lets us grow brands and unit size more quickly Franchising is highly attractive from IHG s perspective: Capital to fund the brands expansion primarily provided by third parties Faster unit growth to achieve scale High barrier to entry business: Need strong brands to franchise Need to provide a major system infrastructure Need a powerful reputation to attract franchisees Need scale to drive high relative returns for franchisees 10
Franchising is about providing a value proposition to owners Franchising stems from franchisees desire to be in business for themselves but not by themselves, as ownership of the franchise brings considerable benefits. Well known brand Room night delivery Best practice transfer Easier access to higher levels of bank funding 11
We have a very widespread owner base We currently have almost 3,000 franchised hotels Widespread owner base: Region Hotels Owners Americas 2,561 > 1500 EMEA 383 >250 Asia Pacific 39 >20 Spread of ownership brings motivated owners and reduces IHG exposure to any one owner Source: IHG interims, June 2004; IHG analysis Each individual contract relatively small 12
A franchise contract provides fee income and system funds Across IHG global portfolio: 10 year duration with a 10 year extension option Fee income from standard royalty rate of 5% of room revenues System fund contributions ( assessments ): Paid by virtually all hotels in system as part of contract terms Must be spent to support the brands Approximately another 5% of room revenue, calculated on a share of revenue or per room basis Do not pass through IHG P&L 13
Global System funds provide us with almost $450m of OPM System fund revenue contribution paid by all hotels globally System fund by type Almost $450m of brand support in total for IHG More than IHG s total P&L overhead base of $302m* Marketing Fund Reservations Fund Priority Club Fund Reservations 23% Priority Club Rewards 42% Marketing 35% We seek franchisee input on use of funds but we retain final authority Source: IHG management reporting * 2003 Central and regional overheads, as reported 14
What s s involved in running our franchise business? System growth: New and existing brands System compliance: Quality and standards Relationships: Senior management contact and feedback mechanisms (e.g. IAHI owners forum) System support: Revenue management, systems deployment Help franchisees optimise hotel performance 15
System growth and renewal is a rigorous multi-stage process... Process steps From initial meeting to opening 2004 estimate of activity for midscale franchise growth Day 0 Meet client Follow Up Meetings Application Notification to Area Franchisee Impact Study 7000 7000 3000 3000 600 600 1100 1100 65 65 12 36 mths 90-120 Days 60-90 Days Ongoing compliance Open Hotel Execute Contract Franchise Approval Committee Product plan 200 - New Growth 200 - New Growth 600 300 - Renewal 600 300 - Renewal 600 600 Source: IHG analysis 16
Our gross rooms growth is comparable to competitors Rooms, '000 20 15 10 5 0-5 -10-15 -20-25 -30 Cendant Starwood Best Western US Brand Development Activity July 2004 YTD (000s Rooms) Adds Losses IHG Hilton Corp Marriott Choice Gross Net 13 2 4 10 9 9 17 (12) (-) 1 3 5 6 11 Source: STR IHG net growth is lower as a result of stringent quality focus 17
Hilton Marriott Hyatt Holiday Inn Starwood Ramada Average American Customer Satisfaction Index Scores 2004 Score 77 76 74 73 73 67 72 Change vs. Baseline 2.70% -5.00% -2.60% 5.80% 0.00% -4.30% -4.00% IHG is passionate about protecting brand standards and satisfaction 80 78 76 74 72 70 68 66 64 ACSI Score by year 1994-2004 Marriott Int l Hilton Corp Holiday Inn Ramada 94 95 96 97 98 99 00 01 02 03 04 Source: University of Michigan / American Society for Quality / CFI Group American Customer Satisfaction Index Note: All baseline measurements were taken in Summer, 1994 18
Upscale and midscale franchisees need slightly different value propositions Types of owners Operating model Returns basis Key needs IHG key value proposition Key performance measures Running yield Midscale Entrepreneurs /REIT/ Developer Typically owner operator Room night delivery, strong brands, operational support System, access to financing, relationships, knowledge sharing Brand performance, cash flow Upscale REIT /Developer /Institution/ High net worth individual Typically owner Running yield + asset appreciation Room night delivery, predictable development cost, available flag Relationships, relative brand performance, key money ROI, Brand profile 19
The value proposition is based on performance and relationships Current financial results of brand Anticipated future financial results Performance Based Loyalty ROI System growth System delivery Performance support History with the brand Investment in the brand Legacy Based Loyalty Relationship Based Loyalty Access to and trust in company leaders Access to and interaction with other franchisees Respect for franchise community by leadership 20
We understand how to drive ROI for owners through smart brand standards Holiday Inn Prototype, Georgia 21
We understand how to drive ROI for owners through smart brand standards Sleep amenities Sleep CD and tips Guaranteed wake-up call Quiet zones Sleep expert staff training Luxurious new bedding Crowne Plaza, Sleep Advantage 22
Our system provides another key element of the value proposition... Revenue systems Global Sales Access IHG Technology Delivers on average 33% of room nights (and growing) plus further contribution from loyalty programme 23
Our integrated technology platform further underpins our offer Holiday Inn Rate Optimiser system (HIRO): Maximises and optimises reservations and rate Accurately forecasts future business Instantly analyses room inventory data Holidex Plus: Most powerful reservations system in the industry Property management and central reservations system Tailored solution depending on property size 2-way interface and common reservations platform offer opportunity for cross-selling 24
We also offer a package of support for franchisees Assistance with revenue maximisation: On call and on site property level consulting Assistance with developing optimal performance strategy: Mining of internal and external information Training and education Product creation and enhancement: Product improvement, plans, improved room designs, Access to class leading procurement systems Integrated communications platform through IAHI 25
Our retention rate shows the strength of our value proposition 95% plus retention rate of Holiday Inn franchises we seek to retain When franchisee exits: It is often uneconomic for them to maintain quality standards: Owners in this case are encouraged to replace themselves with new product Maintaining the relationship is in both parties interests Bad brand citizens are encouraged to leave... Source: IHG management reporting 26
A wide brand portfolio provides competitive advantage Developers prefer working with franchisors of multiple brands: Matching brand to location and asset is key Competing brands in many areas; impact on existing branded hotel if same brand were to open nearby So developers of new hotels are forced to look for alternative, unrepresented brands This means that hotel franchisor can work with developer more frequently if has alternative brands to offer 27
IHG has a strong track record of growing new brands Express fastest ever roll out Growth rate over time, selected US hotel chains Staybridge fastest extended stay brand to reach 75 units 1200 1000 800 Hampton Inn Courtyard Express Fairfield Express Hampton We have the relationships, skills, revenue drivers and scale to launch new brands quickly Hotels 600 400 200 0 Fairfield Courtyard 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Year since launch Giving Franchisees confidence in our ability to be a long term partner Source: STR census database; IHG analysis 28
IHG derives competitive advantage from 2 sources Wide Wide brand brand portfolio Existing Existing brands: brands: Crowne Crowne Plaza Plaza to to exploit exploit upscale upscale opportunity opportunity Holiday Holiday Inn Inn Prototype Prototype Express Express Staybridge Staybridge InterContinental InterContinental on on a selective selective basis basis New New brands brands to to leverage leverage our our infrastructure: infrastructure: Candlewood Candlewood Indigo Indigo Strong Strong value value proposition Highly Highly recognised recognised brands brands ROI-driving ROI-driving brand brand standards standards Quality Quality commitment commitment Rapidly Rapidly growing growing system system delivery delivery World s World s largest largest loyalty loyalty scheme scheme Integrated Integrated technology technology solution solution Unparalleled Unparalleled array array of of support support services services to to franchisees franchisees Long Long term term relationships relationships IHG aims to remain the pre-eminent global franchisor in the hotels industry 29
In summary... Franchising is a high barrier to entry, relationship driven business We have a strong infrastructure and value delivery system to acquire and retain franchisees: Relative ROI outperformance from strong brands and standards Quality focus System delivery Wide network of support services Relationships Our value proposition is very strong and our retention rate and brand growth track record is very high as a result Competitive advantage from wide brand portfolio and strong value proposition makes us attractive partner and drives system growth IHG widely accepted by owners as best franchisor 30
A. Patrick Imbardelli Regional President Asia Pacific Growing a successful management business 31
Roadmap for this session How How it it all all works works the the basics basics What What we we do do key key processes processes Our Our value value proposition proposition why why owners owners partner partner with with IHG IHG IHG IHG competitive competitive advantages advantages and and future future growth growth What is managing? Typical contracts Owner base and profile Costs Key processes Our value proposition Local knowledge Hotel operations IHG advantages China 32
What is managing? IHG perspective: All the elements of franchising plus its own unique disciplines Profitable business when allied with brands Higher absolute fee level than franchising but higher overheads Often necessary to get flag distribution Upscale more attractive but midscale can make money too Only manage where possible to use scale to leverage overheads 33
What is managing? Owner perspective: Opting for a management contract stems from the desire to own hotel real estate without the knowledge of running hotels: Someone else's know how Relative ROI between competing brands, as for franchising For example: Financial buyers REITS State owned enterprises High Net Worth Individuals 34
Our owner base is well distributed 408 managed hotels worldwide In Asia we manage 95 hotels with over 70 different owners Majority of EMEA owners own fewer than 5 hotels 212 hotels in Americas owned by 2 large owners (Felcor and HPT) as well as ca. 20 smaller owners 35
Broadly, across IHG global portfolio: 10 year plus contracts with options to extend Total revenue and profit are usually the key contract metrics Base fee comprises approximately 2-4% of total revenue: Multiple mechanics for incentive fee calculation; profit dependent or return based Maintenance capital spend levels built into contract All the benefits to IHG of a franchise contract, including system fund assessments Total income (base and incentive) of around 10-15% of the equivalent owned & leased asset with very little capital employed No such thing as a standard contract 36
We prefer to manage... In key scale markets around the world, for example, China and Australia where we can leverage overhead base To maintain control of the brand When it demonstrably adds value to the owners In less sophisticated markets (where skills are lacking) In more sophisticated markets (capital markets are advanced enough to split ownership and management) Often not our choice as owner states preference 37
With a management contract IHG is involved from the beginning Edmond Ip COO Greater China Development Cluster Pre-Opening Cluster Operations Cluster JV/Asset Mgmt Cluster Combined development, technical services and legal teams to drive distribution growth Dedicated team focused on preopening of new hotels. Will leverage hotelbased task forces as necessary Hotel operations including quality management, F&B operational support, revenue management and HR support Overseeing the JVs negotiations and agreements, as well as managing the assets with equity plays 38
IHG management business has a strong value proposition Profitability/ROI Operations Excellence People Systems & Processes Development know-how Brands & System Delivery 39
People are the foundation of IHG s management business Lengthy relationships People Team on ground empowered to make decisions Key hotel management skills and people likely to become scarce resource: Loyalty and retention of staff a key differentiator Local hires v expat development Repeat business with owners 40
IHG uses its expertise to deliver key processes Key processes managed by IHG for owners: Systems & Processes HR processes and access to talent Supply chain and procurement F&B concept definition and delivery Sales development Revenue management Financial analysis and performance reporting 41
Development know-how drives pipeline and new openings Hardware Hong Hong Kong Kong icon icon status status Development know-how Brand Brand performance In In hotel hotel performance Deal Deal Structures Simple base base + incentive Guarantee (limited and and with with strict strict criteria) Equity Equity investment Loan Loan or or inducement People People Relationships Track Track record record Creativity and and flexibility 42
How do we measure success? Key metrics: Contract fee levels Margins Brand and operator of choice: Win more than fair share Repeat business System and pipeline growth how many contracts we win 43
Fastest growing market: China is a key market for future growth GDP and international travel rising faster than any other market Broadly 25% of size of US today, by rooms 2001 2002 2020 Rank (2001) Rank (2020) Inbound tourists, m 33 37 187 5 th 1 st Outbound tourists, m n/a 11 100 10 th 4 th Domestic nights, m n/a 400 n/a 2 nd 2 nd Source: WTTC, WTO 2020, GTN (DRI- WEFA); IHG analysis Outbound travellers familiar with IHG brands create value elsewhere in global network 44
For example... World s Second Largest Paved Highway Network Paved Highway Network, 000 km 30.0 World s Fastest Growth Automobile Market Car Sales, millions 1.97 18% 1.13 75% 25.4 2002 2003 Increase by 4,600 km in 2003, and now is world s 2 nd largest behind that of the U.S. 2002 2003 Average growth over past few years at 50%, compared with 3% in U.S. and Europe Source: Various Industry Reports 45
IHG is the largest international brander and manager in China Chinese distribution by operating company, 2004 Operator Rooms 1. Jin Jiang/New Asia 16,500 2. Beijing Tourism Group (BTG) 15,000 3. IHG 14,500 4. Marriott 11,000 5. Shangri-La 8,000 6. Accor 6,500 7. Starwood 6,500 8. Gloria International 3,000 9. Hilton 2,500 10. Hyatt 2,500 IHG pipeline larger than next largest competitor by a factor of 3 Source: Horwath Asia Pacific, Excludes HK, Macau, Taiwan Note: Marriott excludes 4 non-marriott branded hotels 46
Our brands in China are well represented and growing # of properties China 44 4 Growing in key city locations 14 Fastest growing 26 Largest and best known 47
Our value proposition in action in China... Holiday Inn Temple of Heaven 48
Local team of 34 people: Significant hiring in next 2 years to deliver growth strategy Systems and processes: Hotel design, opening and management excellence Creative deal making Brand power: Holiday Inn awareness over 90% Most stayed in brand Our value proposition in action in China... Local reservations centre and system delivery over 10% with Chinese language websites and PCR Source: BDRC toplines survey, Dow Jones Far Eastern Economic review, IHG 49
Pace of IHG development in China continues to quicken 20 18 16 14 12 10 8 6 4 2 0 IHG development activity in China, 2000-2004 LOI signed MC signed Source: IHG Internal Data 2000 2001 2002 2003 2004 H1 Growth thus far largely capital free; some selective investment likely to capitalise on our leadership position 50
In summary... Operating a successful management business relies on many of the disciplines of franchising We have a clear value proposition to owners who wish to manage our hotels: People and relationships Processes and systems to drive hotel performance Creative and flexible development know-how By becoming partner of choice in key depth markets we aim to grow system size 51
Richard Solomons Economics of the business models 52
The earnings from franchising and managing are very high quality Low risk of loss: Generated across a base of 3,000 hotels Wide base of owners No material exposure to any single franchisee Each contract individually small but high margin Cash generative Excellent returns on capital employed Limited capex requirements for maintenance and growth 53
IHG s s managed and franchised earnings are very resilient Fee based earnings have lower volatility: Low sensitivity to RevPAR changes Fees are based on rooms revenues for franchising: Total revenues and incentive fee for managing Franchise hotels are predominantly mid scale EBIT sensitivity to RevPAR change Owned and leased Managed Franchised Change in EBIT from 10% change in RevPAR 30% 20% 10% Long term contracts in place Source: STR HOST report 2003; IHG analysis 54
There are 3 drivers to the managed & franchised business Net Royalty RevPAR x Room x Rate Growth Additions growth 55
RevPAR has historically shown consistent real growth 180 170 160 150 140 Real US RevPAR growth, index (1967 = 100) US Room demand v GDP, 1967 2003, index (1967 = 100) 300 250 200 US Rooms sold US GDP 130 120 110 100 90 1967 1970 1973 1976 1979 1982 1985 1988 Source: US bureau of labour statistics; PWC CAGR = 1.1% 1991 1994 1997 2000 2003 150 100 Nominal growth over same time period of 6% 50 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 56
Branded hotel chains continue to take market share from unbranded IHG grew gross rooms at 5.5% annualised in H1 2004: Approximately 13,000 rooms added in H1 2004 Comparable to industry benchmarks IHG opportunity is to improve net growth rate: Historically around 1% annualised 84% 82% 80% 78% 76% 74% 72% 70% 68% 66% 64% Proportion of room nights consumed in branded hotels by type by year, US 2000 2002 71% 74% Upscale 79% 83% Midscale Source: DK Shifflet, 2003 57
IHG in particular has further opportunities to grow the managed & franchised business Expansion of existing brands in key geographies: US, UK, China Upscale in US in particular New brand developments: Staybridge Suites Candlewood Indigo 58
Conclusions and Summary 59
Focusing on managing and franchising makes sense for IHG Our strategy of focusing on management and franchising is based on our core strengths We see our core strengths as: World class family of brands Brand creation and development expertise Scale presence in the key global markets Franchise and management skills, infrastructure and relationships System delivery and loyalty scheme operation Enabling us to deliver a strong value proposition to franchisees and owners 60
IHG has clear competitive advantages in franchising... Franchising is a high barrier to entry, relationship driven business We have a strong infrastructure and value delivery system to acquire and retain franchisees: Relative ROI outperformance from strong brands and standards Quality focus System delivery Wide network of support services Relationships Our value proposition is very strong and our retention rate and brand growth track record is very high as a result Competitive advantage from wide brand portfolio and strong value proposition makes us attractive partner and drives system growth 61
... and also in managing Operating a successful management business relies on many of the disciplines of franchising We have a clear value proposition to owners who wish to manage our hotels: People and relationships Processes and systems to drive hotel performance Creative and flexible development know-how By becoming partner of choice in key depth markets we aim to grow system size 62
The managed and franchised business has strong fundamentals Low impact from cycle High quality earnings Strong cash flow Low capital investment requirements High returns on capital employed Significant growth potential and opportunities for IHG 63
Some takeaway materials by the exit and...... We look forward to seeing you at our Branding seminar in Atlanta, Georgia on 7&8 December 2004, where you will be able to tour an example of each of our brands and hear presentations on them. 64