20-F 1 u54625e20vf.htm FORM 20-F e20vf
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
 
     
(Mark One)    
 
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
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)
 
67 Alma Road,
Windsor, Berkshire SL4 3HD
(Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
 
American Depositary Shares   New York Stock Exchange
Ordinary Shares of 1329/47 pence each   New York Stock Exchange*
 
 
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
 
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:
 
     
Ordinary Shares of 1329/47 pence each
  294,623,308
 
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:
 
         
US GAAP o
  International Reporting Standards as issued by  
the International Standards Accounting Board
  Other  o
 


Table of Contents

 
TABLE OF CONTENTS
 
             
        Page
 
  4
  5
             
 
PART I
      Identity of Directors, Senior Management and Advisors   7
      Offer Statistics and Expected Timetable   7
      Key Information   7
        Selected Consolidated Financial Information   7
        Risk Factors   11
      Information on the Company   14
        Summary   14
        Segmental Information   18
        Hotels   22
        Soft Drinks   39
        Trademarks   39
        Organizational Structure   39
        Property, Plant and Equipment   39
        Environment   40
      Unresolved Staff Comments   41
      Operating and Financial Review and Prospects   41
        Critical Accounting Policies   41
        Operating Results   43
        Liquidity and Capital Resources   51
      Directors, Senior Management and Employees   54
        Directors and Senior Management   54
        Compensation   57
        Board Practices   58
        Employees   61
        Share Ownership   62
      Major Shareholders and Related Party Transactions   63
        Major Shareholders   63
        Related Party Transactions   63
      Financial Information   63
        Consolidated Statements and Other Financial Information   63
        Significant Changes   64
      The Offer and Listing   64
        Plan of Distribution   65
        Selling Shareholders   65
        Dilution   65
        Expenses of the Issue   65


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        Page
 
      Additional Information   65
        Memorandum and Articles of Association   65
        Material Contracts   68
        Exchange Controls   70
        Taxation   70
        Documents on Display   74
      Quantitative and Qualitative Disclosures About Market Risk   74
      Description of Securities Other Than Equity Securities   76
             
 
PART II
      Defaults, Dividend Arrearages and Delinquencies   76
      Material Modifications to the Rights of Security Holders and Use of Proceeds   76
      Controls and Procedures   76
      [Reserved]   77
      Audit Committee Financial Expert   77
      Code of Ethics   77
      Principal Accountant Fees and Services   77
      Exemptions from the Listing Standards for Audit Committees   78
      Purchases of Equity Securities by the Issuer and Affiliated Purchasers   78
             
 
PART III
      Financial Statements   78
      Financial Statements   79
      Exhibits   79


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INTRODUCTION
 
As used in this document, except as the context otherwise requires, the terms:
 
  •  “board” refers to the board of directors of InterContinental Hotels Group PLC or, where appropriate, the board of InterContinental Hotels Limited or Six Continents Limited;
 
  •  “Britvic” refers to Britannia Soft Drinks Limited for the period up to November 18, 2005, and thereafter, Britannia SD Holdings Limited (renamed Britvic plc on November 21, 2005) which became the holding company of the Britvic Group on November 18, 2005;
 
  •  “Britvic Group” refers to Britvic and its subsidiaries from time to time;
 
  •  “Company” refers to InterContinental Hotels Group PLC, InterContinental Hotels Limited or Six Continents Limited or their respective board of directors as the context requires;
 
  •  “Group” refers to InterContinental Hotels Group PLC and its subsidiaries or, where appropriate, InterContinental Hotels Limited or Six Continents Limited and their subsidiaries as the context requires;
 
  •  “Hotels” or “IHG Hotels” refers to the hotels business of the Group;
 
  •  “IHG” refers to InterContinental Hotels Group PLC or, where appropriate, its board of directors;
 
  •  “IHL” refers to InterContinental Hotels Limited, previously InterContinental Hotels Group PLC, former parent company of the Group and re-registered as a private limited company on June 27, 2005;
 
  •  “ordinary share” or “share” refers, before April 14, 2003, to the ordinary shares of 28 pence each in Six Continents Limited; following that date and until December 10, 2004 to the ordinary shares of £1 each in IHL; following that date and until June 27, 2005 to the ordinary shares of 112 pence each in IHL; following that date and until June 12, 2006 to the ordinary shares of 10 pence each in IHG; following that date until June 4, 2007 to the ordinary shares of 113/7 pence each in IHG; and following June 4, 2007 to the ordinary shares of 1329/47 pence each in IHG;
 
  •  “Six Continents” refers to Six Continents Limited; previously Six Continents PLC and re-registered as a private limited company on June 6, 2005;
 
  •  “Soft Drinks” and “Britvic business” refer to the soft drinks business of InterContinental Hotels Group PLC, which the Company had through its controlling interest in Britvic and which the Company disposed of by way of an initial public offering effective December 14, 2005; and
 
  •  “VAT” refers to UK value added tax levied by HM Revenue and Customs on certain goods and services.
 
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.
 
The Company publishes its Consolidated Financial Statements expressed in UK pounds sterling. In this document, references to “US dollars”, “US$”, “$” or “¢” are to United States (“US”) 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 and references to “A$” are to Australian (“A”) 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. Unless otherwise indicated, the translations of pounds sterling into US dollars have been made at the rate of £1.00 = $2.01, 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 (the “Noon Buying Rate”) on December 31, 2007. On March 14, 2008 the Noon Buying Rate was £1.00 = $2.03. For information regarding rates of exchange between pounds sterling and US dollars from fiscal 2003 to the present, see “Item 3. Key Information — Exchange Rates”.
 
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


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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, 2007 are shown as 2007 and references to the year ended December 31, 2006 are shown as 2006, 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 Company’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 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 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 2007, the Company reported interim financial information at June 30, 2007 in accordance with the Listing Rules of the UK Listing Authority. In addition, it provided quarterly financial information at March 31, 2007 and at September 30, 2007 and intends to continue to provide quarterly financial information during fiscal 2008. The Financial Statements may be found on the Company’s website at www.ihg.com.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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.


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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 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 ability to recruit and retain key personnel; events that adversely impact domestic or international travel, including terrorist incidents; the risks involved in the Group’s reliance upon its proprietary reservation system and increased competition in reservation infrastructure; the risks involved with the Group’s reliance on technologies and systems; the risks of the hotel industry supply and demand cycle; the possible lack of selected development opportunities; risks related to corporate responsibility; the risk of litigation; the risks associated with the Group’s ability to maintain adequate insurance; the Group’s ability to borrow and satisfy debt covenants; compliance with data privacy regulations; and the risks associated with funding the defined benefits under its pension plans.


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PART I
 
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable.
 
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.   KEY INFORMATION
 
SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
Summary
 
The selected consolidated financial data set forth below for the years ended December 31, 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 Company’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.


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Consolidated Income Statement Data
 
                                         
    Years ended December 31,  
    2007(1)     2007     2006     2005(2)     2004(2)  
    $     £     £     £     £  
    (in millions, except per share and ADS amounts)  
 
Revenue:
                                       
Continuing operations
    1,771       883       786       697       607  
Discontinued operations
    79       40       174       1,213       1,597  
                                         
      1,850       923       960       1,910       2,204  
                                         
Total operating profit before exceptional operating items:
                                       
Continuing operations
    474       237       200       175       125  
Discontinued operations
    17       8       31       164       221  
                                         
      491       245       231       339       346  
                                         
Exceptional operating items:
                                       
Continuing operations
    60       30       27       (15 )     (24 )
Discontinued operations
                      (7 )     (25 )
                                         
      60       30       27       (22 )     (49 )
                                         
Total operating profit:
                                       
Continuing operations
    534       267       227       160       101  
Discontinued operations
    17       8       31       157       196  
                                         
      551       275       258       317       297  
                                         
Financial income
    18       9       26       30       70  
Financial expenses
    (108 )     (54 )     (37 )     (63 )     (103 )
                                         
Profit before tax
    461       230       247       284       264  
                                         
Tax:
                                       
On profit before exceptional items
    (90 )     (45 )     (53 )     (88 )     (56 )
On exceptional items
                (6 )           22  
Exceptional tax
    60       30       100       8       161  
                                         
      (30 )     (15 )     41       (80 )     127  
                                         
Profit after tax
    431       215       288       204       391  
Gain on disposal of assets, net of tax
    32       16       117       311       19  
                                         
Profit for the year
    463       231       405       515       410  
                                         
Attributable to:
                                       
Equity holders of the parent
    463       231       405       496       383  
Minority equity interest
                      19       27  
                                         
Profit for the year
    463       231       405       515       410  
                                         
Earnings per ordinary share:
                                       
Continuing operations:
                                       
Basic
    131.3¢       65.6p       69.1p       21.9p       36.3p  
Diluted
    127.7¢       63.8p       67.4p       21.4p       35.9p  
                                         
Total operations:
                                       
Basic
    144.7¢       72.2p       104.1p       95.2p       53.9p  
Diluted
    140.7¢       70.2p       101.5p       93.1p       53.3p  
                                         
 
Footnotes on page 9.


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Consolidated Balance Sheet Data
 
                                         
    December 31,  
    2007(3)     2007     2006     2005     2004  
    $     £     £     £     £  
    (in millions)  
 
Goodwill and intangible assets
    556       277       263       238       206  
Property, plant and equipment
    1,934       962       997       1,356       1,926  
Investments and other financial assets
    253       126       128       155       122  
Retirement benefit assets
    65       32                    
Current assets
    710       353       455       707       598  
Non-current assets classified as held for sale
    115       57       50       279       1,826  
                                         
Total assets
    3,633       1,807       1,893       2,735       4,678  
                                         
Current liabilities
    1,226       610       643       794       926  
Long-term debt
    1,748       869       303       410       1,156  
Net assets
    98       49       686       1,104       1,938  
Share capital
    163       81       66       49       723  
IHG shareholders’ equity
    92       46       678       1,084       1,821  
                                         
Number of Shares in issue at period end (millions)
            295       356       433       622  
                                         
 
 
(1) US dollar amounts have been translated at the weighted average rate for the year of £1.00 = $2.01.
(2) The year ended 2004 includes Hotels 12 months and Soft Drinks 53 weeks ended December 25, 2004. The year ended 2005 includes Hotels 12 months and Soft Drinks 50 weeks and three days ended December 14, 2005.
(3) US dollar amounts have been translated at the Noon Buying Rate on December 31, 2007 of £1.00 = $2.01 solely for convenience.
 
Dividends
 
InterContinental Hotels Group PLC paid an interim dividend of 5.7 pence per share on October 5, 2007. The IHG board has proposed a final dividend of 14.9 pence per share, payable on June 6, 2008, if approved by shareholders at the Annual General Meeting to be held on May 30, 2008, bringing the total IHG dividend for the year ended December 31, 2007 to 20.6 pence per share.
 
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, such amounts are translated into US dollars per ADS at the Noon Buying Rate on each of the respective UK payment dates.
 
Ordinary dividend
 
                                                 
    Pence per ordinary share     $ per ADS  
    Interim     Final     Total     Interim     Final     Total  
 
Period ended December 31, 2003
                                               
Six Continents(1)
    7.65             7.65       0.119             0.119  
IHG
    4.05       9.45       13.50       0.068       0.174       0.242  
Year ended December 31,
                                               
2004
    4.30       10.00       14.30       0.077       0.191       0.268  
2005
    4.60       10.70       15.30       0.081       0.187       0.268  
2006
    5.10       13.30       18.40       0.096       0.259       0.355  
2007
    5.70       14.90       20.60       0.115       0.292 (2)     0.407  
 
 
(1) Restated to reflect an equivalent number of shares in InterContinental Hotels Group PLC.
(2) The 2007 final dividend payable to ADS holders will be paid in USD and was set using the closing USD/GBP spot rate of £1.00:$1.96 on February 15, 2008.


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Special Dividend
 
                 
    Pence per
       
    ordinary share     $ per ADS  
 
December 2004
    72.00       1.39  
June 2006
    118.00       2.17  
June 2007
    200.00       4.00  
 
Return of Capital
 
                 
    Pence per
       
    ordinary share     $ per ADS  
 
June 2005
    165.00       2.86  
 
Exchange Rates
 
The following tables show, for the periods and dates indicated, certain information regarding the exchange rate for pounds sterling, based on the Noon Buying Rate for pounds sterling expressed in US dollars per £1.00. The exchange rate on March 14, 2008 was £1.00 = $2.03.
 
                 
    Month’s
    Month’s
 
    highest
    lowest
 
Month
  exchange rate     exchange rate  
 
September 2007
    2.04       1.99  
October 2007
    2.08       2.03  
November 2007
    2.11       2.05  
December 2007
    2.07       1.98  
January 2008
    1.99       1.95  
February 2008
    1.99       1.94  
March 2008 (through March 14, 2008)
    2.03       1.99  
 
                                 
    Period
    Average
             
    end     rate(1)     High     Low  
 
Period ended December 31,
                               
2003
    1.78       1.63       1.78       1.54  
Year ended December 31,
                               
2004
    1.93       1.84       1.95       1.75  
2005
    1.73       1.82       1.93       1.71  
2006
    1.96       1.84       1.97       1.74  
2007
    2.01       2.01       2.11       1.92  
2008 (through March 14, 2008)
    2.03       2.00       2.03       1.94  
 
 
(1) The average of the Noon Buying Rate on the last day of each full month during the period.
 
A significant portion of the Group’s assets, liabilities and revenues are denominated in currencies other than pounds sterling, principally the US dollar and the euro. For a discussion of the impact of exchange rate movements, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.


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RISK FACTORS
 
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 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 commoditisation (whereby price/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 laws of certain foreign countries in which the Group operates do not protect the Group’s proprietary rights to the same extent as the laws in the United States and the European Union. This is particularly relevant in China where, despite recent improvements in intellectual property rights, the relative lack of protection increases the risk that the Group will be unable to prevent infringements of its intellectual property in this key growth market. Any widespread infringement or misappropriation 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. 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 favourable 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. 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. 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.
 
Changes in legislation or regulatory changes may be implemented that have the effect of favoring franchisees relative to brand owners.


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The Group is exposed to the risks of political and economic developments
 
The Group is exposed to the risks of global and regional adverse political, economic and financial market developments, including recession, inflation and currency fluctuations that could lower revenues and reduce income. A recession in one country or more widely tends to reduce leisure and business travel to and from affected countries and would adversely affect 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 affect IHG’s ability to 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. In addition, fluctuations in currency exchange rates between sterling, the currency in which the Group reports its financial statements, and the US dollar and other currencies in which the Group’s international operations or investments do business, could adversely affect the Group’s reported earnings and the value of its business. Fluctuations of this type have been experienced over recent years with the significant strengthening of sterling against the US dollar. As the majority of the Group’s profits are generated in the United States, such fluctuations may have a significant impact on the Group’s reported results.
 
The Group is dependent upon recruiting and retaining key personnel and developing their skills
 
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 rapid economic growth and the Group must compete against a number of 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 reservation system and is exposed to the risk of failures in the system and increased competition in reservation infrastructure
 
The value of the brands of the Group is partly derived from the ability to drive reservations through its proprietary HolidexPlus reservation system, an electronic booking and delivery channel directly linked to travel agents, hotels and internet networks. Inadequate disaster recovery arrangements, or inadequate continued investment in this technology, leading to loss of key communications linkages, particularly in relation to HolidexPlus, internet reservation channels and other key parts of the IT infrastructure for a prolonged period, or permanently, may result in significant business interruption and subsequent impact on revenues.
 
The Group is also exposed to the risk of competition from third-party intermediaries who provide reservation infrastructure. In particular, any significant increase in the use of these reservation channels in preference to


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proprietary channels may impact the Group’s ability to control the supply, presentation and price of its room inventory.
 
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 to 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. Additionally, failure to develop an appropriate e-commerce strategy and select the right partners could erode the Group’s market share.
 
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 capital, in some cases the Group may consider it appropriate to acquire new land or locations for the development of new hotels. If the availability of suitable sites becomes limited, 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 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 its guests, customers, joint venture partners, suppliers, employees, regulatory authorities, franchisees and/or the owners of hotels managed by it for breach of its contractual or other duties. 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 affect the reputation of the Group even though the monetary consequences are not significant.
 
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 as well as 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 against. 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.


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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 and to maintain an efficient balance sheet. 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 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 pension plans who are entitled to defined benefits. In addition, if the UK Plan of the Group is wound-up or a participating employer ceases to have contributing members, the Group could become statutorily liable to make an immediate payment to the trustees to bring the funding of these 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.
 
Some of the issues which could adversely affect the funding of these defined benefits (and materially affect the Group’s funding obligations) include:
 
  •  poor investment performance of pension fund investments;
 
  •  longer life expectancy than assumed in the plans’ actuarial valuations (which will make pensions payable for longer and therefore more expensive to provide);
 
  •  adverse annuity rates (which tend in particular to depend on prevailing interest rates and life expectancy) as these will make it more expensive to secure pensions with an insurance company; and
 
  •  other events occurring which make past service benefits more expensive than predicted in the actuarial assumptions by reference to which the Group’s past contributions were assessed.
 
The trustees of the UK defined benefits plan can demand increases to the contribution rates relating to the funding of this pension plan, which would oblige the relevant members of the Group to contribute extra amounts to such pension funds. 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.
 
ITEM 4.   INFORMATION ON THE COMPANY
 
SUMMARY
 
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 hotels and guest rooms in nearly 100 countries around the world, as at December 31, 2007. 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.


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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 14, 2008, InterContinental Hotels Group PLC had a market capitalization of approximately £2.3 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
67 Alma Road
Windsor
Berkshire SL4 3HD
Tel: +44 (0) 1753 410 100
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, 181 hotels with a net book value of £2.9 billion have been sold, generating aggregate proceeds of £3.0 billion. Of these 181 hotels, 162 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 14, 2008 the Group had on the market a further three hotels. The following are the more significant transactions which have occurred since January 1, 2007:
 
During 2007, the Group disposed of (i) the Crowne Plaza Santiago on May 16, 2007 for $21 million before transaction costs, approximately $9 million above the net book value, retaining a 10 year franchise contract; (ii) its 74.11% share of the InterContinental Montreal on July 12, 2007 for £17 million before transaction costs, approximately £5 million above book value, retaining a 30 year management contract on the hotel; and (iii) the


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Holiday Inn Disney, Paris on November 30, 2007 for £14 million before transaction costs, approximately £2 million above net book value, retaining a five year franchise contract.
 
The Group also divested a number of equity interests of which proceeds totaled £57 million, including a 33.3% interest in the Crowne Plaza London The City for £19 million and a 15% interest in the InterContinental Chicago for £11 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 2007 totaled £93 million compared with £124 million in 2006 and £183 million in 2005. Capital expenditure in 2007 included the completion of the major refurbishment of the InterContinental London, Park Lane and renovation works at the InterContinental Hong Kong.
 
At December 31, 2007 capital committed, being contracts placed for expenditure on property, plant and equipment not provided for in the financial statements, totaled £10 million.
 
On October 24, 2007 the Group announced a worldwide relaunch of its Holiday Inn brand family. In support of this, the Group will make a non recurring revenue investment of up to £30 million which it is anticipated will be charged to the income statement as an exceptional item during 2008.
 
Following the completion of the hotel disposals in 2007, the Group owns 18 hotels.
 
FIGURE 1
 
                         
Asset disposal program detail
  Number of hotels     Proceeds     Net book value  
          (£ billion)  
 
Disposed since April 2003
    181       3.0       2.9  
Remaining owned and leased hotels
    18             0.9  
 
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 and has returned £3.5 billion to shareholders as at March 14, 2008 (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, 2007 £92 million of this share repurchase was outstanding. During the year 7.7 million shares were repurchased at an average price of 1046 pence per share (total £80.7 million). The precise timing of share purchases will be dependent upon, amongst other things, market conditions. By March 14, 2008, a total of 6.3 million shares had been repurchased under the £150 million repurchase program at an average price per share of 926 pence per share (approximately £58 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.
 
Information relating to the purchases of equity securities can be found in Item 16E.
 
On February 20, 2007, IHG announced a special dividend of approximately £700 million with share consolidation. £709 million was returned to shareholders in June 2007 by way of a special dividend of 200 pence per ordinary share held on June 1, 2007.


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FIGURE 2
 
                                 
Return of funds program
  Timing     Total return     Returned to date(i)     Still to be returned  
 
£501 million special dividend
    Paid in December 2004       £501m       £501m       Nil  
First £250 million share buyback
    Completed in 2004       £250m       £250m       Nil  
£996 million capital return
    Paid in July 2005       £996m       £996m       Nil  
Second £250 million share buyback
    Completed in 2006       £250m       £250m       Nil  
£497 million special dividend
    Paid in June 2006       £497m       £497m       Nil  
Third £250 million share buyback
    Completed in 2007       £250m       £250m       Nil  
£709 million special dividend
    Paid in June 2007       £709m       £709m       Nil  
£150 million share buyback
    Under way       £150m       £58m       £92m  
                                 
Total
            £3,603m       £3,511m       £92m  
                                 
 
(i) As at March 14, 2008.
 
Hotels
 
IHG owns a number of hotel brands including InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo. As at December 31, 2007, IHG’s brands comprised 3,949 franchised, managed, owned or leased hotels and 585,094 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.


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SEGMENTAL INFORMATION
 
Geographic Segmentation
 
The following table shows revenue and operating profit before exceptional operating items in pounds sterling and percentage by geographical area, for the following periods: years ended December 31, 2007, 2006 and 2005.
 
                                 
    Year ended December 31,        
    2007     2006     2005        
    (£ million)  
 
Revenue(1)
                               
Americas
    450       422       376          
Europe, the Middle East and Africa
    245       198       192          
Asia Pacific
    130       111       87          
Central(4)
    58       55       42          
                                 
Continuing operations
    883       786       697          
                                 
Americas
    31       41       69          
Europe, the Middle East and Africa
    9       133       1,090          
Asia Pacific
                54          
                                 
Discontinued operations(3)
    40       174       1,213          
                                 
Total
    923       960       1,910          
                                 
Operating profit before exceptional operating items(1)(2)
                               
Americas
    220       215       186          
Europe, the Middle East and Africa
    67       37       33          
Asia Pacific
    31       29       21          
Central(4)
    (81 )     (81 )     (65 )        
                                 
Continuing operations
    237       200       175          
                                 
Americas
    8       6       12          
Europe, the Middle East and Africa
          25       141          
Asia Pacific
                11          
                                 
Discontinued operations(3)
    8       31       164          
                                 
Total
    245       231       339          
                                 
 
 
Footnotes on page 19.
 


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    Year ended December 31,        
    2007     2006     2005        
    (%)  
 
Revenue
                               
Americas
    48.8       44.0       19.7          
Europe, the Middle East and Africa
    26.5       20.6       10.0          
Asia Pacific
    14.1       11.6       4.6          
Central
    6.3       5.7       2.2          
                                 
Continuing operations
    95.7       81.9       36.5          
                                 
Americas
    3.3       4.3       3.6          
Europe, the Middle East and Africa
    1.0       13.8       57.1          
Asia Pacific
                2.8          
                                 
Discontinued operations
    4.3       18.1       63.5          
                                 
Total
    100.0       100.0       100.0          
                                 
Operating profit before exceptional operating items
                               
Americas
    89.8       93.1       54.9          
Europe, the Middle East and Africa
    27.3       16.0       9.7          
Asia Pacific
    12.7       12.6       6.2          
Central
    (33.1 )     (35.1 )     (19.2 )        
                                 
Continuing operations
    96.7       86.6       51.6          
                                 
Americas
    3.3       2.6       3.5          
Europe, the Middle East and Africa
          10.8       41.6          
Asia Pacific
                3.3          
                                 
Discontinued operations
    3.3       13.4       48.4          
                                 
Total
    100.0       100.0       100.0          
                                 
 
 
(1) The results of overseas operations have been translated into sterling at weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1 = $2.01 (2006 £1 = $1.84, 2005 £1 = $1.83) . In the case of the euro, the translation rate is £1 = €1.46 (2006 £1 = €1.47, 2005 £1 = €1.46).
 
(2) Operating profit before exceptional operating items does not include exceptional operating items for all periods presented. Exceptional operating items (credit unless otherwise noted) by region are the Americas £9 million (2006 £25 million, 2005 £5 million charge); Europe, the Middle East and Africa £10 million (2006 £2 million, 2005 £12 million charge); Asia Pacific £8 million (2006 £nil, 2005 £5 million charge); and Central £3 million (2006 £nil, 2005 £nil).
 
(3) Europe, the Middle East and Africa includes discontinued operations for Hotels £nil (2006 £25 million, 2005 £71 million) and Soft Drinks £nil (2006 £nil, 2005 £70 million). The Americas and Asia Pacific discontinued operations all relate to Hotels. Hotels discontinued operations were all owned and leased.
 
(4) Central revenue primarily relates to Holidex (IHG’s proprietary reservation system) fee income. Central operating profit includes central revenue less costs related to global functions.

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Activity Segmentation
 
The following table shows revenue and operating profit before exceptional operating items in pounds sterling by activity and the percentage contribution of each activity for the following periods: years ended December 31, 2007, 2006 and 2005.
 
                                 
    Year ended December 31,        
    2007     2006     2005        
    (£ million)  
 
Revenue(1)
                               
Hotels
                               
Americas
    450       422       376          
Europe, the Middle East and Africa
    245       198       192          
Asia Pacific
    130       111       87          
Central(4)
    58       55       42          
                                 
Continuing operations
    883       786       697          
                                 
Hotels(3)
                               
Americas
    31       41       69          
Europe, the Middle East and Africa
    9       133       419          
Asia Pacific
                54          
Soft Drinks
                671          
                                 
Discontinued operations
    40       174       1,213          
                                 
Total
    923       960       1,910          
                                 
Operating profit before exceptional operating items(1)(2)
                               
Hotels
                               
Americas
    220       215       186          
Europe, the Middle East and Africa
    67       37       33          
Asia Pacific
    31       29       21          
Central(4)
    (81 )     (81 )     (65 )        
                                 
Continuing operations
    237       200       175          
                                 
Hotels(3)
                               
Americas
    8       6       12          
Europe, the Middle East and Africa
          25       71          
Asia Pacific
                11          
Soft Drinks
                  70          
                                 
Discontinued operations
    8       31       164          
                                 
Total
    245       231       339          
                                 
 
 
Footnotes on page 21.
 


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    Year ended December 31,        
    2007     2006     2005        
    (%)  
 
Revenue
                               
Hotels
                               
Americas
    48.8       44.0       19.7          
Europe, the Middle East and Africa
    26.5       20.6       10.0          
Asia Pacific
    14.1       11.6       4.6          
Central
    6.3       5.7       2.2          
                                 
Continuing operations
    95.7       81.9       36.5          
                                 
Hotels
                               
Americas
    3.3       4.3       3.6          
Europe, the Middle East and Africa
    1.0       13.8       22.0          
Asia Pacific
                2.8          
Soft Drinks
                35.1          
                                 
Discontinued operations
    4.3       18.1       63.5          
                                 
Total
    100.0       100.0       100.0          
                                 
Operating profit before exceptional operating items
                               
Hotels
                               
Americas
    89.8       93.1       54.9          
Europe, the Middle East and Africa
    27.3       16.0       9.7          
Asia Pacific
    12.7       12.6       6.2          
Central
    (33.1 )     (35.1 )     (19.2 )        
                                 
Continuing operations
    96.7       86.6       51.6          
                                 
Hotels
                               
Americas
    3.3       2.6       3.5          
Europe, the Middle East and Africa
          10.8       20.9          
Asia Pacific
                3.3          
Soft Drinks
                20.7          
                                 
Discontinued operations
    3.3       13.4       48.4          
                                 
Total
    100.0       100.0       100.0          
                                 
 
 
(1) The results of overseas operations have been translated into sterling at weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1=$2.01 (2006 £1 = $1.84, 2005 £1 = $1.83). In the case of the euro, the translation rate is £1 = €1.46 (2006 £1 = €1.47, 2005 £1 = €1.46).
 
(2) Operating profit before exceptional operating items does not include exceptional operating items for all periods presented. Exceptional operating items (credit unless otherwise noted) by region are the Americas £9 million (2006 £25 million, 2005 £5 million charge); Europe, the Middle East and Africa £10 million (2006 £2 million, 2005 £12 million charge); Asia Pacific £8 million (2006 £nil, 2005 £5 million charge); and Central £3 million (2006 £nil, 2005: £nil).
 
(3) Hotels discontinued operations were all owned and leased.
 
(4) Central revenue primarily relates to Holidex (IHG’s proprietary reservation system) fee income. Central operating profit includes central revenue less costs related to global functions.

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HOTELS
 
Overview
 
InterContinental Hotels Group is an international hotel business which 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 3,949 franchised, managed, owned and leased hotels and 585,094 guest rooms in nearly 100 countries as at December 31, 2007. Approximately 580,000 rooms or 99% of the Group’s rooms are operated under managed and franchised models.
 
The Group operates in the global hotel market, which has an estimated total room capacity of 18 million rooms. Room capacity has been growing at approximately 3% 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 seven million branded hotel rooms (approximately 40% 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 38% of the branded rooms, only 15% 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 a leadership position (top three by room numbers) in each of the six largest geographic markets, a greater representation than any other major hotel company.
 
US market data indicates a steady increase in hotel industry revenues, broadly in line with Gross Domestic Product, with growth of approximately 1-1.5% per annum in real terms since 1967. Hotel revenue growth in the United States and other key markets has been impacted by a number of underlying trends, including:
 
  •  change in demographics — as the population ages and becomes wealthier, increased leisure time and income encourages more travel and hotel visits;
 
  •  increase in travel volumes as low cost airlines grow rapidly;
 
  •  globalization of trade and tourism;
 
  •  increase in affluence and freedom to travel within the Chinese middle class; and
 
  •  increase in the preference for branded hotels amongst consumers.
 
FIGURE 3
 
         
Branded hotel rooms by region as a percentage of the total market
  2006  
 
United States
    67 %
Europe, Middle East and Africa (“EMEA”)
    35 %
Asia Pacific
    28 %
 
 
Source: IHG Analysis, Northstar Travel Management
 
Within the global market, a relatively low proportion of hotel rooms are branded, however, there has been an increasing trend towards branded rooms. Branded companies are therefore gaining market share at the expense of unbranded companies. The Group is well positioned to benefit from this trend. Hotel owners are increasingly recognising the benefits of working with a group such as IHG 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 to manage or franchise their hotels.
 
Potential negative trends impacting hotel industry growth include increased terrorism, environmental considerations and economic factors such as high oil prices, risk of recession and global credit restrictions.


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Supply growth in the industry is cyclical, averaging between zero and 5% per annum historically. The Group’s fee-based profit is partly protected from changes in supply due to its model of third party ownership of hotels under IHG management and franchise contracts.
 
Operations
 
The Group currently operates an ‘asset-light’ business model and owns only a small number of hotels deemed to be strategically important to the brands they represent. 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, IHG’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 reservation 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 2007, 76% of the Group’s rooms were franchised, with 89% 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 linked to total hotel revenue and may have an additional incentive fee linked to profitability and/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. The Group prepares annual budgets for the hotels that it manages, and the property owners are responsible for funding periodic maintenance and repair on a basis to be agreed with the Group. In order to gain access to central reservation systems, global and regional brand marketing and brand standards and procedures, the owners are typically required to make a further contribution. In certain cases, property owners may require performance targets, with consequences for management fees and sometimes the contract itself (including on occasion, the right of termination) if those targets are not met. At the end of 2007, 23% 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 2007 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, 2007, 2006 and 2005.
 
                                                                 
          Management
             
          contracts and joint
             
    Owned or leased     ventures     Franchised     Total  
    No. of
    No. of
    No. of
    No. of
    No. of
    No. of
    No. of
    No. of
 
    hotels     rooms     hotels     rooms     hotels     rooms     hotels     rooms  
 
2007
    18       6,396       539       134,883       3,392       443,815       3,949       585,094  
2006
    25       8,460       512       125,214       3,204       422,572       3,741       556,246  
2005
    55       15,485       504       121,249       3,047       400,799       3,606       537,533  
 
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.


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Strategy
 
IHG seeks to deliver enduring top quartile shareholder returns, when measured against a broad global hotel peer group. The Group’s underlying strategy is that by putting the guest first, it will grow a portfolio of differentiated hospitality brands in core strategic countries and global key cities to maximise scale advantage. With a clear target for room growth and a number of brands with market premiums offering excellent returns for owners, the Group is well placed to execute the following strategic priorities:
 
  •  brand performance — to operate a portfolio of brands attractive to both owners and guests that have clear market positions and differentiation in the eyes of the guest;
 
  •  excellent hotel returns — to generate higher owner returns through revenue delivery and improved operating efficiency;
 
  •  market scale and knowledge — to accelerate profitable growth in the largest markets where the Group currently has scale; and
 
  •  aligned organization — to create a more efficient organization with strong core capabilities.
 
IHG has 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, 2007, IHG had achieved organic growth of 47,419 net rooms against the target set in June 2005, together with 13 net InterContinental hotel additions and 81 hotels in China.
 
IHG’s future growth will be achieved predominantly by managing and franchising rather than owning hotels. Approximately 580,000 rooms operating under Group brands are managed and franchised. 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. For this reason, the Group has executed a disposal program for most of its owned hotels, releasing capital and enabling returns of funds to shareholders as well as targeted investment in the business.
 
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, 2007, 86% of continuing earnings before interest, tax, exceptional operating items and regional and central overheads was derived from managed and franchised operations.
 
The Group aims to deliver its growth targets through the strongest operating system in the industry which includes:
 
  •  a strong brand portfolio across the major markets, where IHG’s brands achieved revenue per available room (“RevPAR”) growth premiums within respective key market segments during 2007;
 
  •  market coverage — a presence in nearly 100 countries;
 
  •  scale — 3,949 hotels, 585,094 rooms and 137 million room nights per annum;
 
  •  IHG global reservation channels delivering $6.8 billion of global system room revenue in 2007, including $2.6 billion from the internet;
 
  •  a loyalty program, Priority Club Rewards, contributing $5.2 billion of global system room revenue in 2007; and
 
  •  a strong web presence — holidayinn.com is one of the industry’s most visited sites, with around 75 million total site visits per annum.
 
With a clear target for rooms growth and a number of brands with market premiums offering excellent returns to owners, the Group is well placed to execute its strategy and achieve its goals.


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Segmental Results
 
The following table shows revenue and operating profit before exceptional operating items in sterling of the IHG continuing Hotels business by activity and the percentage contribution of each activity for the following periods: years ended December 31, 2007, 2006 and 2005.
 
                         
    Year ended December 31,  
    2007     2006     2005  
    (£ million)  
 
Continuing revenue(1)
                       
Americas
                       
Owned and leased
    128       104       98  
Managed
    78       77       65  
Franchised
    244       241       213  
                         
      450       422       376  
EMEA
                       
Owned and leased
    121       92       102  
Managed
    84       71       55  
Franchised
    40       35       35  
                         
      245       198       192  
Asia
                       
Owned and leased
    73       71       59  
Managed
    49       36       25  
Franchised
    8       4       3  
                         
      130       111       87  
Central(3)
    58       55       42  
                         
Total
    883       786       697  
                         
Continuing operating profit before exceptional operating items(1)(2)
                       
Americas
                       
Owned and leased
    20       12       14  
Managed
    21       27       20  
Franchised
    212       208       186  
Regional overheads
    (33 )     (32 )     (34 )
                         
      220       215       186  
EMEA
                       
Owned and leased
    17       (4 )     (3 )
Managed
    43       37       31  
Franchised
    29       24       26  
Regional overheads
    (22 )     (20 )     (21 )
                         
      67       37       33  
Asia Pacific
                       
Owned and leased
    18       17       11  
Managed
    23       21       16  
Franchised
    3       3       2  
Regional overheads
    (13 )     (12 )     (8 )
                         
      31       29       21  
Central(3)
    (81 )     (81 )     (65 )
                         
Total
    237       200       175  
                         
 
 
Footnotes on page 26.
 


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    Year ended December 31,  
    2007     2006     2005  
    (%)  
 
Continuing revenue
                       
Americas
                       
Owned and leased
    14.5       13.2       14.1  
Managed
    8.8       9.8       9.3  
Franchised
    27.6       30.7       30.6  
                         
      50.9       53.7       54.0  
EMEA
                       
Owned and leased
    13.7       11.7       14.6  
Managed
    9.5       9.0       7.9  
Franchised
    4.5       4.5       5.0  
                         
      27.7       25.2       27.5  
Asia Pacific
                       
Owned and leased
    8.3       9.0       8.5  
Managed
    5.6       4.6       3.6  
Franchised
    0.9       0.5       0.4  
                         
      14.8       14.1       12.5  
Central
    6.6       7.0       6.0  
                         
Total
    100.0       100.0       100.0  
                         
Continuing operating profit before exceptional operating items
                       
Americas
                       
Owned and leased
    8.4       6.0       8.0  
Managed
    8.9       13.5       11.4  
Franchised
    89.5       104.0       106.3  
Regional overheads
    (13.9 )     (16.0 )     (19.4 )
                         
      92.9       107.5       106.3  
EMEA
                       
Owned and leased
    7.2       (2.0 )     (1.7 )
Managed
    18.1       18.5       17.7  
Franchised
    12.2       12.0       14.8  
Regional overheads
    (9.3 )     (10.0 )     (12.0 )
                         
      28.2       18.5       18.8  
Asia Pacific
                       
Owned and leased
    7.6       8.5       6.3  
Managed
    9.7       10.5       9.1  
Franchised
    1.3       1.5       1.1  
Regional overheads
    (5.5 )     (6.0 )     (4.5 )
                         
      13.1       14.5       12.0  
Central
    (34.2 )     (40.5 )     (37.1 )
                         
Total
    100.0       100.0       100.0  
                         
 
 
(1) The results of overseas operations have been translated into sterling at weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1 = $2.01 (2006 £1 = $1.84, 2005 £1 = $1.83). In the case of the euro, the translation rate is £1 = €1.46 (2006 £1 = €1.47, 2005 £1 = €1.46).
 
(2) Operating profit before exceptional operating items does not include exceptional operating items for all periods presented. Exceptional operating items (credit unless otherwise noted) by region are the Americas £9 million (2006 £25 million, 2005 £5 million charge); Europe, the Middle East and Africa £10 million (2006 £2 million, 2005 £12 million charge); Asia Pacific £8 million (2006 £nil, 2005 £5 million charge); and Central £3 million (2006 £nil, 2005 £nil).
 
(3) Central revenue primarily relates to Holidex (IHG’s proprietary reservation system) fee income. Central operating profit includes central revenue less costs related to global functions.

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Table of Contents

The following table shows revenue and operating profit before exceptional operating items in US dollars of the IHG continuing Hotels business by activity and the percentage contribution of each activity for the following periods: years ended December 31, 2007, 2006 and 2005.
 
                         
    Year ended December 31,  
    2007     2006     2005  
    ($ million)  
 
Continuing revenue(1)
                       
Americas
                       
Owned and leased
    257       192       180  
Managed
    156       143       118  
Franchised
    489       443       389  
                         
      902       778       687  
EMEA
                       
Owned and leased
    244       169       187  
Managed
    167       131       100  
Franchised
    81       63       64  
                         
      492       363       351  
Asia Pacific
                       
Owned and leased
    145       131       108  
Managed
    99       65       45  
Franchised
    16       8       6  
                         
      260       204       159  
Central(3)
    117       101       77  
                         
Total
    1,771       1,446       1,274  
                         
Continuing operating profit before exceptional operating items(1)(2)
                       
Americas
                       
Owned and leased
    40       22       26  
Managed
    41       50       36  
Franchised
    425       382       340  
Regional overheads
    (66 )     (59 )     (62 )
                         
      440       395       340  
EMEA
                       
Owned and leased
    33       (7 )     (5 )
Managed
    87       68       56  
Franchised
    58       44       48  
Regional overheads
    (44 )     (36 )     (39 )
                         
      134       69       60  
Asia Pacific
                       
Owned and leased
    36       31       20  
Managed
    46       39       29  
Franchised
    6       5       5  
Regional overheads
    (25 )     (23 )     (15 )
                         
      63       52       39  
Central(3)
    (163 )     (149 )     (118 )
                         
Total
    474       367       321  
                         
 
 
Footnotes on page 28.


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    Year ended December 31,  
    2007     2006     2005  
    (%)  
 
Continuing revenue
                       
Americas
                       
Owned and leased
    14.5       13.3       14.1  
Managed
    8.8       9.9       9.3  
Franchised
    27.6       30.6       30.5  
                         
      50.9       53.8       53.9  
EMEA
                       
Owned and leased
    13.8       11.7       14.7  
Managed
    9.4       9.0       7.9  
Franchised
    4.6       4.4       5.0  
                         
      27.8       25.1       27.6  
Asia Pacific
                       
Owned and leased
    8.2       9.0       8.5  
Managed
    5.6       4.5       3.5  
Franchised
    0.9       0.6       0.5  
                         
      14.7       14.1       12.5  
Central
    6.6       7.0       6.0  
                         
Total
    100.0       100.0       100.0  
                         
Continuing operating profit before exceptional operating items
                       
Americas
                       
Owned and leased
    8.4       6.0       8.1  
Managed
    8.6       13.6       11.2  
Franchised
    89.7       104.0       105.9  
Regional overheads
    (13.9 )     (16.0 )     (19.3 )
                         
      92.8       107.6       105.9  
EMEA
                       
Owned and leased
    7.0       (1.9 )     (1.6 )
Managed
    18.4       18.5       17.4  
Franchised
    12.2       12.0       15.0  
Regional overheads
    (9.3 )     (9.8 )     (12.1 )
                         
      28.3       18.8       18.7  
Asia
                       
Owned and leased
    7.6       8.5       6.2  
Managed
    9.7       10.6       9.0  
Franchised
    1.3       1.4       1.6  
Regional overheads
    (5.3 )     (6.3 )     (4.6 )
                         
      13.3       14.2       12.2  
Central
    (34.4 )     (40.6 )     (36.8 )
                         
Total
    100.0       100.0       100.0  
                         
 
 
(1) The results of overseas operations have been translated into sterling at weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1 = $2.01 (2006 £1 = $1.84, 2005 £1 = $1.83). In the case of the euro, the translation rate is £1 = €1.46 (2006 £1 = €1.47, 2005 £1 = €1.46).
 
(2) Operating profit before exceptional operating items does not include exceptional operating items for all periods presented. Exceptional operating items (credit unless otherwise noted) by region are the Americas £9 million (2006 £25 million, 2005 £5 million charge); Europe, the Middle East and Africa £10 million (2006 £2 million, 2005 £12 million charge); Asia Pacific £8 million (2006 £nil, 2005 £5 million charge); and Central 2007 £3 million (2006 £nil, 2005 £nil).
 
(3) Central revenue primarily relates to Holidex (IHG’s proprietary reservation system) fee income. Central operating profit includes central revenue less costs related to global functions.


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Global System
 
The Group supports revenue delivery into its hotels through its global reservation channels and global loyalty program (Priority Club Rewards) which is paid for by assessments from each hotel in the Group. The elements of the global system include:
 
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 2007 were $5.2 billion and represented approximately 35% of IHG global system rooms sales.
 
Central Reservation System Technology:  The Group operates the HolidexPlus reservation system. The HolidexPlus system receives reservation 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.
 
Reservation Call Centers:  The Group operates 12 reservation 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 2007, the internet channel continued to show strong growth, with global system rooms sales booked through the internet increasing by 27% to $2.6 billion. Approximately 17% 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 (up from 16% in 2006). IHG has established standards for working with third party intermediaries — on-line travel distributors — who sell or re-sell IHG hotel rooms via their internet sites. Under the standards, certified distributors are required to respect IHG’s trademarks, ensure reservations are guaranteed through an automated and common confirmation process, and clearly present fees to customers. About 85% of IHG global system rooms sales booked on the web is now booked directly through the Group’s own brand sites.
 
The Group estimates that, during 2007, global system rooms sales booked through these reservation systems (which include company reservation centers, global distribution systems and internet reservations) rose by approximately 19% to $6.8 billion, and the proportion of IHG global system rooms sales booked through IHG’s reservation channels increased from 44% to 45%.
 
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:
 
  •  adding further locations and improving guest satisfaction for its brands;
 
  •  continuing the focus on enrolments in Priority Club Rewards and increasing their share of the total hotel spend;
 
  •  continuing to improve the direct channels; and
 
  •  improving pricing structure.


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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 Express, operate internationally.
 
                         
    December 31, 2007        
Brands
  Room numbers     Hotels        
 
InterContinental
    50,762       149          
Crowne Plaza
    83,170       299          
Holiday Inn
    256,699       1,381          
Holiday Inn Express
    156,531       1,808          
Staybridge Suites
    13,466       122          
Candlewood Suites
    16,825       158          
Hotel Indigo
    1,501       11          
Other
    6,140       21          
                         
Total
    585,094       3,949          
                         
 
InterContinental
 
                                         
    Americas
    Americas
    EMEA
    EMEA
    Asia Pacific
 
    total     O & L     total     O & L     total  
 
Average room rate $(1)
    169.83       260.63       190.85       449.58       173.22  
Room numbers(2)
    16,624       1,914       20,012       1,288       14,126  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable InterContinental hotels.
 
(2) As at December 31, 2007.
 
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 traveller. 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, 2007, there were 149 InterContinental hotels which represented 9% of IHG’s total hotel rooms. During 2007, five InterContinental hotels were added to the portfolio while four hotels were removed.
 
Crowne Plaza
 
                                 
    Americas
    EMEA
    EMEA
    Asia Pacific
 
    total     total     O & L     total  
 
Average room rate $(1)
    115.01       150.73       117.61       100.23  
Room numbers(2)
    47,893       17,326       233       17,951  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Crowne Plaza hotels.
 
(2) As at December 31, 2007.
 
Crowne Plaza is one of the fastest growing upscale hotel brands in the world, located in more than 50 countries. Crowne Plaza offers simple elegance and full-service facilities for business and leisure travellers alike. Mainly sited in principal cities, these hotels offer high quality accommodation for leisure and business travellers 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, 2007, there were 299 Crowne Plaza hotels which represented 14% of IHG’s total hotel rooms. During 2007, 38 Crowne Plaza hotels were added to the portfolio while 14 hotels were removed.


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Holiday Inn
 
                                 
    Americas
    Americas
    EMEA
    Asia Pacific
 
    total     O & L     total     total  
 
Average room rate $(1)
    95.97       96.04       119.64       81.18  
Room numbers(2)
    177,999       1,882       52,842       25,858  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Holiday Inn hotels.
 
(2) As at December 31, 2007.
 
Friendly service and great value are the hallmarks of the Holiday Inn brand. One of the world’s most recognized brands, Holiday Inn was relaunched in 2007 to improve our ability to meet guest needs for contemporary high-quality and consistent facilities. The relaunch includes a new identity and logo. Aimed at both business travellers and families on holiday, the brand continues to grow around the world.
 
Holiday Inn hotels are predominantly operated under franchise agreements. As at December 31, 2007, there were 1,381 Holiday Inn hotels which represented 44% of IHG’s total hotel rooms and of which 69% were located in the Americas. During 2007, 69 new Holiday Inn hotels were added to the portfolio, while 83 hotels were removed.
 
Holiday Inn Express
 
                         
    Americas
    EMEA
    Asia Pacific
 
    total     total     total  
 
Average room rate $(1)
    94.10       104.73       72.75  
Room numbers(2)
    134,551       19,380       2,600  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Holiday Inn Express hotels.
 
(2) As at December 31, 2007.
 
Convenience, comfort and value make Holiday Inn Express a popular choice with guests and hotel owners. Contemporary guest rooms and bathrooms, a complimentary breakfast and easily accessible locations make this limited service Holiday Inn an ideal choice for people on the road. Holiday Inn Express was also relaunched in 2007.
 
Holiday Inn Express hotels are almost entirely operated under franchise agreements. As at December 31, 2007, there were 1,808 Holiday Inn Express hotels worldwide which represented 27% of IHG’s total hotel rooms and of which 86% were located in the Americas. During 2007, 177 new Holiday Inn Express hotels were added to the portfolio, while 55 hotels were removed.
 
Staybridge Suites
 
         
    Americas
 
    total  
 
Average room rate $(1)
    105.06  
Room numbers(2)
    13,466  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Staybridge Suite’s hotels.
 
(2) As at December 31, 2007.
 
Staybridge Suites is a high-end brand offering guests a home from home for extended hotel stays. Residential in style, they provide studios and suites, kitchens, living rooms and work areas, and high-speed internet access for business and leisure guests. The “Just Like Home” theatre and new buffet kitchen are communal areas where guests can meet and relax. The brand will develop outside the United States during 2008.
 
The Staybridge Suites brand is principally operated under management contracts and franchise agreements. As at December 31, 2007, there were 122 Staybridge Suites hotels, all located in the Americas, which represented 2% of IHG’s total hotel rooms. During 2007, 25 hotels were added to the portfolio.


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Candlewood Suites
 
         
    Americas
 
    total  
 
Average room rate $(1)
    70.14  
Room numbers(2)
    16,825  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Candlewood Suites hotels.
 
(2) As at December 31, 2007.
 
Created for guest stays of a week or longer, Candlewood Suites offer studios and one bedroom suites with well equipped kitchens, spacious work areas and an array of convenient amenities. This extended stay brand continues to grow rapidly in the Americas and recently launched a new bedding collection.
 
The Candlewood Suites brand is operated under management contracts and franchise agreements. Hospitality Properties Trust (“HPT”) is a major owner of Candlewood Suites properties and the Group manages all 76 of HPT’s Candlewood Suites properties under a 20 year agreement. As at December 31, 2007, there were 158 Candlewood Suites hotels which represented 3% of IHG’s total rooms. During 2007, 29 hotels were added to the portfolio and one was removed.
 
Hotel Indigo
 
Hotel Indigo is the industry’s first branded boutique hotel. The brand is aimed at style-conscious guests who want peaceful and affordable luxury combined with all the knowledge, experience and operating systems that an international hotel company can offer. Inspired by lifestyle retailing, it features seasonal changes, inviting service, inspiring artwork, casual dining, airy guest rooms and 24-hour business amenities.
 
The first Hotel Indigo opened in Atlanta, Georgia in the United States in October 2004. As at December 31, 2007, there were 11 Hotel Indigo hotels with five hotels added to the portfolio during the year.
 
         
    Americas
 
    total  
 
Average room rate $(1)
    116.54  
Room numbers(2)
    1,501  
 
 
(1) For the year ended December 31, 2007; quoted at constant US$ exchange rate. Average room rate is for comparable Hotel Indigo hotels.
 
(2) As at December 31, 2007.
 
Geographical Analysis
 
Although it has worldwide hotel operations, the Group is most dependent on the Americas for operating profit, reflecting the structure of the branded global hotel market. The Americas region generated 69% of the Group’s continuing operating profit before central overheads and exceptional operating items during 2007.
 
The geographical analysis, split by number of rooms and operating profit, is set out in the table below.
 
                         
    Americas     EMEA     Asia Pacific  
    (% of total)  
 
Room numbers(1)
    70       19       11  
Regional operating profit (before central overheads and exceptional operating items)(2)
    69       21       10  
 
 
(1) As at December 31, 2007.
 
(2) For the year ended December 31, 2007.


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The following table shows information concerning the geographical locations and ownership of IHG’s hotels as at December 31, 2007.
 
                                                                 
    Owned and leased     Managed     Franchised     Total  
    Hotels     Rooms     Hotels     Rooms     Hotels     Rooms     Hotels     Rooms  
 
Americas
                                                               
InterContinental
    4       1,914       23       8,313       23       6,397       50       16,624  
Crowne Plaza
                19       6,620       153       41,273       172       47,893  
Holiday Inn
    5       1,882       29       9,654       918       166,463       952       177,999  
Holiday Inn Express
                1       252       1,614       134,299       1,615       134,551  
Staybridge Suites
    2       233       41       5,142       79       8,091       122       13,466  
Candlewood Suites
                78       9,410       80       7,415       158       16,825  
Hotel Indigo
                2       305       9       1,196       11       1,501  
                                                                 
Total
    11       4,029       193       39,696       2,876       365,134       3,080       408,859  
                                                                 
EMEA
                                                               
InterContinental
    3       1,288       53       17,077       6       1,647       62       20,012  
Crowne Plaza
    1       233       20       5,234       51       11,859       72       17,326  
Holiday Inn
                86       15,452       249       37,390       335       52,842  
Holiday Inn Express
    1       153       12       1,310       169       17,917       182       19,380  
                                                                 
Total
    5       1,674       171       39,073       475       68,813       651       109,560  
                                                                 
Asia Pacific
                                                               
InterContinental
    1       495       28       11,256       8       2,375       37       14,126  
Crowne Plaza
                50       15,833       5       2,118       55       17,951  
Holiday Inn
    1       198       78       23,242       15       2,418       94       25,858  
Holiday Inn Express
                10       2,463       1       137       11       2,600  
Other
                9       3,320       12       2,820       21       6,140  
                                                                 
Total
    2       693       175       56,114       41       9,868       218       66,675  
                                                                 
Total
                                                               
InterContinental
    8       3,697       104       36,646       37       10,419       149       50,762  
Crowne Plaza
    1       233       89       27,687       209       55,250       299       83,170  
Holiday Inn
    6       2,080       193       48,348       1,182       206,271       1,381       256,699  
Holiday Inn Express
    1       153       23       4,025       1,784       152,353       1,808       156,531  
Staybridge Suites
    2       233       41       5,142       79       8,091       122       13,466  
Candlewood Suites
                78       9,410       80       7,415       158       16,825  
Hotel Indigo
                2       305       9       1,196       11       1,501  
Other
                9       3,320       12       2,820       21       6,140  
                                                                 
Total
    18       6,396       539       134,883       3,392       443,815       3,949       585,094  
                                                                 
 
Americas
 
In the Americas, the largest proportion of rooms is operated under the franchise business model primarily in the midscale segment (Holiday Inn and Holiday Inn Express). Similarly, in the upscale segment, Crowne Plaza is predominantly franchised, whereas the majority of the InterContinental brand is operated under franchise and management agreements. With 3,080 hotels, the Americas represented 78% of the Group’s hotels and 69% of the Group’s continuing operating profit before central costs and exceptional operating items during the year ended December 31, 2007. The key profit producing region is the United States, although IHG is also represented in each of Latin America, Canada, Mexico and the Caribbean.
 
EMEA
 
Comprising 651 hotels at the end of 2007, EMEA represented approximately 21% of the Group’s continuing operating profit before central costs and exceptional operating items during the year ended December 31, 2007.


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Profits are primarily generated from hotels in the United Kingdom, Continental European gateway cities and the Middle East portfolio.
 
Asia Pacific
 
Comprising 218 hotels as at December 31, 2007, Asia Pacific represents approximately 10% of the Group’s operating profit before central costs and exceptional operating items during the year ended December 31, 2007. Greater China is expected to generate significant growth in the hotel and tourism industry over the next decade. As at December 31, 2007 the Group had 81 hotels in Greater China and a further 107 hotels in development.
 
Room Count and Pipeline
 
During 2007, the IHG global system (the number of hotels and rooms which are owned, leased, managed or franchised by the Group) increased by 208 hotels (28,848 rooms, or 5.2%) to 3,949 hotels (585,094 rooms). The record growth level was driven, in particular, by continued expansion in the United States, the United Kingdom, China and Japan, resulting in openings of 366 hotels (52,846 rooms). Holiday Inn Express represented 58.7% of the net hotel growth, demonstrating strong market demand in the midscale, limited service sector. The extended stay portfolio, comprising Staybridge Suites and Candlewood Suites hotels, expanded by 53 hotels (5,189 rooms), indicating owner confidence in this sector.
 
The net decline in the Holiday Inn hotel and room count (14 hotels and 3,771 rooms) primarily reflects IHG’s continued strategy to reinvigorate the Holiday Inn brand through the removal of lower quality, non-brand conforming hotels in the United States. This strategy is further supported by the worldwide brand relaunch of the Holiday Inn brand family, announced in October 2007, which entails the consistent delivery of best-in-class service and physical quality in all Holiday Inn and Holiday Inn Express hotels.
 
At the end of 2007, the IHG pipeline (contracts signed for hotels and rooms yet to enter the IHG global system) totaled 1,674 hotels (225,872 rooms). In the year, record room signings across all regions of 125,533 rooms led to pipeline growth of 67,881 rooms (or 43.0%). This level of growth demonstrates strong demand for IHG brands across all regions and represents a key driver of future profitability.
 
There are no assurances that all of the hotels in the pipeline will open or enter the system. The construction, conversion and development of hotels is dependent upon a number of factors, including meeting brand standards, obtaining the necessary permits relating to construction and operation, the cost of constructing, converting and equipping such hotels and the ability to obtain suitable financing at acceptable interest rates. The supply of capital for hotel development in the United States and major economies may not continue at previous levels and consequently the system pipeline could decrease.
 
Americas
 
The Americas hotel and room count grew by 150 hotels (13,950 rooms) to 3,080 hotels (408,859 rooms). The growth included openings of 274 hotels (31,744 rooms) led by continued demand for Holiday Inn Express of 156 hotels (13,908 rooms). Franchised hotels contributed over 98% of net growth, reflecting the sustained demand for the franchised model. Net growth also included removals of 124 hotels (17,794 rooms), of which Holiday Inn hotels represented 54.0% (69.2% rooms).
 
The Americas pipeline continued to achieve high growth levels and totaled 1,330 hotels (141,157 rooms) at December 31, 2007. During the year, 75,279 room signings were completed, compared with 61,673 room signings in 2006. These signing levels outpaced the prior year as demand for Holiday Inn and Holiday Inn Express continued to accelerate. Furthermore, the extended stay brands, Staybridge Suites and Candlewood Suites, contributed 24.3% of the region’s room signings.
 
  EMEA
 
During 2007, EMEA hotel and room count increased by 28 hotels (2,960 rooms) to 651 hotels (109,560 rooms). The net growth included the opening of 55 hotels (7,956 rooms) and the removal of 27 hotels (4,996 rooms).


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System growth was led by openings in the United Kingdom of 22 hotels (2,522 rooms). Holiday Inn was the largest contributor of room openings, adding over 50% of the region’s total.
 
The pipeline in EMEA increased by 44 hotels (10,832 rooms) to 187 hotels (32,889 rooms). The growth included a record level of 19,153 room signings, driven by exceptional demand in the Middle East, particularly in the United Arab Emirates and Saudi Arabia. Across the region, sustained demand for the Holiday Inn brand led to 6,004 room signings during the year whilst the region also experienced a significant increase in room signings for the InterContinental and Crowne Plaza brands. The EMEA pipeline included 10 Staybridge Suites hotels (1,229 rooms), of which the first hotels are expected to open in the United Kingdom and the Middle East during 2008.
 
  Asia Pacific
 
Asia Pacific hotel and room count increased by 30 hotels (11,938 rooms) to 218 hotels (66,675 rooms). The net growth included 16 hotels (7,827 rooms) in Greater China reflecting continued expansion in one of IHG’s strategic markets, together with 15 hotels (3,542 rooms) in Japan that joined the system as part of the IHG ANA joint venture.
 
The pipeline in Asia Pacific increased by 71 hotels (21,577 rooms) to 157 hotels (51,826 rooms). Demand in the Greater China market continued throughout the year and represented 82.3% of the region’s room signings. From a brand perspective, Crowne Plaza attracted significant interest, contributing over half of the total room signings.
 
FIGURE 4
 
                                                 
    Hotels     Rooms  
                Change
                Change
 
Global hotel and room count at December 31   2007     2006     over 2006     2007     2006     over 2006  
 
Analyzed by brand:
                                               
InterContinental
    149       148       1       50,762       49,599       1,163  
Crowne Plaza
    299       275       24       83,170       75,632       7,538  
Holiday Inn
    1,381       1,395       (14 )     256,699       260,470       (3,771 )
Holiday Inn Express
    1,808       1,686       122       156,531       143,582       12,949  
Staybridge Suites
    122       97       25       13,466       10,953       2,513  
Candlewood Suites
    158       130       28       16,825       14,149       2,676  
Hotel Indigo
    11       6       5       1,501       893       608  
Other
    21       4       17       6,140       968       5,172  
                                                 
Total
    3,949       3,741       208       585,094       556,246       28,848  
                                                 
Analyzed by ownership type:
                                               
Owned and leased
    18       25       (7 )     6,396       8,460       (2,064 )
Managed
    539       512       27       134,883       125,214       9,669  
Franchised
    3,392       3,204       188       443,815       422,572       21,243  
                                                 
Total
    3,949       3,741       208       585,094       556,246       28,848  
                                                 


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FIGURE 5
 
                                                 
    Hotels     Rooms  
                Change
                Change
 
Global pipeline at December 31
  2007     2006     over 2006     2007     2006     over 2006  
 
Analyzed by brand:
                                               
InterContinental
    62       36       26       20,013       13,211       6,802  
Crowne Plaza
    118       60       58       36,362       17,113       19,249  
Holiday Inn
    365       299       66       56,945       44,774       12,171  
Holiday Inn Express
    712       574       138       70,142       55,520       14,622  
Staybridge Suites
    157       120       37       17,150       12,605       4,545  
Candlewood Suites
    207       128       79       18,605       11,723       6,882  
Hotel Indigo
    52       24       28       6,565       3,045       3,520  
Other
    1             1       90             90  
                                                 
Total
    1,674       1,241       433       225,872       157,991       67,881  
                                                 
Analyzed by ownership type:
                                               
Managed
    247       139       108       71,814       41,648       30,166  
Franchised
    1,427       1,102       325       154,058       116,343       37,715  
                                                 
Total
    1,674       1,241       433       225,872       157,991       67,881  
                                                 
 
Seasonality
 
Although the performance of individual hotels and geographic markets might be highly seasonal due to a variety of factors such as the tourist trade and local economic conditions, the geographical spread of the Group’s hotels in nearly 100 countries and the relative stability of the income stream from management and franchising activities diminish the effect of seasonality on the results of the Group.
 
Competition
 
The Group’s hotels compete with a wide range of facilities offering various types of lodging options and related services to the public. The competition includes several large and moderate sized hotel chains offering upper, mid and lower priced accommodation and also includes independent hotels in each of these market segments, particularly outside of North America where the lodging industry is much more fragmented. Major hotel chains which compete with the Group include Marriott International, Inc., Starwood Hotels & Resorts Worldwide, Inc., Choice Hotels International, Inc., Best Western International, Inc., Hilton Hotels Corporation, Wyndham Worldwide, Four Seasons Hotels Inc. and Accor S.A.
 
Key Relationships
 
IHG maintains effective business relationships across all aspects of its operations. The Group’s operations are not dependent upon any single customer, supplier or hotel owner due to the extent of its brands, market segments and geographical coverage. For example, IHG’s largest third-party hotel owner controls less than 4% of the Group’s total room count.
 
To promote effective owner relationships, the Group’s management meets with owners of IHG branded hotels on a regular basis. In addition, IHG has an important relationship with the IAHI — The Owners’ Association (“IAHI”). The IAHI is an independent worldwide association for owners of the Crowne Plaza, Holiday Inn, Holiday Inn Express, Hotel Indigo, Staybridge Suites and Candlewood Suites brands. IHG and the IAHI work together to support and facilitate the continued development of IHG’s brands and systems, with specific emphasis during 2007 on the relaunch of the Holiday Inn brand family. Additionally, IHG and the IAHI began working together to develop and facilitate key corporate responsibility initiatives within the Group’s brands.
 
Many jurisdictions and countries regulate the offering of franchise agreements and recent trends indicate an increase in the number of countries adopting franchise legislation. As a significant percentage of the Group’s


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revenues is derived from franchise fees, the Group’s continued compliance with franchise legislation is important to the successful deployment of the Group’s strategy.
 
RevPAR
 
The following tables present RevPAR statistics for the years ended December 31, 2007 and 2006. RevPAR is a key performance indicator which measures underlying hotel revenue with year-on-year performance being measured by the RevPAR movement against the prior year.
 
Owned and leased, managed and franchised statistics are for comparable hotels, and include only those hotels in the IHG system as of December 31, 2007 and owned and leased, managed or franchised by the Group since January 1, 2006.
 
The comparison with 2006 is at constant US$ exchange rates.
 
                                                                         
    Owned & leased     Managed     Franchised  
                Change vs
                Change vs
                Change vs
 
    2007     2006     2006     2007     2006     2006     2007     2006     2006  
 
Americas
                                                                       
InterContinental
                                                                       
Occupancy
    83.6 %     81.7 %     1.9 %pts     70.5 %     68.0 %     2.5 %pts     64.7 %     64.9 %     (0.2 )%pts
Average daily rate
  $ 260.63     $ 241.21       8.05 %   $ 172.28     $ 161.33       6.79 %   $ 126.53     $ 116.51       8.60 %
RevPAR
  $ 217.86     $ 196.97       10.61 %   $ 121.51     $ 109.64       10.83 %   $ 81.87     $ 75.64       8.24 %
Crowne Plaza
                                                                       
Occupancy
    0       0       0       74.9 %     74.7 %     0.2 %pts     64.1 %     63.0 %     1.1 %pts
Average daily rate
    0       0       0     $ 142.46     $ 133.33       6.85 %   $ 109.16     $ 103.22       5.75 %
RevPAR
    0       0       0     $ 106.71     $ 99.55       7.19 %   $ 69.96     $ 65.00       7.63 %
Holiday Inn
                                                                       
Occupancy
    72.9 %     69.2 %     3.7 %pts     68.9 %     67.6 %     1.3 %pts     63.1 %     63.5 %     (0.4 )%pts
Average daily rate
  $ 96.04     $ 93.67       2.53 %   $ 106.53     $ 100.86       5.62 %   $ 95.26     $ 90.52       5.24 %
RevPAR
  $ 70.01     $ 64.79       8.06 %   $ 73.45     $ 68.19       7.71 %   $ 60.12     $ 57.44       4.67 %
Holiday Inn Express
                                                                       
Occupancy
    0       0       0       75.8 %     74.8 %     1.0 %pts     68.1 %     68.7 %     (0.6 )%pts
Average daily rate
    0       0       0     $ 148.58     $ 133.55       11.25 %   $ 93.96     $ 87.32       7.60 %
RevPAR
    0       0       0     $ 112.67     $ 99.91       12.77 %   $ 63.98     $ 59.95       6.72 %
Staybridge Suites
                                                                       
Occupancy
    73.7 %     74.8 %     (1.1 )%pts     74.9 %     76.5 %     (1.6 )%pts     73.4 %     73.3 %     0.1 %pts
Average daily rate
  $ 100.56     $ 94.61       6.29 %   $ 108.83     $ 104.53       4.11 %   $ 101.81     $ 96.24       5.79 %
RevPAR
  $ 74.12     $ 70.73       4.79 %   $ 81.56     $ 79.92       2.05 %   $ 74.77     $ 70.53       6.01 %
Candlewood Suites
                                                                       
Occupancy
    0       0       0       74.5 %     75.7 %     (1.2 )%pts     66.3 %     69.2 %     (2.9 )%pts
Average daily rate
    0       0       0     $ 69.81     $ 66.50       4.98 %   $ 71.14     $ 68.99       3.12 %
RevPAR
    0       0       0     $ 52.02     $ 50.31       3.40 %   $ 47.19     $ 47.71       (1.09 )%
Hotel Indigo
                                                                       
Occupancy
    0       0       0       68.4 %     66.3 %     2.1 %pts     53.2 %     41.1 %     12.1 %pts
Average daily rate
    0       0       0     $ 142.78     $ 143.74       (0.67 )%   $ 88.12     $ 78.37       12.44 %
RevPAR
    0       0       0     $ 97.72     $ 95.25       2.59 %   $ 46.89     $ 32.25       45.40 %
 


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    Owned & leased     Managed     Franchised  
                Change vs
                Change vs
                Change vs
 
    2007     2006     2006     2007     2006     2006     2007     2006     2006  
 
EMEA
                                                                       
InterContinental
                                                                       
Occupancy
    81.7 %     79.2 %     2.5 %pts     68.4 %     65.3 %     3.1 %pts     67.1 %     64.5 %     2.6 %pts
Average daily rate
  $ 449.58     $ 406.56       10.58 %   $ 176.96     $ 164.13       7.82 %   $ 281.93     $ 242.64       16.19 %
RevPAR
  $ 367.30     $ 322.17       14.01 %   $ 121.06     $ 107.18       12.95 %   $ 189.31     $ 156.44       21.01 %
Crown Plaza
                                                                       
Occupancy
    70.9 %     70.1 %     0.8 %pts     78.5 %     77.2 %     1.3 %pts     69.6 %     68.6 %     1.0 %pts
Average daily rate
  $ 117.61     $ 122.04       (3.63 )%   $ 169.52     $ 153.74       10.26 %   $ 141.89     $ 135.03       5.08 %
RevPAR
  $ 83.43     $ 85.60       (2.54 )%   $ 133.01     $ 118.71       12.05 %   $ 98.79     $ 92.67       6.60 %
Holiday Inn
                                                                       
Occupancy
    0       0       0       74.5 %     73.9 %     0.6 %pts     67.6 %     66.3 %     1.3 %pts
Average daily rate
    0       0       0     $ 127.69     $ 120.05       6.36 %   $ 115.87     $ 110.27       5.08 %
RevPAR
    0       0       0     $ 95.07     $ 88.73       7.15 %   $ 78.38     $ 73.10       7.22 %
Holiday Inn Express
                                                                       
Occupancy
    72.5 %     70.1 %     2.4 %pts     68.3 %     63.5 %     4.8 %pts     73.8 %     72.8 %     1.0 %pts
Average daily rate
  $ 81.92     $ 84.81       (3.41 )%   $ 87.88     $ 82.29       6.79 %   $ 106.19     $ 101.78       4.33 %
RevPAR
  $ 59.39     $ 59.49       (0.17 )%   $ 60.02     $ 52.28       14.80 %   $ 78.34     $ 74.04       5.81 %
 
                                                                         
    Owned & leased     Managed     Franchised  
                Change vs
                Change vs
                Change vs
 
    2007     2006     2006     2007     2006     2006     2007     2006     2006  
 
Asia Pacific
                                                                       
InterContinental
                                                                       
Occupancy
    69.9 %     72.5 %     (2.6 )%pts     73.8 %     70.2 %     3.6 %pts     73.2 %     70.8 %     2.4 %pts
Average daily rate
  $ 377.22     $ 339.09       11.24 %   $ 154.45     $ 150.48       2.64 %   $ 184.82     $ 157.63       17.25 %
RevPAR
  $ 263.77     $ 245.88       7.28 %   $ 114.03     $ 105.68       7.90 %   $ 135.32     $ 111.60       21.25 %
Crowne Plaza
                                                                       
Occupancy
    0       0       0       75.7 %     75.3 %     0.4 %pts     84.9 %     85.4 %     (0.5 )%pts
Average daily rate
    0       0       0     $ 97.60     $ 92.57       5.43 %   $ 120.67     $ 108.69       11.02 %
RevPAR
    0       0       0     $ 73.87     $ 69.67       6.03 %   $ 102.41     $ 92.80       10.36 %
Holiday Inn
                                                                       
Occupancy
    76.7 %     78.6 %     (1.9 )%pts     76.0 %     75.7 %     0.3 %pts     71.1 %     70.8 %     0.3 %pts
Average daily rate
  $ 116.17     $ 106.32       9.26 %   $ 81.87     $ 75.43       8.54 %   $ 72.78     $ 68.49       6.26 %
RevPAR
  $ 89.16     $ 83.56       6.70 %   $ 62.22     $ 57.13       8.91 %   $ 51.72     $ 48.48       6.68 %
Holiday Inn Express
                                                                       
Occupancy
    0       0       0       84.9 %     82.7 %     2.2 %pts     55.4 %     65.4 %     (10.0 )%pts
Average daily rate
    0       0       0     $ 75.05     $ 67.58       11.05 %   $ 56.47     $ 53.52       5.51 %
RevPAR
    0       0       0     $ 63.68     $ 55.88       13.96 %   $ 31.28     $ 35.01       (10.65 )%
Other
                                                                       
Occupancy
    0       0       0       59.3 %     56.4 %     2.9 %pts     0       0       0  
Average daily rate
    0       0       0     $ 119.27     $ 113.80       4.81 %     0       0       0  
RevPAR
    0       0       0     $ 70.74     $ 64.22       10.15 %     0       0       0  
 
Regulation
 
Both in the United Kingdom and internationally, the Group’s hotel operations are subject to regulation, including health and safety, zoning and similar land use laws as well as regulations that influence or determine wages, prices, interest rates, construction procedures and costs.

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SOFT DRINKS
 
The Group disposed of its interest in Britvic by way of an IPO in December 2005. The Group 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.
 
Britvic generated operating profits before other operating income and expenses of £70 million on revenues of £671 million in the period up to December 14, 2005.
 
TRADEMARKS
 
Group companies own a substantial number of service brands and product brands and the Group believes that its significant trademarks are protected in all material respects in the markets in which it currently operates.
 
ORGANIZATIONAL STRUCTURE
 
Principal operating subsidiary undertakings
 
InterContinental Hotels Group PLC was the beneficial owner of all (unless specified) of the equity share capital, either itself or through subsidiary undertakings, of the following companies during the year. Unless stated otherwise, the following companies were incorporated in Great Britain, registered in England and Wales and operate principally within the United Kingdom. The companies listed below include those which principally affect the amount of profit and assets of the Group.
 
Six Continents Limiteda
 
Hotel Inter-Continental London Limiteda
 
Six Continents Hotels, Inc.b
 
InterContinental Hotels Corporationb
 
Barclay Operating Corporationb
 
IHG Resources Inc.b
 
InterContinental Hong Kong Limitedc
 
Société Nouvelle du-Grand Hotel, SAd
 
 
(a) Incorporated in Great Britain and registered in England and Wales.
 
(b) Incorporated in the United States.
 
(c) Incorporated in Hong Kong.
 
(d) Incorporated in France.
 
PROPERTY, PLANT AND EQUIPMENT
 
Group companies own and lease properties throughout the world. The table below analyzes the net book value of land and buildings (excluding assets classified as held for sale) at December 31, 2007. Approximately 37% of the properties by value were directly owned, with 53% held under leases having a term of 50 years or longer.
 
                                 
    Europe,
           
Net book value of land and buildings as
  the Middle East
           
at December 31, 2007   and Africa   Americas   Asia Pacific   Total
    (£ million)
 
Hotels
    318       251       166       735  
                                 


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Group properties comprise hotels. Approximately 85% of the Group’s property values relate to the top five owned and leased hotels (in terms of value) of a total of 18 hotels.
 
At December 31, 2007, a previously recorded impairment charge of £3 million was reversed following an impairment review of hotel assets based on current market conditions.
 
ENVIRONMENT
 
IHG is committed to all its operating companies having a responsibility to act in a way that respects the environment in which they operate. The Group’s strong presence in the United States and European Union markets mean that it is affected by and is familiar with highly developed environmental laws and controls. IHG regularly considers environmental matters and seeks to embed good practice into its business strategies and operations. IHG is a member of the FTSE4Good Index Series.
 
The Group has a wide range of environmental responsibilities and a unique opportunity to lead the world’s hospitality industry in environmental innovation.
 
As IHG pursues its strategic growth and continues to develop its environmental practice, the Group aims to minimise negative effects on the environment. The Group is committed to providing updated information to stakeholders on:
 
  •  developments in global environmental policy;
  •  how it establishes management responsibility and accountability for environmental performance;
  •  how it evaluates and manages the Group’s hotels’ environmental footprint;
  •  new projects and developments; and
  •  performance benchmarking against best practice.
 
In 2006 IHG improved data collection and reporting to increase energy efficiency. The Group’s hotels already take steps to conserve resources, including energy and water, and to manage waste and recycling effectively. In 2007, these achievements were benchmarked across the Group’s business so that clear targets for improvement can be set.
 
The Group’s immediate priorities for action are environmental management and support for the communities in which it operates. The travel and tourism industry is coming under increasing pressure to address its impact on the environment and society and become more sustainable. Addressing this challenge is a priority.
 
IHG believes that travel and tourism should be operated responsibly and that the benefits of taking this approach far outweigh the costs. Tourism provides opportunities for local economic development, new business and much needed jobs, especially in developing countries. It also opens the door to improved learning, better communication, greater diversity and richer, more fulfilling social experiences.
 
The Group accepts that there are actions that hotel operators can take to minimise travel and tourism’s negative effects still further. The following new initiatives were launched in 2007:
 
  •  an online tool which will enable IHG to measure its water, waste and energy across the globe was piloted;
  •  a carbon and environmental footprint, the first by a major hotel group was completed;
  •  compact fluorescent light bulbs were distributed as replacements for incandescent bulbs. It is estimated that this initiative will result in over $2 million of annual energy savings; and
  •  a range of environmental initiatives were implemented at IHG’s corporate offices, including recycling and improved waste management.
 
IHG encourages owners and guests to support these activities.
 
IHG will continue to concentrate its efforts on supporting local communities and seek to develop protocols to assess the responsible management of our supply chain.
 
IHG has developed a more integrated corporate responsibility (“CR”) strategy and created a global team, representing all parts of the business, to manage the CR agenda and to develop detailed future plans.


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ITEM 4A.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
INTRODUCTION
 
Business and Overview
 
InterContinental Hotels Group is an international hotel business which 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 3,949 franchised, managed, owned and leased hotels and 585,094 guest rooms in nearly 100 countries as at December 31, 2007. The Group also manages the hotel loyalty program, Priority Club Rewards.
 
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.
 
Operational Performance
 
For the year ended December 31, 2007, the Hotels business reported growth in all regions at the revenue and operating profit lines for continuing operations. The growth was driven by strong underlying RevPAR gains across all regions, hotel expansion in key markets and profit uplift from owned and leased assets.
 
The performance of the Hotels business is evaluated primarily on a regional basis. The regional operations are split by similar product or services: franchise agreement, management contract, and owned and leased operations. All three income types are affected by occupancy and room rates achieved by hotels, the ability to manage costs and the change in the number of available rooms through acquisition, development and disposition. Results are also impacted by economic conditions and capacity. The Group’s segmental results are shown before exceptional operating items, interest expense, interest income and income taxes.
 
The Group believes the period-over-period movement in RevPAR to be a meaningful indicator for the performance of the Hotels business.
 
CRITICAL ACCOUNTING POLICIES
 
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expense during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, investments, property, plant and equipment, goodwill and intangible assets, income taxes, guest program liability, self insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.
 
Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.


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The Company’s critical accounting policies are set out below.
 
Revenue recognition
 
Revenue is derived from the following sources: owned and leased properties; management fees; franchise fees and other revenues which are ancillary to the Company’s operations.
 
Generally, revenue represents sales (excluding VAT and similar taxes) of goods and services, net of discounts, provided in the normal course of business and recognized when services have been rendered. The following is a description of the composition of revenues of the Company.
 
Owned and leased — primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned and leased hotels operated under the Company’s brand names. Revenue is recognized when rooms are occupied and food and beverages are sold.
 
Management fees — earned from hotels managed by the Company, usually under long-term contracts with the hotel owner. Management fees include a base fee, which is generally a percentage of hotel revenue, and an incentive fee, which is generally based on the hotel’s profitability or cash flows. Revenue is recognized when earned and realized or realizable under the terms of the contract.
 
Franchise fees — received in connection with the license of the Company’s brand names, usually under long-term contracts with the hotel owner. The Company charges franchise royalty fees as a percentage of room revenue. Revenue is recognized when earned and realized or realizable under the terms of the agreement.
 
The Company participates in three funds established to collect and administer assessments from hotel owners for specific use in marketing, the Priority Club loyalty program and the global reservation system. The Company acts, in substance, as an agent with regard to the funds and all assessments are designated for specific purposes and result in no profit for the Group. Accordingly, the revenues, expenses and cash flows of the funds are not included in the Consolidated Income Statement or Consolidated Cash Flow Statement.
 
Goodwill, intangible assets, and property, plant and equipment
 
Goodwill arising on acquisitions prior to October 1, 1998 was eliminated against equity. From October 1, 1998 to December 31, 2003, acquired goodwill was capitalized and amortized over a period not exceeding 20 years. Since January 1, 2004, goodwill continued to be capitalized but amortization ceased as at that date, replaced by an impairment review on an annual basis or more frequently if there are indicators of impairment. Goodwill is allocated to cash-generating units for impairment testing purposes.
 
Intangible assets and property, plant and equipment are capitalized and amortized over their expected useful lives, and reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. Assets that do not generate independent cash flows are combined into cash-generating units.
 
The impairment testing of individual assets or cash-generating units requires an assessment of the recoverable amount of the asset or cash-generating unit. If the carrying value of the asset or cash-generating unit exceeds its estimated recoverable amount, the asset or cash-generating unit is written down to its recoverable amount. Recoverable amount is the greater of fair value less cost to sell and value in use. Value in use is assessed based on estimated future cash flows discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The outcome of such an assessment is subjective, and the result sensitive to the assumed future cashflows to be generated by the assets and discount rates applied in calculating the value in use, both of which will be dependent on the type of asset and its location. Any impairment arising is charged to the income statement.
 
Income taxes
 
The Company provides for deferred tax in accordance with IAS 12 “Income Taxes” in respect of temporary differences between the tax base and carrying value of assets and liabilities including accelerated capital allowances, unrelieved tax losses, unremitted profits from overseas where the Company does not control remittance, gains rolled over into replacement assets, gains on previously revalued properties and other short-


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term temporary differences. Deferred tax assets are recognized to the extent that it is regarded as probable that the deductible temporary differences can be realized. The Company estimates deferred tax assets and liabilities based on current tax laws and rates, and in certain cases, business plans. Changes in these estimates may affect the amount of deferred tax liabilities or the valuation of deferred tax assets.
 
Accruals for tax contingencies require judgments on the expected outcome of tax exposures which may be subject to significant uncertainty, and therefore the actual results may vary from expectations resulting in adjustments to contingencies and cash tax settlements.
 
Loyalty program
 
The hotel loyalty program, Priority Club Rewards enables members to earn points, funded through hotel assessments, during each stay at an InterContinental Hotels Group hotel and redeem the points at a later date for free accommodation or other benefits. The future redemption liability is included in trade and other payables in the consolidated balance sheet and is estimated using actuarial methods based on statistical formulas that project the timing of future point redemptions based on historical levels to give eventual redemption rates and points values. The future redemption liability amounted to £212 million at December 31, 2007.
 
Pensions and other post-employment benefit plans
 
Accounting for pensions and other post-employment benefit plans requires the Company to make assumptions including, but not limited to, future asset returns, discount rates, rates of inflation, life expectancies and health care costs. The use of different assumptions, in any of the above calculations, could have a material effect on the accounting values of the relevant assets and liabilities which could result in a material change to the cost of such liabilities as recognized in the income statement over time. These assumptions are subject to periodic review. A sensitivity analysis to changes in various assumptions is included in Note 3 of Notes to the Consolidated Financial Statements.
 
OPERATING RESULTS
 
Accounting Principles
 
The following discussion and analysis is based on the Consolidated Financial Statements of the Company, which are prepared in accordance with IFRS.
 
For the year ended December 31, 2007 the results include exceptional items totaling a net credit of £76 million (2006 £238 million, 2005 £297 million). For comparability of the periods presented, some performance indicators in this Operating and Financial Review and Prospects discussion have been calculated after eliminating these exceptional items. Such indicators are prefixed with “adjusted”. A reconciliation to the amounts under IFRS including such exceptional items is included in Note 5 of Notes to the Consolidated Financial Statements.
 


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    Year ended
    Year ended
    Year ended
 
    December 31,
    December 31,
    December 31,
 
    2007     2006     2005  
    (£ million)  
 
GROUP RESULTS
                       
Revenue:
                       
Continuing operations
                       
Hotels
    883       786       697  
Discontinued operations
                       
Hotels
    40       174       542  
Soft Drinks
                671  
                         
Total revenue
    923       960       1,910  
                         
Operating profit before exceptional operating items:
                       
Continuing operations
                       
Hotels
    237       200       175  
Discontinued operations
                       
Hotels
    8       31       94  
Soft Drinks
                70  
                         
Total operating profit before exceptional operating items
    245       231       339  
Exceptional operating items
    30       27       (22 )
                         
Operating profit
    275       258       317  
Net financial expenses
    (45 )     (11 )     (33 )
                         
Profit before tax
    230       247       284  
Tax
    (15 )     41       (80 )
                         
Profit after tax
    215       288       204  
Gain on disposal of assets, net of tax
    16       117       311  
                         
Profit available for the year
    231       405       515  
                         
Earnings per ordinary share:
                       
Basic
    72.2p       104.1p       95.2p  
Adjusted
    48.4p       42.9p       38.2p  
Adjusted — continuing operations
    46.9p       38.0p       23.2p  
                         
 
Year ended December 2007 compared with year ended December 2006
 
IHG revenue from continuing operations for the year ended December 31, 2007 was £883 million (2006 £786 million). Operating profit before exceptional operating items from continuing operations for the year ended December 31, 2007 was £237 million (2006 £200 million). The growth was driven by strong underlying RevPAR gains across all regions, hotel expansion in key markets and profit uplift from owned and leased assets.
 
Including discontinued operations, total revenue decreased by 3.9% to £923 million whilst operating profit before exceptional operating items increased by 6.1% to £245 million, reflecting the year-on-year impact of asset disposals. Discontinued operations represent the results from operations that have been sold, or are held for sale, and where there is a coordinated plan to dispose of the operations under IHG’s asset disposal programme, including owned and leased hotels in the United States and Continental Europe that have been sold or placed on the market from January 1, 2006.

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As the weighted average US dollar exchange rate to sterling has weakened during 2007 (2007 $2.01: £1, 2006 $1.84: £1), growth rates for results expressed in US dollars are higher than those in sterling. Continuing operating profit before exceptional items was $474 million, ahead of 2006 by 29.2%. Including discontinued operations, operating profit before exceptional items was $491 million, 15.8% higher than 2006. Translated at constant currency, applying 2006 exchange rates, continuing revenue increased by 19.6% and continuing operating profit increased by 30.0%.
 
Exceptional operating items
 
Exceptional operating items of £30 million included an £18 million gain on the sale of financial assets and an £11 million gain on the sale of associate investments.
 
Exceptional operating items are treated as exceptional items by reason of their size or nature and are excluded from the calculation of adjusted earnings per share in order to provide a more meaningful comparison of performance.
 
Net financial expenses
 
Net financial expenses increased from £11 million in 2006 to £45 million in 2007, as a result of higher debt levels following payment of the £709 million special dividend in June 2007.
 
Financing costs included £10 million (2006 £10 million) of interest costs associated with Priority Club Rewards where interest is charged on the accumulated balance of cash received in advance of the redemption points awarded. Financing costs in 2007 also included £9 million (2006 £4 million) in respect of the InterContinental Boston finance lease.
 
Taxation
 
The effective rate of tax on profit before tax, excluding the impact of exceptional items, was 22% (2006 24%). By also excluding the impact of prior year items, which are included wholly within continuing operations, the equivalent tax rate would be 36% (2006 36%). Prior year items relate, primarily, to the adjustment of prior year tax accruals in line with filed tax returns and the release of provisions relating to tax matters which were settled during the year, or in respect of which the statutory limitation period had expired. This rate is higher than the UK statutory rate of 30% due mainly to certain overseas profits (particularly in the United States) being subject to statutory rates higher than the UK statutory rate and disallowable expenses.
 
Taxation within exceptional items totaled a credit of £30 million (2006 £94 million credit) in respect of continuing operations. This represented, primarily, the release of exceptional provisions relating to tax matters which were settled during the year, or in respect of which the statutory limitation period had expired. In 2006, taxation exceptional items, in addition to such provision releases, included £12 million for the recognition of a deferred tax asset in respect of tax losses.
 
Net tax paid in 2007 totaled £69 million (2006 £49 million) including £32 million (2006 £6 million) in respect of disposals.
 
Earnings per share
 
Basic earnings per share in 2007 were 72.2 pence, compared with 104.1 pence in 2006. Adjusted earnings per share were 48.4 pence, against 42.9 pence in 2006. Adjusted continuing earnings per share were 46.9 pence, 23.4% up on last year.


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Highlights for the year ended December 31, 2007
 
The following is a discussion of the year ended December 31, 2007 compared with the year ended December 31, 2006.
 
Continuing Hotels Results
 
                                 
    Year ended
    Year ended
             
    December 31,
    December 31,
             
    2007     2006     Change        
    (£ million)     %        
 
Revenue:
                               
Americas
    450       422       6.6          
EMEA
    245       198       23.7          
Asia Pacific
    130       111       17.1          
Central
    58       55       5.5          
                                 
      883       786       12.3          
                                 
Operating profit before exceptional operating items:
                               
Americas
    220       215       2.3          
EMEA
    67       37       81.1          
Asia Pacific
    31       29       6.9          
Central
    (81 )     (81 )