Intercontinental Hotels Earnings Call INSIGHTS: Target Net Debt-to-EBITDA, Special Dividend Timing

On Tuesday, Intercontinental Hotels Group (NYSE:IHG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Target Net Debt-to-EBITDA

Patrick Scholes – Friedman, Billings, Ramsey & Co: I have two questions. First is just little more clarification on your target net debt-to-EBITDA still is that approximately three times?

Richard Solomons – Chief Executive: Okay, ask the second one and then we will…

Patrick Scholes – Friedman, Billings, Ramsey & Co: Then the second one I had read during the quarter an article how you are changing your strategy in India exiting some relationships and then possibly doing building on your own. If that’s correct, could you talk little bit more about that?

Richard Solomons – Chief Executive: Okay, I will take that one and then get Tom talk little bit more about debt and the balance sheet. Not straightly correct, no. I think it is half correct. People in India a long time certainly way we thought we were in China back into the 60s. To be honest, we probably have made all the mistakes there are to make in entering into different market and we hope we’ve learned from those. So our strategy in India has been to unwind our relationships with some owners and take out some poor quality assets, as you have see us do in other markets. What we currently have is about 12 hotels opened, but we have a pipeline of getting on 50 hotels. Most recently we signed a joint venture, which I think we’ve talked for about with an (owner relation) called Duet for launching Holiday Inn Express in India. So what we’re doing is, we tied up the portfolio. We have small investments about $30 million into the joint venture, which will develop, I forget it — Tom 16 or 18. Express’s in India which is – actually I just — 19 Express’s, I think is a very good of the numbers right now, 19 Express’s in India. So, we see a lot of growth potential in that market. It’s not an easy place to do business and choosing the right partners is absolutely crucial and we’ve very comfortable, we have done that with Duet’s and we are quite excited about the opportunities there. So that’s India. Tom talk about balance sheet terms.

Tom Singer – CFO: Yeah. Just in terms of the balance sheet, Patrick, I mean obviously we are keen to make sure that our balance sheet is efficient and we previously talked to the equity markets about net debt-to-EBITDA ratio between two and two half times that’s really short hand to say that the over writing criteria is to make sure that we remain in investment grade.

Special Dividend Timing

David Loeb – Baird: Actually I had a few if that’s okay. One kind of simple one, in thinking about the special dividend was the timing of that is it important that the timing of that be by calendar year-end given some expectation of increased tax rates on dividends in the U.S. next year?

Tom Singer – CFO: No doubt that wasn’t really driving the thinking, David. What we are keen to do is return value quickly to shareholders, but we do need to go through the step of having a shareholder meeting to approve the special dividend, which we are planning for October and we will return the special dividend as soon as we can after that. I know that some of our peers have announced distributions of capital, which are driven by the particular tax position of their major shareholders, but that wasn’t a consideration in our thinking.

David Loeb – Baird: Shifting to China for a minute. You have made tremendous progress, particularly on HUALUXE in a very short time. Can you talk a little bit about the contract terms? In terms of the length of those contracts and the basic fee structure, are they similar to your – the bulk of your Chinese contracts, meaning call it 10 years or do they tend to be longer contracts?

Richard Solomons – Chief Executive: No, the terms are pretty much in line with our existing contracts. I think it’s an interesting facet of the Chinese market that we think it’s very important that we have a consistent offer there, because things get shared amongst owners, people know each other and I think it’s important (to be treating) everybody the same way. So, we have good terms there, as you know on our contracts, and the HUALUXE contracts are broadly exactly the same. I think it’s really important for us that we talk about growth, but we talk about high quality growth and that high quality is about the owner you are doing business with, it’s the location of the asset and is also the terms of the deal. There is no question in China that we obviously have a very big lead in that market, we were there before anybody else and we have grown significantly fast enough as you know the great presence is about 170 hotels opened, another 150 in the pipeline. There are people out there just signing a lot of deals in order to have the numbers and we are not getting into that game, we’ve got to make sure we’ve got sustainable growth with decent fee streams, so we are holding very firm contracts out there.

David Loeb – Baird: From a competitive position, is it advantageous to have 10-year contracts versus the 20-year longer that Marriott has been able to get in some of the major markets and Starwood has been able to get in major and resort and secondary markets?

Richard Solomons – Chief Executive: We have long-term contracts in China absolutely.

David Loeb – Baird: I’ll leave it at that. On the U.S.-owned stage, I think the last was, we saw you had three InterContinentals in the U.S., I assume Boston is one of those. What are the other two and what are your thoughts about disposal of those?

Richard Solomons – Chief Executive: Out of the three hotels Boston is a leased hotel, we’ve got the Mark Hopkins in San Francisco and we obviously got the Barclay in New York, which is for sale, Tom, you want to just talk on that?

Tom Singer – CFO: So on the Barclay, we are in middle of a negotiation with a preferred bidder who we promised exclusivity too, it’s taking longer than we would have liked really because there is also the need to agree a significant renovation plan for the property. We expect the new owner will have to spend over $100 million to refurbish the asset. It just takes time to work through the detail of (indiscernible) for them to complete the fiscal due diligence on the property. So that transaction continues to move forward and clearly the return of capital that we’ve announced today is in no way contingent upon us, ultimately selling that asset which we remain comfortable, we’ll do in coming months. In terms of the other two owned assets in the U.S., we have no plans at this point to dispose of them and year-over-year announcement that we’ve made today about future InterContinental disposal has a relation to Park Lane in London.

David Loeb – Baird: I guess, obviously New York have been following very closely and appreciated your remarks in the release about that as well, I was going to ask separately about that, if that was – if the negotiations were still with the same party and you were still on track for that it was just taking well?

Richard Solomons – Chief Executive: Yeah, it is some of the same party as I would just say there is just a lot of detail that has to be agreed and we are very comfortable with the prospective purchaser of that assets and they share our vision for what the asset could become in terms of 8 other significant flagship for the InterCon brand, but it just takes time to close out the deal.

David Loeb – Baird: So, my question was really more geared towards the Mark Hopkins given asset sales are not held that seems like a very robust market. I understand with Boston the finance lease really means that there is not much you can change there, but is the Mark is that another potential source of capital at some point in the not too distant future given how hot that market is?

Richard Solomons – Chief Executive: Yeah, we continue to look for ways of reducing the capital intensity of the business over time. As I said, we’ve talked about our focus now on Park Lane in London and Mark Hopkins will continue to evaluate it over time, but it is also priority for future asset disposals at this point.

David Loeb – Baird: I have one more that’s more of a request and then I may come back with some other detailed links later on. We have had a lot of interest from U.S. investors trying to breakdown the EBITDA streams by line of business in some cases by geography, I just want to ask again if you would consider giving us depreciation and amortization by region and by business unit so that we can do some of that work in helping our investors comp you against kind of business-by-business against the major global competitors?

Richard Solomons – Chief Executive: We hear your request and we will continue to give some thoughts, but we are not going to commit that over the quarter, David. We understand (where it is coming from).