InterContinental Hotels (IHG) 6-KFinal Results

"In 2022 we saw demand return strongly in most of our markets, pushing Group RevPAR back close to 2019 levels and fee margin ahead. It's particularly pleasing that in the second half of the year we exceeded 2019 levels for both RevPAR and profitability. Looking to 2023, while there are economic uncertainties, we expect continued strong leisure demand in many markets, alongside further return of business and group travel and the ongoing reopening of China.

In total, we signed 467 hotels in 2022 and opened 269, which led to net system growth of over 4%. The further 1,800 hotels in our pipeline represents future growth of over 30% of today's system size. The Holiday Inn Brand Family, with its global leadership position, delivered around a third of our hotel signings and half of openings.

IHG's enterprise platform strength helps our hotel owners capture demand and grow their business, with enterprise contribution increasing in 2022 to represent 77% of their total room revenue. Critical to this was the launch of our new mobile app during the year, which has led to mobile now accounting for more than half of all digital bookings, while the transformation of our IHG One Rewards programme has delivered significant improvements in both enrolments and loyalty contribution. Alongside substantial investments in revenue-generating technology platforms to support future growth, we have also continued to invest in our internal systems to maintain the health of the business, and in capabilities to help IHG and our hotel owners meet our 2030 Journey to Tomorrow responsible business commitments.

IHG's overarching ambition is to deliver industry-leading growth in our scale, enterprise platform and performance, doing so sustainably for all stakeholders including our hotel owners, guests and society as a whole. We are a stronger and more resilient company than ever before, and we are proud of the advancements made in each of our strategic priorities. Reflecting the confidence we have in continued growth and the highly cash generative nature of our business, the Board is pleased to be recommending a 10% increase in the final dividend in respect of 2022 and to announce a further share buyback programme to return an additional $750m to shareholders in 2023."

 

Analysts and institutional shareholders wishing to ask questions should use the following dial-in details for a Q&A facility:

 

 

 

 

 

 

InterContinental Hotels Group PLC is the Group's holding company and is incorporated and registered in England and Wales. Approximately 325,000 people work across IHG's hotels and corporate offices globally.

 

 

This announcement contains certain forward-looking statements as defined under United States law (Section 21E of the Securities Exchange Act of 1934) and otherwise. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as 'anticipate', 'target', 'expect', 'estimate', 'intend', 'plan', 'goal', 'believe' or other words of similar meaning. These statements are based on assumptions and assessments made by InterContinental Hotels Group PLC's management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. By their nature, forward-looking statements are inherently predictive, speculative and involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed in or implied by, such forward-looking statements. The main factors that could affect the business and the financial results are described in the 'Risk Factors' section in the current InterContinental Hotels Group PLC's Annual report and Form 20-F filed with the United States Securities and Exchange Commission.

 

 

 

 

 

 

 

 

IHG sees a continuation of its strong track record of driving growth and shareholder value through our:

 

 

In 2022, IHG has achieved RevPAR back close to 2019 levels and ahead in the second half, delivered adjusted net system size growth above the long-run average, expanded the fee margin to 210bps above the prior peak, and restored the ordinary dividend along with resuming the return of additional surplus capital to shareholders through buybacks.

 

 

IHG's asset-light business model is highly cash generative through the cycle and enables us to invest in our brands and strengthen our enterprise platform. We have a disciplined approach to capital allocation which ensures that the business is appropriately invested in, whilst looking to maintain an efficient and conservative balance sheet.

 

The Board's perspectives on the uses of cash generated by the business are unchanged: ensuring the business is investing to optimise growth that will drive long-term shareholder value creation, funding a sustainably growing dividend, and then returning surplus capital to shareholders, whilst targeting our leverage ratio within a range of 2.5-3.0x net debt:adjusted EBITDA to maintain an investment grade credit rating.

 

The Board is proposing a final dividend of 94.5¢ in respect of 2022, which is growth of +10% on 2021. An interim dividend of 43.9¢ was resumed and paid in October 2022. The total dividend for the year would therefore be 138.4¢, representing an increase of +61% on 2021 as no interim dividend was paid in the prior year. The ex-dividend date is Thursday 30 March 2023 and the Record date is Friday 31 March. Subject to shareholder approval at the AGM on Friday 5 May, the dividend will be paid on Tuesday 16 May.

 

The proposed total dividend for 2022 is covered 2.0x by Adjusted EPS. Over the coming years the Board aims to see dividend cover revert to around the prior level that has averaged 2.3x in the 2012-2019 period.

 

The dividend payments for 2022 will have returned close to $250m to IHG's shareholders. An additional $500m of surplus capital was returned to shareholders through a share buyback programme that concluded in January 2023. This repurchased 9,272,994 shares at an average price of £46.57 per share, and reduced the total number of voting rights in the Company by 5.0%.

 

A new share buyback programme will commence immediately, targeted to return $750m over the course of 2023. With the further improvement in profitability and strong cash generation achieved in 2022, IHG's net debt:adjusted EBITDA ratio reduced to 2.1x at 31 December 2022. With adjusted EBITDA of $896m in 2022, this new buyback programme to return another $750m of surplus capital to shareholders would increase pro forma leverage by 0.8x and therefore resets it on this basis towards the upper end of our target range of 2.5-3.0x.

 

The Board expects IHG's business model to continue its strong long-term track record of generating substantial capacity to enable our investment plans that drive growth, to fund a sustainably growing ordinary dividend, and to return surplus capital to our shareholders.

 

Openings and signings progress in 2022 reflects IHG's strong portfolio of brands and the overall enterprise platform that we provide to hotel owners, together with the long-term attractiveness of the markets we operate in:

The regional performance reviews provide further detail of the system and pipeline by region, and further analysis by brand and by ownership type.

 

 

Our four strategic priorities put the expanded brand portfolio we have built in recent years at the heart of our business, and our owners and guests at the heart of our thinking. Our priorities recognise the crucial role of a sophisticated, well-invested digital approach, ensure we meet our growing responsibility to care for and invest in our people, and make a positive difference to our communities and planet.

 

In 2022, we have increased our level of investment spending to meet these priorities, including further development of our portfolio and individual brands, the critical step of transforming our loyalty programme, and strengthening our digital channels. We have also invested in the resiliency and flexibility of our core revenue-generating technology platforms to support future growth, alongside enhancing our core HR systems and in capabilities that will help IHG and our hotel owners meet our Journey to Tomorrow responsible business commitments.

 

We continue to place strong emphasis on how we best utilise our own cost investment resources, together with those of the System Fund, to help strengthen our enterprise, capture demand and capitalise on significant opportunities for growth. In 2021, fee business cost savings of $75m were achieved and have been sustained in 2022. As intended, the additional temporary reductions in the 2021 cost base of $25m were redeployed in 2022. While there continues to be pressure to the underlying level of cost inflation in our overheads base, IHG has a strong long-term track record of driving incremental efficiencies and scale advantage in its cost base to help offset these, and delivering productivity gains to further support our hotel owners, at the same time as continuing to invest in each of our strategic priorities.

We continue to invest in all our brands, enhancing design, service and quality and increasing their scale. We also take opportunities to add additional brands to our portfolio to offer wider choice to guests and loyalty members and provide more owners access to the power of IHG's enterprise platform. Highlights in 2022 included:

 

 

Delivering True Hospitality for Good means creating seamless and tailored guest experiences that generate increased demand and build loyalty, whilst delivering high returns for our owners in responsible and sustainable ways.

 

Our loyalty programme is critical to our business and future growth, with 2022 seeing the welcome return to over half our room nights being driven by loyalty members. We now have more than 115 million members in the programme. Loyalty members stay in our hotels more often, typically spend 20% more than non-members and are estimated to be 9x more likely to book direct, which is our most profitable channel for owners.

 

In 2022 we launched our transformed loyalty programme, IHG One Rewards, to offer industry-leading value, richer benefits and greater choice for members to enhance their stays, alongside attracting a next-generation of travellers. The enhanced rewards include free breakfast for Diamond Elite members and the ability for guests to choose the rewards that matter to them most through the introduction of Milestone Rewards. Achievements include:

 

We have also further strengthened our relationship with Mr & Mrs Smith and expanded the benefits to our IHG One Rewards members. The fourth quarter of 2022 saw the largest number of properties loaded since initial launch, and there are now 687 properties live; these are not part of IHG's system size, but as a loyalty partnership provide IHG One Rewards members an even wider selection of luxury and lifestyle hotels to indulge in while they earn and redeem points.

 

With 2022 continuing to see supply chain issues and increasing supply cost pressures, together with labour shortages, our owners around the world rely heavily on IHG to help them run an efficient business. We have continued to expand the benefits for owners of being part of the IHG system, whilst also improving guest experience.

Our digital-first approach drives a higher percentage of direct bookings to our hotels, helps meet evolving guest expectations, creates cost efficiencies and delivers data and insights to optimise revenue management decisions. Developments in 2022 included:

 

With hotels in thousands of communities all over the world, our business and brands touch the lives of millions of people every day and are united by a purpose of True Hospitality for Good. Our actions are shaped by a culture of strong governance, clear policies and a series of ambitious commitments for our people, communities and planet set out in our Journey to Tomorrow 2030 responsible business plan, which launched in 2021. We are making substantial investments in systems and capabilities to help IHG and our hotel owners meet these commitments. Developments in 2022 included:

 

 

 

IHG is proud to be at the heart of thousands of communities around the world, and as part of delivering our purpose of True Hospitality for Good we focus on making a positive impact through three areas: skills building, disaster relief and tackling food poverty:

 

As part of our Journey to Tomorrow commitments, our 2030 science-based target is to reduce by 46% from the 2019 baseline year our absolute Scope 1 and 2 Greenhouse Gas (GHG) emissions as well as our Scope 3 GHG emissions covering both our Fuel and Energy Related Activities (FERA) and franchise estate. Notable progress in 2022 including:

 

 

Our other key driver of revenue, net system size, increased by 3.6% year-on-year to 911.6k rooms, impacted by the removal of 6.5k rooms in the first half of the year relating to the ceasing of operations in Russia. Adjusting for this, net system size increased 4.3%.

 

 

Operating profit improved by $134m from $494m to $628m, including a $66m increase in charges from operating exceptional items and a $94m increase in the reported System Fund loss.

 

 

 

 

 

The Group operates a System Fund to collect and administer cash assessments from hotel owners for the specific purpose of use in marketing, reservations, and the Group's loyalty programme, IHG One Rewards. The System Fund also benefits from proceeds from the sale of loyalty points under third-party co-branding arrangements. The Fund is not managed to generate a surplus or deficit for IHG over the longer term but is managed for the benefit of hotels in the IHG System with the objective of driving revenues for the hotels in the System.

 

The growth in the IHG One Rewards programme means that, although assessments are received from hotels up front when a member earns points, more revenue  is deferred each year than is recognised in the System Fund.  This can  lead to accounting losses in the System Fund each year as the deferred revenue balance grows which do not necessarily reflect the Fund's cash position and the Group's capacity to invest.

 

In the year to 31 December 2022, System Fund revenues increased $289m (31.1%) to $1,217m, primarily driven by the continued recovery in travel demand yielding higher assessment revenues.

 

The reported System Fund loss increased by $94m to $105m, reflecting increased investments in consumer marketing, loyalty and direct channels, largely driven by the re-launch of the Group's loyalty program and higher levels of Reward Night redemptions, which offset the increase in assessment income.

Cost reimbursement revenue represents reimbursements of expenses incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon costs incurred with no added mark up, this revenue and related expenses have no impact on either our operating profit or net profit for the year. In the year to 31 December 2022, reimbursable revenue increased by $243m (41.3%) to $832m. Over 90% of the increase was in the US and Canada reflecting the overall recovery in trading conditions.

Operating exceptional items totalled a charge of $95m, driven by the following items:

 

Further information on exceptional items can be found in note 5 to the Financial Statements.

Financial expenses include $82m (2021: $91m) of total interest costs on public bonds, which are fixed rate debt. Interest expense on lease liabilities was $29m (2021: $29m).

Contingent purchase consideration arose on the acquisition of Regent. The gain of $8m (2021: $6m of which $1m related to Regent and $5m to contingent consideration no longer payable) relates to a favourable movement in the bond rates used in the valuation. The total contingent purchase consideration liability at 31 December 2022 is $65m (31 December 2021: $73m).

The effective rate of tax on profit before exceptional items, foreign exchange gains and System Fund was 27% (2021: 31%); this was lower than 2021 largely due to the improved profit base. An overall $26m tax credit ($33m current tax credit and a $7m deferred tax charge) arose in respect of exceptional items (2021: $29m credit). Net tax paid in 2022 totalled $211m (2021: $86m); the 2021 comparative included $15m of tax refunds, of which there were none in 2022. The Group continued to recognise significant deferred tax assets of $109m (2021: $127m) in the UK in respect of revenue losses and other temporary differences. Further information on tax can be found in note 6 to the Financial Statements.

 

The Board is proposing a final dividend of 94.5¢ in respect of 2022, which is growth of 10% on 2021.  An interim dividend of 43.9¢ was resumed and paid in October 2022. The total dividend for the year would therefore be 138.4¢, representing an increase of 61% as no interim dividend was paid in 2021. The ex-dividend date is Thursday 30 March 2023 and the Record Date is Friday 31 March.  The corresponding dividend amount in Pence Sterling per ordinary share will be announced on 26 April 2023, calculated based on the average of the market exchange rates for the three working days commencing 21 April 2023. Subject to shareholder approval at the AGM on Friday 5 May 2023, the dividend will be paid on Tuesday 16 May 2023. 

The dividend payments for 2022 will have returned close to $250m to IHG's shareholders. An additional $500m of surplus capital was returned to shareholders through a share buyback programme that concluded in January 2023. This repurchased 9,272,994 shares at an average price of £46.57 per share, and reduced the total number of voting rights in the Company by 5.0%.

 

The Board has also announced a further share buyback programme to return an additional $750m to shareholders in 2023.

For the year ended 31 December 2022, cash flow from operations was $961m, an increase of $113m on the previous year, primarily reflecting the increase in operating profit.

Cash flow from operations is the principal source of cash used to fund interest and tax payments, capital expenditure and ordinary dividend payments of the Group.

 

 

The Group had net liabilities of $1,608m at 31 December 2022 ($1,474m at 31 December 2021). In accordance with accounting standards, the Group's internally developed brands are not recorded on the Group's balance sheet, and its asset-light business model means that most properties from which income is derived are not owned. This does not have an impact on the ability of the Group to raise external funding or the dividend capacity of the Group.

 

Goodwill and other intangible assets total $1,144m. This was a decrease of $51m compared to the prior year. Goodwill and brands have a total net book value of $774m as at 31 December 2022 ($780m as at 31 December 2021). Brands relate to the acquisitions of Kimpton, Regent and Six Senses. They are each considered to have an indefinite life given their strong brand awareness and reputation, and management's commitment to continued investment in their growth. Goodwill and brands are allocated to cash generating units (CGUs) and they are tested annually for impairment, with no impairment recognised in 2022 given the recoverable amounts of the CGUs exceeded their carrying value. The movement in the year is due to exchange rates.

 

Remaining intangible assets relates to software ($339m), management agreements ($21m) and other intangible assets ($10m).

 

Trade receivables increased by $94m, from $399m at 31 December 2021 to $493m, primarily due to improved trading in the last quarter of 2022 compared to the last quarter of 2021. Current trade and other payables increased by $118m, primarily driven by an increase in trade payables of $43m due to higher marketing and other spend compared to 2021 and $29m related to the share repurchase programme. Deferred revenue increased by $111m, driven by an increase in the future redeemable points balance related to the loyalty programme.

 

 

The Group currently has $2,341m of sterling and euro bonds outstanding. The bonds mature in October 2024 (€500m), August 2025 (£300m), August 2026 (£350m), May 2027 (€500m) and October 2028 (£400m). There are currency swaps in place on both the euro bonds, fixing the October 2024 bond at £454m and the May 2027 bond at £436m.  The Group currently has a senior unsecured long-term credit rating of BBB from Standard and Poor's.

 

In April 2022, IHG entered into a new $1.35bn syndicated bank revolving credit facility (RCF). The previous $1.275bn syndicated facility and $75m bilateral facility have been cancelled. The new five-year RCF matures in April 2027. Two one-year extension options are at the lenders' discretion. There are two financial covenants: interest cover and leverage ratio. Covenants are tested at half year and full year on a trailing 12-month basis. The interest cover covenant requires a ratio of Covenant EBITDA to Covenant interest payable above 3.5:1 and the leverage ratio requires Covenant net debt to Covenant EBITDA below 4.0:1. These covenants now include the impact of IFRS 16, Leases, which was previously excluded due to 'frozen GAAP' treatment in the previous agreement. The new facility uses alternative reference rates instead of LIBOR.  See note 10 to the Financial Statements for further information.

 

At 31 December 2022 the leverage ratio was 2.12x and the interest cover ratio was 8.22x. See note 10 to the Financial Statements for further information. The facility was undrawn at 31 December 2022.

 

The Group is in compliance with all of the applicable financial covenants in its loan documents, none of which are expected to present a material restriction on funding in the near future.

 

In the Group's opinion, the available facilities are sufficient for the Group's present liquidity requirements.

Total gross revenue provides a measure of the overall strength of the Group's brands. It comprises total rooms revenue from franchised hotels and total hotel revenue from managed, owned, leased and managed lease hotels and excludes revenue from the System Fund and reimbursement of costs. Other than owned, leased and managed lease hotels, total gross revenue is not revenue attributable to IHG as it is derived from hotels owned by third parties. Definition for this key performance measure can be found in the 'Use of key performance measures and non-GAAP measures' section.

Total gross revenue in IHG's system increased by 33.1% (36.8% increase at constant currency) to $25.8bn as a result of improved trading conditions in many markets throughout the year along with growth in the number of hotels in our system.

 

Net system size increased by 3.6% year-on-year, or 4.3% when adjusting for the 0.7% impact of exiting Russia. 49,443 rooms (269 hotels) were opened in the year, 12% more than in 2021, including 12,402 rooms (33 hotels) for Iberostar Beachfront Resorts added as part of our long-term commercial agreement. In 2022, 96 hotels (18,143 rooms) left the system, including 28 hotels (6,457 rooms) as part of ceasing operations in Russia. In 2021, 264 hotels (49,667 rooms) left the IHG system, including 151 Holiday Inn and Crowne Plaza hotels (34,345 rooms) as we concluded our review of these brands.

 

At the end of 2022, the global pipeline totalled 281,468 rooms (1,859 hotels), a 3.9% increase of 10,508 rooms (62 hotels), as signings outpaced openings and attrition. The IHG pipeline represents hotels where a contract has been signed and the appropriate fees paid.

 

Group signings increased from 437 hotels in 2021 to 467 hotels in 2022, and rooms increased from 68,870 in 2021 to 80,338 rooms in 2022, growth of 16.7%. Signings in 2022 included 159 hotels (23,056 rooms) for the Holiday Inn Brand Family and 48 hotels (18,467 rooms) for Iberostar Beachfront Resorts. Conversions represented around a quarter of signings in 2022 (excluding Iberostar Beachfront Resorts).

 

 

 

 

 

 

 

Net system size grew 3.3% year-on-year. Excluding the Iberostar Beachfront Resorts properties that were added to the system, net growth would have been 1.5%.

 

There were 32.5k rooms (231 hotels) signed during the year, including 15.6k rooms (73 hotels) during Q4, of which 11.4k rooms (28 hotels) were Iberostar Beachfront Resorts signings. During the year there were 73 hotel signings across the Holiday Inn Brand Family and 69 across Staybridge Suites and Candlewood Suites, along with 14 further avid hotels and 11 further Atwell Suites. Other notable signings included a strong year for Kimpton with six signings, including the first all-inclusive property for the brand in Mexico, the first two Vignette Collection properties in the region, and an InterContinental Resort in the Caribbean Island of Dominica.

 

The pipeline stands at 100.3k rooms (954 hotels), which represents around 20% of the current system size in the region.

 

 

 

 

 

 

 

 

 

Net system size grew 2.4% year-on-year; adjusting for the removal of hotels in Russia, net system size growth was 3.1% higher at 5.5%. Excluding the Iberostar Beachfront Resorts properties that were added to the system, net growth would have been 3.9%.

 

There were 25.8k rooms (128 hotels) signed during the year, including 15.2k rooms (66 hotels) during Q4, of which 7.0k rooms (20 hotels) were Iberostar Beachfront Resorts signings. During the year there were 33 signings across the Holiday Inn Brand Family and a particularly strong year for the InterContinental brand with 14 signings and for Six Senses with six signings. A strong year for conversions, which represented around 40% of all signings (excluding Iberostar Beachfront Resorts), included 16 voco and eight Vignette properties. One of six multi-brand portfolio deals will bring the Hotel Indigo, Crowne Plaza and Holiday Inn Express brands to the UNESCO world heritage site at Hoi An, Vietnam. Other notable signings included the fourth Kimpton in Thailand with Kimpton Hua Hin Resort and our first Hotel Indigo in Tokyo and the fifth in London at K West Shepherd's Bush.

 

The pipeline stands at 83.4k rooms (434 hotels), which represents 36% of the current system size in the region.

 

 

 

 

 

 

Gross system size growth was 8.1% year-on-year, with the Covid-related restrictions in 2022 also impacting the ability for new hotels to open. There were 12.7k rooms (65 hotels) added to our system during the year, a reduction from 18.1k rooms (88 hotels) achieved in 2021. Openings in 2022 included 35 Holiday Inn Express and nine Holiday Inn properties. Other notable openings were five HUALUXE properties including Shanghai Changfeng Park and Qingdao Licang, three voco properties as the brand builds its presence, and the reopening of the flagship Regent Hong Kong. There were 3.2k rooms (12 hotels) removed in the year, representing a removal rate of 2.1%. Net system size growth was 6.0% year-on-year.

 

There were 22.0k rooms (108 hotels) signed during the year, including 5.5k rooms (29 hotels) during Q4. Signings in 2022 included 34 for Holiday Inn Express and 19 for Holiday Inn. This was a particularly strong and record-breaking year for Crowne Plaza, with a total of 23 signings growing its pipeline to 64 hotels. Other notable signings included those across our Luxury & Lifestyle brands, with two Regent properties (Shanghai On The Bund and Shenzhen Bay), three Kimpton and four InterContinental properties added to the pipeline, along with a further 11 for Hotel Indigo; Luxury & Lifestyle now represents over 20% of the pipeline in the region.

 

The pipeline in total stands at 97.7k rooms (471 hotels), which represents 59% of the current system size in the region.

 

Central revenue, which is mainly comprised of technology fee income, increased by $2m (1.0%) to $199m. Central revenue was impacted by trading in Greater China resulting in lower technology fees.

 

Gross costs increased by $22m (7.7%) year-on-year, driven by investment spend to support growth and enhancing the capabilities of our core HR systems, in addition to underlying inflationary pressures on costs. Investment also included $5m in costs related to Iberostar Beachfront Resorts, with a further net impact on operating profit from reportable segments expected to be $10-15m in 2023. Increases in gross costs were partially offset by favourable currency movements.

 

The resulting $108m operating loss was an increase of $20m year-on-year, a decrease of $32m compared to 2019.

 

In addition to performance measures directly observable in the Financial Statements (IFRS measures), the Business Review presents certain financial measures when discussing the Group's performance which are not measures of financial performance or liquidity under International Financial Reporting Standards (IFRS). In management's view, these measures provide investors and other stakeholders with an enhanced understanding of IHG's operating performance, profitability, financial strength and funding requirements. These measures do not have standardised meanings under IFRS, and companies do not necessarily calculate these in the same way. As these measures exclude certain items (for example impairment and the costs of individually significant legal cases or commercial disputes) they may be materially different to the measures prescribed by IFRS and may result in a more favourable view of performance. Accordingly, they should be viewed as complementary to, and not as a substitute for, the measures prescribed by IFRS and as included in the Financial Statements.

RevPAR is the primary metric used by management to track hotel performance across regions and brands. RevPAR is also a commonly used performance measure in the hotel industry.

 

RevPAR comprises IHG's System rooms revenue divided by the number of room nights available and can be derived from occupancy rate multiplied by average daily rate (ADR). ADR is rooms revenue divided by the number of room nights sold.

 

References to RevPAR, occupancy and ADR are presented on a comparable basis, comprising groupings of hotels that have traded in all months in both the current and comparable year. The principal exclusions in deriving this measure are new hotels (including those acquired), hotels closed for major refurbishment and hotels sold in either of the comparable years. These measures include the impact of hotels temporarily closed as a result of Covid-19.

 

RevPAR and ADR are quoted at a constant US$ conversion rate, in order to allow a better understanding of the comparable year-on-year trading performance excluding distortions created by fluctuations in exchange rates.

Total gross revenue is revenue not wholly attributable to IHG, however, management believes this measure is meaningful to investors and other stakeholders as it provides a measure of System performance, giving an indication of the strength of IHG's brands and the combined impact of IHG's growth strategy and RevPAR performance.

 

Total gross revenue refers to revenue which IHG has a role in driving and from which IHG derives an income stream.

 

Total gross revenue comprises:

Other than total hotel revenue from owned, leased and managed lease hotels, total gross revenue is not revenue attributable to IHG as managed and franchised hotels are owned by third parties.

Total gross revenue is used to describe this measure as it aligns with terms used in the Group's management and franchise agreements and therefore is well understood by owners and other stakeholders.

Revenue and operating profit from (1) fee business and (2) owned, leased and managed lease hotels, are described as 'revenue from reportable segments' and 'operating profit from reportable segments', respectively, within note 2 to the Financial Statements. These measures are presented for each of the Group's regions. Management believes revenue and operating profit from reportable segments are meaningful to investors and other stakeholders as they exclude the following elements and reflect how management monitors the business:

In further discussing the Group's performance in respect of revenue and operating profit, additional non-IFRS measures are used and explained further below:

Operating profit measures are, by their nature, before interest and tax. The Group's reported operating profit additionally excludes fair value changes in contingent purchase consideration, which relates to financing of acquisitions. Management believes such measures are useful for investors and other stakeholders when comparing performance across different companies as interest and tax can vary widely across different industries or among companies within the same industry. For example, interest expense can be highly dependent on a company's capital structure, debt levels and credit ratings. In addition, the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate.

 

Although management believes these measures are useful to investors and other stakeholders in assessing the Group's ongoing financial performance and provide improved comparability between periods, there are limitations in their use as compared to measures of financial performance under IFRS. As such, they should not be considered in isolation or viewed as a substitute for IFRS measures. In addition, these measures may not necessarily be comparable to other similarly titled measures of other companies due to potential inconsistencies in the methods of calculation.

These measures adjust revenue from reportable segments and operating profit from reportable segments, respectively, to exclude revenue and operating profit generated by owned, leased and managed lease hotels which have been disposed, and significant liquidated damages, which are not comparable year-on-year and are not indicative of the Group's ongoing profitability. The revenue and operating profit of current year acquisitions are also excluded as these obscure underlying business results and trends when comparing to the prior year. In addition, in order to remove the impact of fluctuations in foreign exchange, which would distort the comparability of the Group's operating performance, prior year measures are restated at constant currency using current year exchange rates.

 

Management believes these are meaningful to investors and other stakeholders to better understand comparable year-on-year trading and enable assessment of the underlying trends in the Group's financial performance.

Underlying fee revenue is used to calculate underlying fee revenue growth. Underlying fee revenue is calculated on the same basis as underlying revenue as described above but for the fee business only.

 

Management believes underlying fee revenue is meaningful to investors and other stakeholders as an indicator of IHG's ability to grow the core fee-based business, aligned to IHG's asset-light strategy.

Fee margin is presented at actual exchange rates and is a measure of the profit arising from fee revenue. Fee margin is calculated by dividing 'fee operating profit' by 'fee revenue'. Fee revenue and fee operating profit are calculated from revenue from reportable segments and operating profit from reportable segments, as defined above, adjusted to exclude revenue and operating profit from the Group's owned, leased and managed lease hotels and significant liquidated damages.

 

In addition, fee margin is adjusted for the results of the Group's captive insurance company, which is not part of the Group's main trading operations, and as such these amounts are adjusted from the fee margin to better depict the profitability of the fee business.

 

Management believes fee margin is meaningful to investors and other stakeholders as an indicator of the sustainable long-term growth in the profitability of IHG's core fee-based business, as the scale of IHG's operations increases with growth in IHG's System size.

Adjusted interest is presented before exceptional items and excludes foreign exchange gains / losses primarily related to the Group's internal funding structure and the following items of interest which are recorded within the System Fund:

 

Given results related to the System Fund are excluded from adjusted measures used by management, these are excluded from adjusted interest and adjusted earnings per ordinary share (see below).

 

The exclusion of foreign exchange gains / losses provides greater comparability with covenant interest as calculated under the terms of the Group's revolving credit facility.

 

Management believes adjusted interest is a meaningful measure for investors and other stakeholders as it provides an indication of the comparable year-on-year expense associated with financing the business including the interest on any balance held on behalf of the System Fund.

Foreign exchange gains / losses vary year-on-year depending on the movement in exchange rates and, as outlined above, exceptional items also vary year-on-year. Both can impact the current year's tax charge. The System Fund is not managed to a profit or loss for IHG over the longer term and is, in general, not subject to tax.

 

Management believes removing these from both profit and tax provides a better view of the Group's underlying tax rate on ordinary operations and aids comparability year-on-year, thus providing a more meaningful understanding of the Group's ongoing tax charge. A reconciliation of the tax charge as recorded in the Group income statement, to tax excluding the impact of foreign exchange gains / losses, exceptional items and System Fund, and the calculation of the underlying tax rate can be found in note 6 to the Financial Statements.

Adjusted earnings per ordinary share adjusts the profit available for equity holders used in the calculation of basic earnings per share to remove System Fund revenue and expenses, the items of interest related to the System Fund and foreign exchange gains / losses as excluded in adjusted interest (above), change in fair value of contingent purchase consideration, exceptional items, and the related tax impacts of such adjustments and exceptional tax.

 

Management believes that adjusted earnings per share is a meaningful measure for investors and other stakeholders as it provides a more comparable earnings per share measure aligned with how management monitors the business.

Net debt is used in the monitoring of the Group's liquidity and capital structure and is used by management in the calculation of the key ratios attached to the Group's bank covenants and with the objective of maintaining an investment grade credit rating. Net debt is used by investors and other stakeholders to evaluate the financial strength of the business.

 

Net debt comprises loans and other borrowings, lease liabilities, the exchange element of the fair value of derivatives hedging debt values, less cash and cash equivalents. A summary of the composition of net debt is included in note 10 to the Financial Statements.

One of the key measures used by the Group in monitoring its debt and capital structure is the net debt: adjusted EBITDA ratio, which is managed with the objective of maintaining an investment grade credit rating. The Group has a stated aim of maintaining this ratio at 2.5-3.0x. Adjusted EBITDA is defined as cash flow from operations, excluding cash flows relating to exceptional items, cash flows arising from the System Fund result, other non-cash adjustments to operating profit or loss, working capital and other adjustments, and contract acquisition costs (key money).

 

Adjusted EBITDA is useful to investors as an approximation of operational cash flow generation and is also relevant to the Group's banking covenants, which use Covenant EBITDA in calculating the leverage ratio. Details of covenant levels and performance against these are provided in note 10 to the Financial Statements.

 

These measures have limitations as they omit certain components of the overall cash flow statement. They are not intended to represent IHG's residual cash flow available for discretionary expenditures, nor do they reflect the Group's future capital commitments. These measures are used by many companies, but there can be differences in how each company defines the terms, limiting their usefulness as a comparative measure. Therefore, it is important to view these measures only as a complement to the Group statement of cash flows.

Gross capital expenditure represents the consolidated capital expenditure of IHG inclusive of System Fund capital investments. Gross capital expenditure is defined as net cash from investing activities, adjusted to include contract acquisition costs (key money). In order to demonstrate the capital outflow of the Group, cash flows arising from any disposals or distributions from associates and joint ventures are excluded. The measure also excludes any material investments made in acquiring businesses, including any subsequent payments of deferred or contingent purchase consideration included within investing activities, which represent ongoing payments for acquisitions.

Gross capital expenditure is reported as either maintenance, recyclable or System Fund. This disaggregation provides useful information as it enables users to distinguish between:

 

Management believes gross capital expenditure is a useful measure as it illustrates how the Group continues to invest in the business to drive growth. It also allows for comparison year-on-year.

Net capital expenditure provides an indicator of the capital intensity of IHG's business model. Net capital expenditure is derived from net cash from investing activities, adjusted to include contract acquisition costs (net of repayments) and to exclude any material investments made in acquiring businesses, including any subsequent payments of deferred or contingent purchase consideration included within investing activities which are typically non-recurring in nature. Net capital expenditure includes the inflows arising from any disposal receipts, or distributions from associates and joint ventures.

 

In addition, System Fund depreciation and amortisation relating to property, plant and equipment and intangible assets, respectively, is added back, reducing the overall cash outflow. This reflects the way in which System Funded capital investments are recovered from the System Fund, over the life of the asset.

 

Management believes net capital expenditure is a useful measure as it illustrates the net capital investment by IHG, after taking into account capital recycling through asset disposal and the funding of strategic investments by the System Fund. It provides investors and other stakeholders with visibility of the cash flows which are allocated to long-term investments to drive the Group's strategy.

 

Adjusted free cash flow is net cash from operating activities adjusted for: (1) the inclusion of the cash outflow arising from the purchase of shares by employee share trusts reflecting the requirement to satisfy incentive schemes which are linked to operating performance; (2) the inclusion of maintenance capital expenditure (excluding contract acquisition costs); (3) the inclusion of the principal element of lease payments; and (4) the exclusion of payments of deferred or contingent purchase consideration included within net cash from operating activities.

 

Management believes adjusted free cash flow is a useful measure for investors and other stakeholders as it represents the cash available to invest back into the business to drive future growth and pay the ordinary dividend, with any surplus being available for additional returns to shareholders.

 

The following definitions have been amended: