SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 20-F

 

 

Commission file number: 1-10409

 

InterContinental Hotels Group PLC

(Exact name of registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

 

Broadwater Park,

Denham, Buckinghamshire UB9 5HR

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

 

Securities for which there is a reporting obligation pursuant to Section 15(d)of the Act:
None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yes þ     No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

     Large accelerated filer  þ          Accelerated filer  o          Non-accelerated filer  o

 

Indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17 o     Item 18  þ

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes          o                No          þ

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

 

TABLE OF CONTENTS

 

 

As used in this document, except as the context otherwise requires, the terms:

 

 

References in this document to the “Companies Act” mean the Companies Act 1985, as amended, of Great Britain; references to the “EU” mean the European Union; references in this document to “UK” refer to the United Kingdom of Great Britain and Northern Ireland; references to “US” refer to the United States of America.

 

The Company publishes its Consolidated Financial Statements expressed in US dollars. On May 30, 2008, IHG announced its intention to change its reporting currency from sterling to US dollars, reflecting the profile of its revenue and operating profit, which are primarily generated in US dollars or US dollar-linked currencies. This change was first introduced in the interim results for the six months to June 30, 2008, and the financial statements included herein are IHG’s first annual financial statements to be presented in US dollars and all comparative information has been restated accordingly.

 

In this document, references to “US dollars”, “US$”, “$” or ‘‘¢” are to United States currency, references to “euro” or “€” are to the euro, the currency of the European Economic and Monetary Union, references to “pounds sterling”, “sterling”, “£”, “pence” or “p” are to UK currency. Solely for convenience, this Annual Report on Form 20-F contains translations of certain pound sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pound sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rates indicated. The noon buying rate in The City of New York for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of

New York on March 23, 2009 was £1.00 = $1.45. For further information on exchange rates please refer to page F-19.

 

The Company’s fiscal year ends on December 31. The December 31 fiscal year end is in line with the calendar accounting year ends of the majority of comparable US and European hotel companies. IHG will continue to report on a December 31 fiscal year end basis, as the Group believes this facilitates more meaningful comparisons with other key participants in the industry. References in this document to a particular year are to the fiscal year unless otherwise indicated. For example, references to the year ended December 31, 2008 are shown as 2008 and references to the year ended December 31, 2007 are shown as 2007, unless otherwise specified, and references to other fiscal years are shown in a similar manner.

 

The Company’s Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and in accordance with IFRS as adopted by the European Union (“EU”). IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB, however, the differences have no impact on the Group’s Consolidated Financial Statements for the years presented.

 

IHG believes that the reporting of profit and earnings measures before exceptional items provides additional meaningful information on underlying returns and trends to shareholders. The Group’s key performance indicators used in budgets, monthly reporting, forecasts, long-term planning and incentive plans for internal financial reporting focus primarily on profit and earnings measures before exceptional items. Throughout this document earnings per ordinary share is also calculated excluding the effect of all exceptional operating items, exceptional interest, exceptional tax and gain on disposal of assets and is referred to as adjusted earnings per ordinary share.

 

The Company furnishes JP Morgan Chase Bank, N.A., as Depositary, with annual reports containing Consolidated Financial Statements and an independent auditor’s opinion thereon. These Financial Statements are prepared on the basis of IFRS. The Company also furnishes to the Depositary all notices of shareholders’ meetings and other reports and communications that are made generally available to shareholders of the Company. The Depositary makes such notices, reports and communications available for inspection by registered holders of ADRs and mails to all registered holders of ADRs notices of shareholders’ meetings received by the Depositary. During 2008, the Company reported interim financial information at June 30, 2008 in accordance with the Listing Rules of the UK Listing Authority. In addition, it provided quarterly financial information at March 31, 2008 and at September 30, 2008 and intends to continue to provide quarterly financial information during fiscal 2009. The Financial Statements may be found on the Company’s website at www.ihg.com.

 

This Form 20-F contains certain forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 with respect to the financial condition, results of operations and business of InterContinental Hotels Group and certain plans and objectives of the Board of Directors of InterContinental Hotels Group PLC with respect thereto. 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’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.

 

Such statements in the Form 20-F include, but are not limited to, statements under the following headings; (i) “Item 4. Information on the Company”; (ii) Item 5. Operating and Financial Review and Prospects”; (iii) “Item 8. Financial Information”; and (iv) “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. Specific risks faced by the Company are described under “Item 3. Key Information — Risk Factors” commencing on page 11.

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, including, but not limited to: the global economic recession, the risks involved with the Group’s reliance on the reputation of its brands and protection of its intellectual property rights; the risks relating to identifying, securing and retaining management and franchise agreements; the effect of political and economic developments; the organizational capability to manage changes in key personnel and senior management; events that adversely impact domestic or international travel; the risks involved in the Group’s reliance upon its proprietary reservations system and increased competition in reservations infrastructure; the risks in relation to technology and systems; the risks of the hotel industry supply and demand cycle; the possible lack of selected development opportunities; the risks related to corporate responsibility; the risk of litigation; the risks associated with the Group’s ability to maintain adequate insurance; the risks associated with the Group’s ability to borrow and satisfy debt covenants; compliance with data privacy regulations; the risks related to information security; and the risks associated with funding the defined benefits under its pension plans.

 

 

Not applicable.

 

 

Not applicable.

 

 

Summary

 

The selected consolidated financial data set forth below for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and in accordance with IFRS as adopted by the European Union (“EU”), and is derived from the Consolidated Financial Statements of the Group which have been audited by its independent registered public accounting firm, Ernst & Young LLP.

 

IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB, however, the differences have no impact on the Group’s Consolidated Financial Statements for the years presented. The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.

Consolidated Income Statement Data

 

Consolidated Balance Sheet Data

 

 

 

 

Dividends

 

InterContinental Hotels Group PLC paid an interim dividend of 6.4 pence per share (equivalent to 12.2 cents per ADS at the closing exchange rate of August 8, 2008) on October 3, 2008. The IHG Board has proposed a final dividend of 20.2 pence per share (equivalent to 29.2 cents per ADS at the closing exchange rate on February 13, 2009), payable on June 5, 2009, if approved by shareholders at the Annual General Meeting to be held on May 29, 2009, bringing the total IHG dividend for the year ended December 31, 2008 to 26.6 pence per share (equivalent to 41.4 cents per ADS).

 

The table below sets forth the amounts of interim, final and total dividends on each ordinary share in respect of each fiscal year indicated. Comparative dividends per share have been restated using the aggregate of the weighted average number of shares of InterContinental Hotels Group PLC (as IHL then was) and Six Continents PLC (as Six Continents then was), adjusted to equivalent shares of InterContinental Hotels Group PLC. For the purposes of showing the dollar amounts per ADS in respect of the interim and final dividends 2004, and interim dividend 2005, such amounts are translated into US dollars per ADS at the Noon Buying Rate on each of the respective UK payment dates. In respect of the final dividend 2005 and the interim and final dividends for each of 2006, 2007 and 2008, such amounts are translated into US dollars immediately prior to their announcement.

 

Ordinary dividend

 

 

Special Dividend

 

 

Return of Capital

 

 

This section describes some of the risks that could materially affect the Group’s business. The factors below should be considered in connection with any financial and forward-looking information in this Form 20-F and the cautionary note regarding forward-looking statements contained on pages 5 and 6.

 

The unprecedented financial events of late 2008 and the resulting global recession are having, and will continue to have, a significant impact on the Group and the wider hotel industry. In particular, over the relatively short-term, the main risks are falling consumer demand, restrictions on the availability of debt for owners, and a fall in the pace of new room openings. The risks below are not the only ones that the Group faces. Some risks are not yet known to IHG and some that IHG does not currently believe to be material could later turn out to be material. All of these risks could materially affect the Group’s business, revenue, operating profit, earnings, net assets and liquidity and/or capital resources.

 

The Group is reliant on the reputation of its brands and the protection of its intellectual property rights

 

Any event that materially damages the reputation of one or more of the Group’s brands and/or failure to sustain the appeal of the Group’s brands to its customers could have an adverse impact on the value of that brand and subsequent revenues from that brand or business. In addition, the value of the Group’s brands is influenced by a number of other factors, some of which may be outside the Group’s control, including commoditization (whereby price and/or quality becomes relatively more important than brand identifications due, in part, to the increased prevalence of third-party intermediaries), consumer preference and perception, failure by the Group or its franchisees to ensure compliance with the significant regulations applicable to hotel operations (including fire and life safety requirements), or other factors affecting consumers’ willingness to purchase goods and services, including any factor which adversely affects the reputation of those brands.

 

In particular, where the Group is unable to enforce adherence to its operating and quality standards, or the significant regulations applicable to hotel operations, pursuant to its management and franchise contracts, there may be further adverse impact upon brand reputation or customer perception and therefore the value of the hotel brands.

 

Given the importance of brand recognition to the Group’s business, the Group has invested considerable effort in protecting its intellectual property, including registration of trademarks and domain names. However, the controls and laws are variable and subject to change. Any widespread infringement, misappropriation or weakening of the control environment could materially harm the value of the Group’s brands and its ability to develop the business.

 

The Group is exposed to a variety of risks related to identifying, securing and retaining management and franchise agreements

 

The Group’s growth strategy depends on its success in identifying, securing and retaining management and franchise agreements. This is an inherent risk for the hotel industry and franchise business model. Competition with other hotel companies may generally reduce the number of suitable management, franchise and investment opportunities offered to the Group and increase the bargaining power of property owners seeking to engage a manager or become a franchisee. The terms of new management or franchise agreements may not be as favorable as current arrangements and the Group may not be able to renew existing arrangements on the same terms.

 

There can also be no assurance that the Group will be able to identify, retain or add franchisees to the Group system or to secure management contracts. For example, the availability of suitable sites, planning and other local regulations or the availability and affordability of finance may all restrict the supply of suitable hotel development opportunities under franchise or management agreements. In connection with entering into management or franchise agreements, the Group may be required to make investments in, or guarantee the obligations of, third parties or guarantee minimum income to third parties. There are also risks that significant franchisees or groups of franchisees may have interests that conflict, or are not aligned, with those of the Group including, for example, the unwillingness of franchisees to support brand improvement initiatives.

 

Changes in legislation or regulatory changes may be implemented that have the effect of favoring franchisees relative to brand owners.

The Group is exposed to the risks of political and economic developments

 

The Group is exposed to the inherent risks of global and regional adverse political, economic and financial market developments, including recession, inflation, availability of affordable credit and currency fluctuations that could lower revenues and reduce income. A recession reduces leisure and business travel to and from affected countries and adversely affects room rates and/or occupancy levels and other income-generating activities, resulting in deterioration of results of operations and potentially reducing the value of properties in affected economies. The owners or potential owners of hotels managed or franchised by one group face similar risks which could adversely impact IHG’s ability to retain and secure management or franchise agreements. More specifically, the Group is highly exposed to the US market and, accordingly, is particularly susceptible to adverse changes in the US economy.

 

Further political or economic factors or regulatory action could effectively prevent the Group from receiving profits from, or selling its investments in, certain countries, or otherwise adversely affect operations. For example, changes to tax rates or legislation in the jurisdictions in which the Group operates could decrease the proportion of profits the Group is entitled to retain, or the Group’s interpretation of various tax laws and regulations may prove to be incorrect, resulting in higher than expected tax charges.

 

The Group requires organizational capability to manage changes in key personnel and senior management

 

In order to develop, support and market its products, the Group must hire and retain highly skilled employees with particular expertise. The implementation of the Group’s strategic business plans could be undermined by failure to recruit or retain key personnel, the unexpected loss of key senior employees, failures in the Group’s succession planning and incentive plans, or a failure to invest in the development of key skills. Some of the markets in which the Group operates are experiencing economic growth and the Group must compete against other companies inside and outside the hospitality industry for suitably qualified or experienced employees. Failure to attract and retain these employees may threaten the success of the Group’s operations in these markets. Additionally, unless skills are supported by a sufficient infrastructure to enable knowledge and skills to be passed on, the Group risks losing accumulated knowledge if key employees leave the Group.

 

The Group is exposed to the risk of events that adversely impact domestic or international travel

 

The room rates and occupancy levels of the Group could be adversely impacted by events that reduce domestic or international travel, such as actual or threatened acts of terrorism or war, epidemics, travel-related accidents, travel-related industrial action, increased transportation and fuel costs and natural disasters resulting in reduced worldwide travel or other local factors impacting individual hotels. A decrease in the demand for hotel rooms as a result of such events may have an adverse impact on the Group’s operations and financial results. In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of the Group.

 

The Group is reliant upon its proprietary reservations system and is exposed to the risk of failures in the system and increased competition in reservations infrastructure

 

The value of the brands of the Group is partly derived from the ability to drive reservations through its proprietary HolidexPlus reservations system, a central repository of all hotel room inventories linked electronically to multiple sales channels including IHG owned Internet websites, third-party Internet intermediaries and travel agents, call centers and hotels.

 

Lack of resilience in operational availability could lead to prolonged service disruption and may result in significant business interruption and subsequent impact on revenues. Lack of investment in these systems may also result in reduced ability to compete additionally, failure to maintain an appropriate e-commerce strategy and select the right partners could erode the Group’s market share.

The Group is exposed to certain risks in relation to technology and systems

 

To varying degrees, the Group is reliant upon certain technologies and systems (including IT systems) for the running of its business, particularly those which are highly integrated with business processes. Disruption to those technologies or systems could adversely affect the efficiency of the business, notwithstanding business continuity or disaster recovery processes. The Group may have to make substantial additional investments in new technologies or systems to remain competitive. Failing to keep pace with developments in technologies or systems may put the Group at a competitive disadvantage. The technologies or systems that the Group chooses may not be commercially successful or the technology or system strategy employed may not be sufficiently aligned with the needs of the business or responsive to changes in business strategy. As a result, the Group could lose customers, fail to attract new customers or incur substantial costs or face other losses.

 

The Group is exposed to the risks of the hotel industry supply and demand cycle

 

The future operating results of the Group could be adversely affected by industry over capacity (by number of rooms) and weak demand due, in part, to the cyclical nature of the hotel industry, or other differences between planning assumptions and actual operating conditions. Reductions in room rates and occupancy levels would adversely impact the results of Group operations.

 

The Group may experience a lack of selected development opportunities

 

While the strategy of the Group is to extend the hotel network through activities that do not involve significant amounts of its own capital, if the availability of suitable development sites becomes limited for IHG and its prospective hotel owners, this could adversely affect its results of operations.

 

The Group is exposed to risks related to corporate responsibility

 

The reputation of the Group and the value of its brands are influenced by a wide variety of factors, including the perception of key stakeholders and the communities in which the Group operates. The social and environmental impacts of business are under increasing scrutiny, and the Group is exposed to the risk of damage to its reputation if it fails to demonstrate sufficiently responsible practices in a number of areas such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for the local community.

 

The Group is exposed to the risk of litigation

 

The Group could be at risk of litigation from many parties, including guests, customers, joint venture partners, suppliers, employees, regulatory authorities, franchisees and/or the owners of hotels managed by it. Claims filed in the United States may include requests for punitive damages as well as compensatory damages. Exposure to litigation or fines imposed by regulatory authorities may also affect the reputation of the Group.

 

The Group may face difficulties insuring its business

 

Historically, the Group has maintained insurance at levels determined by it to be appropriate in light of the cost of cover and the risk profiles of the business in which it operates. However, forces beyond the Group’s control including market forces, may limit the scope of coverage the Group can obtain and the Group’s ability to obtain coverage at reasonable rates. Other forces beyond the Group’s control, such as terrorist attacks or natural disasters may be uninsurable or simply too expensive to insure. Inadequate or insufficient insurance could expose the Group to large claims or could result in the loss of capital invested in properties, as well as the anticipated future revenue from properties, and could leave the Group responsible for guarantees, debt or other financial obligations related to such properties.

 

The Group is exposed to a variety of risks associated with its ability to borrow and satisfy debt covenants

 

The Group is reliant on having access to borrowing facilities to meet its expected capital requirements. The majority of the Group’s borrowing facilities are only available if the financial covenants in the facilities are complied with. If the Group is not in compliance with the covenants, the lenders may demand the repayment of the

funds advanced. If the Group’s financial performance does not meet market expectations it may not be able to refinance its existing facilities on terms it considers favorable. The availability of funds for future financing is, in part, dependent on conditions and liquidity in the capital markets.

 

The Group is required to comply with data privacy regulations

 

Existing and emerging data privacy regulations limit the extent to which the Group can use customer information for marketing or promotional purposes. Compliance with these regulations in each jurisdiction in which the Group operates may require changes in marketing strategies and associated processes which could increase operating costs or reduce the success with which products and services can be marketed to existing or future customers. In addition, non-compliance with privacy regulations may result in fines, damage to reputation or restrictions on the use or transfer of information.

 

The Group is exposed to the risks related to information security

 

The Group is increasingly dependent upon the availability, integrity and confidentiality of information and the ability to report appropriate and accurate business performance, including financial reporting, to investors and markets.

 

The reputation and performance of the Group may be adversely affected if it fails to maintain appropriate confidentiality of information and ensure relevant controls are in place to enable the release of information only through the appropriate channels in a timely and accurate manner.

 

The Group is exposed to funding risks in relation to the defined benefits under its pension plans

 

The Group is required by law to maintain a minimum funding level in relation to its ongoing obligation to provide current and future pensions for members of its UK pension plans who are entitled to defined benefits. In addition, if certain Plans of the Group are wound-up, the Group could become statutorily liable to make an immediate payment to the trustees to bring the funding of defined benefits to a level which is higher than this minimum. The contributions payable by the Group must be set with a view to making prudent provision for the benefits accruing under the plans of the Group.

 

In particular, the trustees of IHG’s UK defined benefit plan may demand increases to the contribution rates relating to the funding of this plan, which would oblige relevant employers of the Group to contribute extra amounts. The trustees must consult the plan’s actuary and principal employer before exercising this power. In practice, contribution rates are agreed between the Group and the trustees on actuarial advice, and are set for three-year terms. The last such review was as at March 31, 2006.

 

 

Group Overview

 

The Group is a worldwide owner, manager and franchisor of hotels and resorts. Through its various subsidiaries it owned, leased, managed, or franchised 4,186 hotels and 619,851 guest rooms in nearly 100 countries around the world, as at December 31, 2008. The Group’s brands include InterContinental Hotels & Resorts (“InterContinental”), Crowne Plaza Hotels & Resorts (“Crowne Plaza”), Holiday Inn Hotels & Resorts (“Holiday Inn”), Holiday Inn Express (or Express by Holiday Inn outside of the Americas), Staybridge Suites, Candlewood Suites and Hotel Indigo. The Group also manages the hotel loyalty program, Priority Club Rewards.

 

With the disposal of the Group’s interests in Britvic, a manufacturer and distributor of soft drinks in the United Kingdom, by way of an initial public offering (“IPO”) in December 2005, the Group is now focused solely on hotel franchising, management and ownership.

 

The Group’s revenue and earnings are derived from (i) hotel operations, which include operation of the Group’s owned hotels, management and other fees paid under management contracts, where the Group operates

third-parties’ hotels, and franchise and other fees paid under franchise agreements and (ii) until December 14, 2005, the manufacture and distribution of soft drinks.

 

On March 23, 2009, InterContinental Hotels Group PLC had a market capitalization of approximately £1.6 billion, and was included in the list of FTSE 100 companies, a list of the 100 largest companies by market capitalization on the London Stock Exchange.

 

Following a capital restructuring in June 2005, InterContinental Hotels Group PLC became the holding company for the Group. Six Continents Limited (formerly Six Continents PLC), which was formed in 1967, is the principal subsidiary company. The Company’s corporate headquarters are in the United Kingdom, and the registered address is:

 

InterContinental Hotels Group PLC

Broadwater Park

Denham

Buckinghamshire UB9 5HR

Tel: +44 (0) 1895 512000

Internet address: www.ihg.com

 

InterContinental Hotels Group PLC was incorporated in Great Britain on May 21, 2004 and registered in, and operates under, the laws of England and Wales. Operations undertaken in countries other than England and Wales are subject to the laws of those countries in which they reside.

 

Group History and Recent Developments

 

The Group, formerly known as Bass and, more recently, Six Continents, was historically a conglomerate operating as, among other things, a brewer, soft drinks manufacturer, hotelier, leisure operator, and restaurant, pub and bar owner. In the last several years, the Group has undergone a major transformation in its operations and organization, as a result of the Separation (as discussed below) and a number of significant disposals during this period, which has narrowed the scope of its business.

 

On April 15, 2003, following shareholder and regulatory approval, Six Continents PLC (as it then was) separated into two new listed groups, InterContinental Hotels Group PLC (as it then was) comprising the Hotels and Soft Drinks businesses and Mitchells & Butlers plc comprising the Retail and Standard Commercial Property Developments businesses (the “Separation”).

 

The Group disposed of its interests in the soft drinks business by way of an initial public offering (“IPO”) of Britvic, a manufacturer and distributor of soft drinks in the United Kingdom, in December 2005.

 

Acquisitions and Dispositions

 

Since the Separation, 183 hotels with a net book value of $5.2 billion have been sold, generating aggregate proceeds of $5.5 billion. Of these 183 hotels, 164 hotels have remained in the IHG global system (the number of hotels and rooms owned, leased, managed or franchised by the Group) through either franchise or management agreements. As of March 23, 2009 the Group had on the market a further 5 hotels.

 

During 2008, the Group disposed of the Holiday Inn Jamaica for $30 million.

 

The Group also divested a number of equity interests of which proceeds totaled $61 million, including a 31.25% interest in the Crowne Plaza Christchurch for $24 million and a 17.0% interest in the Crowne Plaza Amsterdam for $20 million.

 

The asset disposal program which commenced in 2003 has significantly reduced the capital requirements of the Group whilst largely retaining the hotels in the IHG system through management and franchise agreements.

 

Capital expenditure in 2008 totaled $108 million compared with $186 million in 2007 and $228 million in 2006.

At December 31, 2008 capital committed, being contracts placed for expenditure on property, plant and equipment not provided for in the financial statements, totaled $40 million.

 

On October 24, 2007 the Group announced a worldwide relaunch of its Holiday Inn brand family. In support of this relaunch, the Group will make a non-recurring revenue investment of $60 million which will be charged to the income statement as an exceptional item, $35 million was charged in 2008.

 

Following the completion of the hotel disposals in 2008, the Group owns 16 hotels.

 

FIGURE 1

 

 

Return of Funds

 

Since March 2004, the Group has announced the return of £3.6 billion of funds to shareholders by way of special dividends, share repurchase programs and capital returns. As of March 23, 2009 IHG had returned over £3.5 billion to shareholders (see Figure 2).

 

A third £250 million share repurchase program was completed in 2007 and the £150 million share repurchase program announced on February 20, 2007 was commenced. At December 31, 2008 £30 million of this share repurchase program was outstanding. During 2008 9.2 million shares were repurchased at an average price of 759 pence per share (total £70 million). The precise timing of share purchases is dependent upon, amongst other things, market conditions. By March 23, 2009, a total of 14.4 million shares had been repurchased under the £150 million repurchase program at an average price per share of 831 pence per share (approximately £120 million). Purchases are made under the existing authority from shareholders which will be renewed at the Company’s Annual General Meeting. Any shares repurchased under these programs will be canceled.

 

The program was deferred in November 2008 in order to preserve cash and maintain the strength of IHG’s balance sheet.

 

Information relating to the purchases of equity securities can be found in Item 16E.

FIGURE 2

 

 

 

Hotels

 

IHG, through various subsidiaries, owns a number of hotel brands including InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo. As of December 31, 2008, IHG’s brands comprised 4,186 franchised, managed, owned or leased hotels and 619,851 rooms in nearly 100 countries.

 

Soft Drinks

 

In December 2005 IHG disposed of its interests in Britvic, one of the two leading manufacturers of soft drinks by value and volume in Great Britain, by way of an IPO. IHG received aggregate proceeds of approximately £371 million (including two additional dividends, one of £47 million received in November 2005 and another of £89 million received in May 2005, before any commissions or expenses). The Group results for fiscal 2005 include the results of Soft Drinks for the period up until the IPO of Britvic on December 14, 2005.

 

Geographic Segmentation

 

The following table shows revenue and operating profit before exceptional operating items in US dollars and percentage by geographical area, for the following periods: years ended December 31, 2008, 2007 and 2006.

 

 

 

Footnotes on page 19.

 

 

 

 

Overview

 

InterContinental Hotels Group PLC is an international hotel business which, through various subsidiaries, owns a portfolio of established and diverse hotel brands, including InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo, with 4,186 franchised, managed, owned and leased hotels and 619,851 guest rooms in nearly 100 countries as at December 31, 2008. Approximately 614,000 rooms or 99% of the Group’s rooms are operated under managed and franchised models.

 

The unprecedented financial events of late 2008 and the resulting global recession have had, and will continue to have, a significant impact on IHG and the wider hotel industry. IHG’s share price fell by 36% in 2008 and, although the Group outperformed its peers, whose aggregate share price fell by 49%, this is a major change in sentiment. IHG will continue to monitor key trends and indicators to ensure its strategy remains well suited to the developing environment and its capabilities. In essence, IHG believes its business is resilient and, accordingly, its strategy remains unchanged. However, IHG sees short-term risks in the pace of future openings, availability of debt and consumer demand. None of these factors is expected to require major change to IHG’s strategy and it remains focused on the medium to long-term, while it protects short-term profitability.

 

It is beyond doubt that this downturn is severe, with a sharp decline in revenue per available room (RevPAR) and bookings. However, IHG believes it is well placed to manage through this economic situation, despite its severity. While the current downturn is unusual in its rapidity, unpredictability and degree of credit restriction, the hotel industry has always been cyclical. Traditionally it has experienced periods of five to eight years of RevPAR growth followed by up to two years of declines in RevPAR. Demand has rarely fallen for sustained periods and it is the interplay between hotel supply and demand in the industry that drives longer-term fluctuations in RevPAR. The Group’s fee-based profit is partly protected from changes in hotel supply due to its model of third-party ownership of hotels under the Group’s management and franchise contracts. IHG profit varies more with hotel revenue (demand) than it does with hotel profit performance. IHG believes it is well placed over the coming year compared with competitors who own hotels, rather than simply operate them, as does the Group.

 

The global hotel market, has an estimated room capacity of 17.5 million rooms. This has grown at approximately 2% per annum over the last five years. Competitors in the market include other large hotel companies and independently owned hotels.

 

The market remains fragmented, with an estimated 7.7 million branded hotel rooms (approximately 45% of the total market). The Group has an estimated 8% share of the branded market (approximately 3% of the total market). The top six major companies, including IHG, together control approximately 42% of the branded rooms, only 19% of total hotel rooms.

 

Geographically, the market is more concentrated with the top 20 countries accounting for 80% of global hotel rooms. Within this, the United States is dominant (more than 25% of global hotel rooms) with China, Japan and Italy being the next largest markets. The Group’s brands have more leadership positions (top three by room numbers) in the six largest geographic markets than any other major hotel company.

 

US market data historically indicates a steady increase in hotel industry revenues, broadly in line with Gross Domestic Product, with growth of approximately 1.5% per annum in real terms since 1967. Globally, IHG believes demand is driven by a number of underlying trends:

 

 

FIGURE 3

 

 

 

Source: IHG Analysis, Northstar Travel Management, Smith Travel Research (STR)

 

Within the global market, a relatively low proportion of hotel rooms are branded; however, there has been an increasing trend towards branded rooms. Over the three years 2006, 2007 and 2008, the branded market (as represented by the nine major global branded hotel companies) has grown at a 3.6% compound annual growth rate (CAGR), over twice as quickly as the overall market implying an increased preference towards branded hotels. Branded companies are therefore gaining market share at the expense of unbranded companies. IHG is well positioned to benefit from this trend. Hotel owners are increasingly recognizing the benefits of working with IHG Hotels which can offer a portfolio of brands to suit the different real estate opportunities an owner may have, together with effective revenue delivery through global reservation channels. Furthermore, hotel ownership is increasingly being separated from hotel operations, encouraging hotel owners to use third parties such as IHG Hotels to manage or franchise their hotels.

 

Potential negative trends impacting hotel industry growth include the possibility of increased terrorism, environmental considerations and economic factors such as those now prevailing, namely recession and global credit restrictions.

 

IHG’s future growth will be achieved predominantly through managing and franchising rather than owning hotels. Approximately 614,000 rooms operating under Group brands are managed or franchised and 5,600 are owned and leased.

 

The managed and franchised fee-based model is attractive because it enables the Group to achieve its goals with limited capital investment at an accelerated pace. A further advantage is the reduced volatility of the fee-based income stream, compared with ownership of assets.

 

A key characteristic of the managed and franchised business is that it generates more cash than is required for investment in the business, with a high return on capital employed. During the year ended December 31, 2008, 85% of continuing earnings before regional and central overheads, exceptional items, interest and tax is derived from managed and franchised operations.

 

Operations

 

The Group currently operates an ‘asset-light’ business model and owns only a small number of hotels. Through three distinct business models which offer different growth, return, risk and reward opportunities, IHG achieves growth through its partnerships with financial participants who may provide capital in exchange for, among other things, the Group’s expertise and brand value. The models are summarized as follows:

 

franchised, where Group companies neither own nor manage the hotel, but license the use of a Group brand and provide access to reservations systems, loyalty schemes and know-how. The Group derives revenues from a brand royalty or licensing fee, based on a percentage of room revenue. At the end of 2008, 75% of the Group’s rooms were franchised, with 90% of rooms in the Americas operating under this model.

 

managed, where in addition to licensing the use of a Group brand, a Group company manages the hotel for third party owners. The Group derives revenues from base and incentive management fees and provides the system infrastructure necessary for the hotel to operate. Management contract fees are generally a percentage of hotel revenue and may have an additional incentive fee linked to profitability or cash flow. The terms of these agreements vary, but are often long-term (for example, 10 years or more). The Group’s responsibilities under the management agreement typically include hiring, training and supervising the managers and employees that operate the hotels under the relevant brand standards. In order to gain access to central reservations systems, global and regional brand

marketing and brand standards and procedures, owners are typically required to make a further contribution. At the end of 2008, 24% of the Group’s rooms were operated under management contracts.

 

owned and leased (“O & L”), where a Group company both owns (or leases) and operates the hotel and, in the case of ownership, takes all the benefits and risks associated with ownership. The Group has sold a significant proportion of its owned and leased portfolio and in future expects to own only hotels where it is considered strategically important to do so. Rooms owned or leased by the Group at the end of 2008 represented 1% of the Group’s rooms.

 

In addition, the Group also makes equity investments in hotel ownership entities, where its equity investment is less than 100% and it participates in a share of the benefits and risks of ownership. A management contract is generally entered into as well as the equity investment.

 

The following table shows the number of hotels and rooms owned, leased, managed or franchised by IHG as at December 31, 2008, 2007 and 2006.

 

 

The Group sets quality and service standards for all of its hotel brands (including those operated under management contracts or franchise arrangements) and operates a customer satisfaction and hotel quality measurement system to ensure those standards are met or exceeded. The quality measurement system includes an assessment of both physical property and customer service standards.

 

Strategy

 

IHG seeks to deliver enduring top quartile shareholder returns, when measured against a broad global hotel peer group, by focusing on its core purpose of creating “Great Hotels Guests Love”. IHG aims to offer guests a level of service and hospitality that will encourage them to make return visits to the Group’s hotels.

 

We measure success in three ways:

 

 

Successful performance against various combinations of these, and other, metrics drives payment of a significant percentage of senior management discretionary remuneration.

 

IHG’s strategy has seen significant development through 2008 as the Group moved to make its core purpose a reality. IHG has taken a hard look at its operations and capabilities to focus on what really matters most to deliver Great Hotels Guests Love. IHG has backed this up with a major effort to align its people and measure the most important drivers, resulting in a clear, target-based program within its hotels to motivate teams and guide behaviours.

 

Our strategy now encompasses two key aspects:

 

 

The Group’s underlying ‘Where’ strategy is that IHG will grow a portfolio of differentiated hospitality brands in select strategic countries and global key cities to maximize our scale advantage. The ‘How’ aspect of the Group’s

strategy flows from the Group’s core purpose and research at the hotel level as to what really makes a difference for guests.

 

In support of the Group’s overall strategy there are now five key priorities — one ‘Where we compete’ and four ‘How we win’:

 

Where we compete

 

 

How we win

 

 

In June 2005 IHG set an organic growth target of at least 50,000 to 60,000 net rooms to be added by the end of 2008, with specific growth targets for the InterContinental brand (15-25 net InterContinental hotel additions) and within the Chinese market (125 hotels in China). As at December 31, 2008, IHG had achieved organic growth of over 82,000 net rooms against the target set in June 2005, together with 23 net InterContinental hotel additions and 112 hotels in China (for China, the target is expected to be exceeded in early 2009).

 

The Group delivered its growth targets through its operating system which includes:

 

 

Segmental Results by Activity

 

The following table shows the Group’s continuing revenue and operating profit before exceptional operating items by activity and the percentage contribution of each activity for the following periods: years ended December 31, 2008, 2007 and 2006.

 

 

 

Footnotes on page 25.

 

 

 

 

Global System

 

Hotels operated under the Group’s brands are, pursuant to terms within their contracts, subject to cash assessments for brand marketing, reservations systems and Priority Club membership stays. These assessments, typically based upon room revenue, are pooled within the system funds for the collective benefit of all hotels by brand or geography. The assessments are used for revenue generating activities including the costs of call centers, frequency program points, websites, sales teams, advertising and brand development and affiliate marketing programs.

 

Priority Club Rewards:  The Group operates the Priority Club Rewards loyalty program. Members enjoy a variety of privileges and rewards as they stay at the Group’s hotels around the world. Global system rooms sales generated from Priority Club Rewards members during 2008 were $5.9 billion and represented approximately 37% of IHG Hotels global system rooms sales.

 

Central Reservation System Technology:  The Group operates the HolidexPlus reservations system. The HolidexPlus system receives reservations requests entered on terminals located at most of its reservation centers, as well as from global distribution systems operated by a number of major corporations and travel agents. Where local hotel systems allow, the HolidexPlus system immediately confirms reservations or indicates alternative accommodation available within IHG’s network. Confirmations are transmitted electronically to the hotel for which the reservation is made.

 

Reservations Call Centers:  The Group operates 12 reservations centers around the world which enable it to sell in local languages in many countries and offer a high quality service to customers.

 

Internet:  The Group introduced electronic hotel reservations in 1995. The Internet continues to be an important communications, branding and distribution channel for the Group’s sales. During 2008, the internet channel continued to show strong growth, with global system rooms sales booked through the internet increasing by 21% to $2.6 billion. Approximately 20% (17% in 2007) of IHG global system rooms sales is via the internet through various branded websites, such as www.intercontinental.com and www.holidayinn.com, as well as certified third parties. IHG has established standards for working with third party intermediaries — on-line travel distributors — who sell or re-sell the Group’s branded hotel rooms via their internet sites. Under the standards, certified distributors are required to respect the Group’s trademarks, ensure reservations are guaranteed through an automated and common confirmation process, and clearly present fees to customers. About 86% of IHG Hotels’ global system rooms sales booked on the web is now booked directly through the Group’s own brand sites.

 

The Group estimates that, during 2008, global system rooms sales booked through these reservations systems (which include company reservations centers, global distribution systems and internet reservations) rose by approximately 10% to $7.6 billion, and the proportion of IHG Hotels’ global system rooms sales booked through the Group’s reservation channels increased from 45% to 48%.

 

Sales and Marketing

 

IHG targets its sales and marketing expenditure in each region on driving revenue and brand awareness or, in the case of sales investments, targeting segments such as corporate accounts, travel agencies and meeting organizers. The majority of IHG’s sales and marketing expenditure is funded by contractual fees paid by most hotels in the system.

 

The strategic goals for the global system as a whole include:

 

 

Global Brands

 

Brands Overview

 

The Group’s portfolio includes seven established and diverse brands. These brands cover several market segments and in the case of InterContinental, Crowne Plaza, Holiday Inn and Holiday Inn Express, operate internationally. During 2008, the first Staybridge Suites hotels opened outside the Americas, in Liverpool and Cairo and the first Hotel Indigo in London. Candlewood Suites operates exclusively in the Americas.

 

 

InterContinental

 

 

 

 

InterContinental hotels are located in major cities and leisure destinations in over 60 countries. Each hotel offers high-class facilities and services aimed at the discerning business and leisure traveler. The brand strives to provide guests with memorable experiences which also give a sense of each hotel’s location. These hotels blend luxury with a celebration of local culture and heritage which is reflected in everything from décor to dining.

 

InterContinental hotels are principally managed by the Group. As at December 31, 2008, there were 159 InterContinental hotels which represented 9% of the Group’s total hotel rooms. During 2008, 11 InterContinental hotels were added to the portfolio while one hotel was removed.

 

Crowne Plaza

 

 

 

 

Crowne Plaza is one of the fastest growing upscale hotel brands in the world, located in more than 55 countries. Crowne Plaza offers simple elegance and full-service facilities for business and leisure travelers alike. Mainly sited in principal cities, these hotels offer high quality accommodation for leisure and business travelers who appreciate style, a sociable environment, excellent meeting facilities and state-of-the-art business technology.

The majority of Crowne Plaza hotels are operated under franchise agreements. As at December 31, 2008, there were 342 Crowne Plaza hotels which represented 15% of the Group’s total hotel rooms. During 2008, 50 Crowne Plaza hotels were added to the portfolio while seven hotels were removed.

 

Holiday Inn