FORM 20-F
 

 
 
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, 2006
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 113/7 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 113/7 pence each                              356,116,049
      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
 
 


 

TABLE OF CONTENTS
             
        Page
         
 Introduction     4  
 Cautionary Note Regarding Forward-Looking Statements     5  
 PART I
Item 1.
   Identity of Directors, Senior Management and Advisors     7  
Item 2.
   Offer Statistics and Expected Timetable     7  
Item 3.
   Key Information     7  
     Selected Consolidated Financial Information     7  
     Risk Factors     13  
Item 4.
   Information on the Company     16  
     Summary     16  
     Segmental Information     20  
     Hotels     24  
     Soft Drinks     45  
     Trademarks     45  
     Organizational Structure     45  
     Property, Plant and Equipment     45  
     Environment     46  
Item 4A.
   Unresolved Staff Comments     47  
Item 5.
   Operating and Financial Review and Prospects     47  
     Introduction     47  
     Critical Accounting Policies Under International Financial Reporting Standards (“IFRS”) and US GAAP     47  
     Operating Results     50  
     Liquidity and Capital Resources     60  
Item 6.
   Directors, Senior Management and Employees     62  
     Directors and Senior Management     62  
     Compensation     65  
     Board Practices     67  
     Employees     69  
     Share Ownership     71  
Item 7.
   Major Shareholders and Related Party Transactions     71  
     Major Shareholders     71  
     Related Party Transactions     72  
Item 8.
   Financial Information     72  
     Consolidated Statements and Other Financial Information     72  
     Significant Changes     72  
Item 9.
   The Offer and Listing     72  
     Plan of Distribution     74  
     Selling Shareholders     74  
     Dilution     74  
     Expenses of the Issue     74  

2


 

             
        Page
         
 
Item 10.
   Additional Information     74  
     Memorandum and Articles of Association     74  
     Material Contracts     77  
     Exchange Controls     79  
     Taxation     79  
     Documents on Display     83  
Item 11.
   Quantitative and Qualitative Disclosures About Market Risk     83  
Item 12.
   Description of Securities Other Than Equity Securities     85  
 
 PART II
Item 13.
   Defaults, Dividend Arrearages and Delinquencies     85  
Item 14.
   Material Modifications to the Rights of Security Holders and Use of Proceeds     85  
Item 15.
   Controls and Procedures     85  
Item 16.
   [Reserved]     86  
Item 16A.
   Audit Committee Financial Expert     86  
Item 16B.
   Code of Ethics     86  
Item 16C.
   Principal Accountant Fees and Services     86  
Item 16D.
   Exemptions from the Listing Standards for Audit Committees     87  
Item 16E.
   Purchases of Equity Securities by the Issuer and Affiliated Purchasers     87  
 
 PART III
Item 17.
   Financial Statements     87  
Item 18.
   Financial Statements     88  
Item 19.
   Exhibits     88  

3


 

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;
 
  •  “MAB” or “Mitchells and Butlers” refers to Mitchells & Butlers plc;
 
  •  “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; and following June 12, 2006 to the ordinary shares of 113/7 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 = $1.96, 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, 2006. On March 16, 2007 the Noon Buying Rate was

4


 

£1.00 = $1.94. For information regarding rates of exchange between pounds sterling and US dollars from fiscal 2002 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 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, 2006 are shown as 2006 and references to the year ended December 31, 2005 are shown as 2005, unless otherwise specified, references to the fiscal period ended December 31, 2004, are shown as 2004 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 adopted by the European Union (“EU”) which differ from the accounting principles generally accepted in the United States (“US GAAP”). The significant differences applicable to the Group are explained in Note 32 of Notes to the Financial Statements.
      IHG believes that the reporting of profit and earnings measures before other operating income and expenses 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 other operating income and expenses. Throughout this document earnings per share is also calculated excluding the effect of all other operating income and expenses, special interest, special 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 2006, the Company reported interim financial information at June 30, 2006 in accordance with the Listing Rules of the UK Listing Authority. In addition, it provided quarterly financial information at March 31, 2006 and at September 30, 2006 and intends to continue to provide quarterly financial information during fiscal 2007. 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 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 13.

5


 

      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 and epidemics such as Severe Acute Respiratory Syndrome (“SARS”); the risks involved in the Group’s reliance upon its proprietary reservation system and increased competition from third-party intermediaries who provide reservation infrastructure; the risks involved with the Group’s reliance on technologies and systems; the future balance between supply and demand for the Group’s hotels; the lack of selected development opportunities; 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.

6


 

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, 2006, 2005 and 2004 has been prepared in line with International Financial Reporting Standards as adopted in the European Union (“EU”), which is consistent with IFRS, 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. There is no available comparative data for the years ended prior to December 31, 2004 as consolidated financial data was then prepared in accordance with accounting principles generally accepted in the United Kingdom (“UK GAAP”). 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.

7


 

Consolidated Profit and Loss Account Data
                                   
    Years ended December 31,
     
    2006(2)   2006   2005(1)   2004(1)
                 
    $   £   £   £
    (in millions, except per share and ADS amounts)
Amounts in accordance with IFRS
                               
Revenue:
                               
 
Continuing operations
    1,480       805       713       606  
 
Discontinued operations
    285       155       1,197       1,598  
                         
      1,765       960       1,910       2,204  
                         
Total operating profit before other operating income and expenses:
                               
 
Continuing operations
    369       201       173       120  
 
Discontinued operations
    55       30       166       226  
                         
      424       231       339       346  
                         
Other operating income and expenses:
                               
 
Continuing operations
    50       27       (22 )     (49 )
                         
      50       27       (22 )     (49 )
                         
Total operating profit:
                               
 
Continuing operations
    419       228       151       71  
 
Discontinued operations
    55       30       166       226  
                         
      474       258       317       297  
                         
Financial income
    48       26       30       70  
Financial expenses
    (68 )     (37 )     (63 )     (103 )
                         
Profit before tax
    454       247       284       264  
Tax
    75       41       (80 )     127  
                         
Profit after tax
    529       288       204       391  
Gain on disposal of assets, net of tax
    215       117       311       19  
                         
Profit available for shareholders
    744       405       515       410  
                         
Attributable to:
                               
 
Equity holders of the parent
    744       405       496       383  
 
Minority equity interest
                19       27  
                         
Profit for the year
    744       405       515       410  
                         
Earnings per ordinary share:
                               
 
Basic
    191.9p       104.1p       95.2p       53.9p  
 
Diluted
    186.9p       101.5p       93.1p       53.3p  
                         
Footnotes on page 10.

8


 

                                                                     
                    Three months   12 months   15 months    
        ended   ended   ended   Year ended
    Year ended December 31,   December 31,   December 31,   December 31,   September 30,
                     
    2006(2)   2006   2005(1)   2004(1)   2002   2003   2003(1)   2002(1)
                                 
        £   £   £   £   £   £   £
    $    
        (in millions, except per share and ADS amounts)
Amounts in accordance with US GAAP
                                                               
Income/(loss) before cumulative effect on prior years of change in accounting principle:
                                                               
 
Continuing operations
    928       505       104       257       14       (63 )     (49 )     102  
 
Discontinued operations:
                                                               
   
Income from discontinued operations
                41       62       46       92       138       226  
   
Surplus on disposal
                210       21                         171  
                                                 
 
Total discontinued operations
                251       83       46       92       138       397  
Cumulative effect on prior years of:
adoption of FAS 142
                            (712 )           (712 )      
 
adoption of FAS 123(R)
    (35 )     (19 )                                    
                                                 
Net income/(loss)
    893       486       355       340       (652 )     29       (623 )     499  
                                                 
Per ordinary share and American Depositary Share(4)
                                                               
Basic
                                                               
Income/(loss) before cumulative effect on prior years of change in accounting principle:
                                                               
 
Continuing operations
    238.6 ¢     129.8 p     20.0 p     36.2 p     1.9 p     (8.6 )p     (6.7 )p     14.0 p
 
Discontinued operations
                48.2 p     11.7 p     6.3 p     12.6 p     18.9 p     54.3 p
Cumulative effect on prior years of:
adoption of FAS 142
                            (97.1 )p           (97.1 )p      
 
adoption of FAS 123(R)
    (9.0     (4.9 )p                                    
                                                 
Net income/(loss)
    229.6 ¢     124.9 p     68.2 p     47.9 p     (88.9 )p     4.0 p     (84.9 )p     68.3 p
                                                 
Diluted
                                                               
Income/(loss) before cumulative effect on prior years of change in accounting principle:
                                                               
 
Continuing operations
    233.8 ¢     127.2 p     19.5 p     35.7 p     1.9 p     (8.6 )p     (6.7 )p     13.9 p
 
Discontinued operations
                47.1 p     11.5 p     6.3 p     12.6 p     18.9 p     54.1 p
Cumulative effect on prior years of:
adoption of FAS 142
                            (97.1 )p           (97.1 )p      
 
adoption of FAS 123(R)
    (8.8     (4.8 )p                                    
                                                 
Net income/(loss)
    225.0 ¢     122.4 p     66.6 p     47.2 p     (88.9 )p     4.0 p     (84.9 )p     68.0 p
                                                 
Footnotes on page 10.

9


 

Consolidated Balance Sheet Data
                                 
    December 31,
     
    2006(3)   2006   2005   2004
                 
    $   £   £   £
    (in millions)
Amounts in accordance with IFRS
                               
Goodwill and intangible assets
    516       263       238       206  
Property, plant and equipment
    1,956       997       1,356       1,926  
Investments and other financial assets
    251       128       155       122  
Current assets
    892       455       707       598  
Non-current assets classified as held for sale
    98       50       279       1,826  
Total assets
    3,713       1,893       2,735       4,678  
                         
Current liabilities(5)
    1,261       643       794       926  
Long-term debt(5)
    594       303       410       1,156  
Share capital
    129       66       49       723  
IHG shareholders’ equity
    1,330       678       1,084       1,821  
                         
Number of Shares in issue at period end (millions)
            356       433       622  
                         
                                                 
    December 31,
     
    2006(3)   2006   2005   2004   2003   2002
                         
    $   £   £   £   £   £
    (in millions)
Amounts in accordance with US GAAP
                                               
Goodwill and intangible assets
    2,401       1,224       1,395       1,384       1,587       2,702  
Property, plant and equipment
    2,605       1,328       1,685       3,454       3,916       6,552  
Investments and other financial assets
    214       109       141       115       174       189  
Current assets
    979       499       738       699       978       983  
Non-current assets classified as held for sale
    84       43       258       300              
Total assets
    6,283       3,203       4,217       5,952       6,655       10,426  
                                     
Current liabilities(5)
    1,671       852       1,161       2,021       1,496       2,109  
Long-term debt(5)
    190       97       36       52       523       622  
Share capital
    80       41       43       697       739       243  
IHG shareholders’ equity
    2,938       1,498       2,015       2,796       3,380       6,221  
                                     
Number of Shares in issue at period end (millions)
            356       433       622       739       734  
                                     
 
(1)  The year ended 2002 includes Hotels 12 months and Soft Drinks 52 weeks. The period ended 2003 includes Hotels 15 months, Soft Drinks 64 weeks ended December 20, 2003 and Mitchells and Butlers 28 weeks ended April 12, 2003. 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.
 
(2)  US dollar amounts have been translated at the weighted average rate for the year of £1.00 = $1.84.
 
(3)  US dollar amounts have been translated at the Noon Buying Rate on December 31, 2006 of £1.00 = $1.96 solely for convenience.
 
(4)  Each American Depositary Share represents one ordinary share.
 
(5)  Long-term debt under IFRS includes amounts supported by long-term credit facilities, which are classified as current liabilities under US GAAP.

10


 

     Dividends
      InterContinental Hotels Group PLC paid an interim dividend of 5.1 pence per share on October 5, 2006. The IHG board has proposed a final dividend of 13.3 pence per share, payable on June 8, 2007, if approved by shareholders at the Annual General Meeting to be held on June 1, 2007, bringing the total IHG dividend for the year ended December 31, 2006 to 18.4 pence per share.
      On February 20, 2007, IHG announced its intention to pay a £700 million special dividend to shareholders during the second quarter of 2007.
      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 before deduction of UK withholding tax (as described under “Item 10. Additional Information  — Taxation”) and 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
                         
Year ended September 30,
                                               
2002(1)
    12.58       29.14       41.72       0.205       0.474       0.679  
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 (2)     0.355  
 
(1)  Restated to reflect an equivalent number of shares in InterContinental Hotels Group PLC.
 
(2)  The 2006 final dividend payable to ADS holders will be paid in USD and was set using the closing USD/ GBP spot rate of £1.00: $1.94 on February 16, 2007.
     Special Dividend
                 
    Pence per    
    ordinary share   $ per ADS
         
December 2004
    72.00       1.39  
June 2006
    118.00       2.17  
     Return of Capital
                 
    Pence per    
    ordinary share   $ per ADS
         
June 2005
    165.00       2.86  

11


 

     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 16, 2007 was £1.00 = $1.94.
                 
    Month’s   Month’s
    highest   lowest
Month   exchange rate   exchange rate
         
September 2006
    1.91       1.86  
October 2006
    1.91       1.86  
November 2006
    1.97       1.89  
December 2006
    1.98       1.95  
January 2007
    1.99       1.93  
February 2007
    1.97       1.94  
March 2007 (through March 16, 2007)
    1.96       1.92  
                                 
    Period   Average        
    end   rate(1)   High   Low
                 
Year ended September 30,
                               
2002
    1.56       1.48       1.58       1.41  
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 (through March 16, 2007)
    1.94       1.96       1.99       1.92  
 
(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”.

12


 

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 IP ownership 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 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.

13


 

      Changes in legislation or regulatory changes may be implemented that have the effect of favouring franchisees relative to brand owners.
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 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.
      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 Group’s profits have become increasingly weighted towards North America, such fluctuations may have greater 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. 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 (such as SARS and avian flu), 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 Information Technology (“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

14


 

preference to 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 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.
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

15


 

performance does not meet market expectations it may not be able to refinance its existing facilities on terms it considers favourable. 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 any plan of the Group is wound-up, 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 which are substantially weighted towards global equity markets;
 
  •  long life expectancy (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 plans can demand increases to the contribution rates relating to the funding of those pension plans, which would oblige the relevant members of the Group to contribute extra amounts to such pension funds. The trustees must consult the plans’ 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. As at March 16, 2007, being the latest practicable date prior to publication of this document, the Group has agreed to make a special contribution to the UK Pension Plan of £40 million over the next three years. However, this action does not preclude the trustees from further demands in respect of increases to contribution rates and funding levels.
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 3,741 hotels and 556,246 guest rooms in nearly 100 countries and territories around the world, as at December 31, 2006. 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

16


 

the Americas), Staybridge Suites, Candlewood Suites and Hotel Indigo. The Group also manages the hotel loyalty program, Priority Club Rewards.
      With the disposal of the Group’s interests in Britvic, a manufacturer and distributor of soft drinks in the United Kingdom, by way of an initial public offering (“IPO”) in December 2005, the Group is now focused solely on hotel franchising, management and ownership.
      The Group’s revenue and earnings are derived from (i) hotel operations, which include operation of the Group’s owned hotels, management and other fees paid under management contracts, where the Group operates third-parties’ hotels, and franchise and other fees paid under franchise agreements and (ii) until December 14, 2005, the manufacture and distribution of soft drinks.
      On March 16, 2007, InterContinental Hotels Group PLC had a market capitalization of approximately £4.3 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”).
Acquisitions and Dispositions
      Since the Separation, 174 hotels with a net book value of £2.9 billion have been sold, generating aggregate proceeds of £3.0 billion. Of these 174 hotels, 156 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 16, 2007 the Group had on the market a further five hotels. The following are the more significant transactions which have occurred since January 1, 2006:
      On February 10, 2006 the Group announced the sale of 9.5 million shares in FelCor Lodging Trust, Incorporated (“FelCor”) for $180.5 million, ($19 per share). This sale followed renegotiation of the management agreement with FelCor.
      On March 13, 2006, the Group announced the sale to Westbridge Hospitality Fund LP, (“Westbridge”), of 24 hotels in Continental Europe. Westbridge is a joint venture between CADIM, a Montreal-based pension

17


 

fund manager, and Westmont Hospitality, one of IHG’s largest franchisees. The portfolio was sold for £240 million, before transaction costs. IHG retained a 15 year franchise contract on each of the hotels. The sale completed on May 2, 2006.
      On July 13, 2006 the Group announced the sale of seven European InterContinental hotels to Morgan Stanley Real Estate Funds (“MSREF”) for £440 million, before transaction costs. IHG retained a 30 year management contract on each of the hotels, with two 10 year renewals at IHG’s discretion. The long-term contracts ensure continued representation of the InterContinental brand in key European markets.
      On October 28, 2006 the Group announced the signing of a hotel joint venture with All Nippon Airways (“ANA”), IHG ANA Hotels Group Japan LLC (“IHG ANA”). IHG invested £10 million for a 75% share in the joint venture, increasing IHG’s portfolio in Japan from 12 hotels (3,686 rooms) to 25 hotels (8,623 rooms). As part of the transaction, ANA has signed a 15 year management contract with IHG ANA Hotels Group Japan for its 13 owned and leased hotels (4,937 rooms).
      On January 16, 2007 the Group announced the sale of its 33.3% interest in the Crowne Plaza London — The City to Grupo Statuto, a leading Italian real estate investor. The hotel has been sold for gross proceeds of £81 million. IHG’s net proceeds after debt repayments are £18 million, £11 million above net book value.
      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 2006 totaled £124 million compared with £183 million in 2005 and £257 million in 2004. Capital expenditure in 2006 included the refurbishment of the InterContinental London, Park Lane and a rolling rooms refurbishment program at the InterContinental Hong Kong.
      At December 31, 2006 capital committed, being contracts placed for expenditure on property, plant and equipment not provided for in the financial statements, totaled £24 million.
      Following the completion of the hotel disposals in 2006, the Group owns 25 hotels.
FIGURE 1
                         
Asset disposal program detail   Number of hotels   Proceeds   Net book value
             
        (£ billion)
Disposed to date
    174       3.0       2.9  
Remaining hotels
    25             1.0  
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 (see Figure 2).
      In 2006, 28.4 million shares were repurchased at an average price of 909 pence per share (total £258 million). These repurchases completed the second and initiated the third £250 million share repurchase program, announced on September 8, 2005. The precise timing of share purchases will be dependent upon, amongst other things, market conditions. By March 16, 2007, a total of 26.05 million shares had been repurchased under the third repurchase program at an average price per share of 938 pence per share (approximately £244 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 further £850 million return of funds to shareholders. This comprises a proposed special dividend of approximately £700 million with share consolidation and a further £150 million share repurchase program to commence after completion of the third £250 million program.

18


 

      In June 2006, £497 million was returned to shareholders by way of a special dividend of 118 pence per ordinary share held on June 9, 2006.
FIGURE 2
                                 
Return of funds program   Timing   Total return   Returned to date(i)   Still to be returned
                 
            (£ million)    
£501 million special dividend
    Paid December 17, 2004       501       501       Nil  
First £250 million share buyback
    Completed in 2004       250       250       Nil  
£996 million capital return
    Paid July 8, 2005       996       996       Nil  
Second £250 million share buyback
    Completed in 2006       250       250       Nil  
£497 million special dividend
    Paid June 22, 2006       497       497       Nil  
Third £250 million share buyback
    Ongoing       250       244       6  
£700 million special dividend
    Expected second quarter 2       007 700             700  
£150 million share buyback
    Yet to commence       150             150  
                         
Total
            3,594       2,738       856  
                         
(i)  As at March 16, 2007.
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, 2006, IHG’s brands comprised 3,741 franchised, managed, owned or leased hotels and 556,246 guest rooms in nearly 100 countries and territories.
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.

19


 

SEGMENTAL INFORMATION
Geographic Segmentation
      The following table shows revenue and operating profit before other operating income and expenses in pounds sterling and percentage by geographical area, for the following periods: years ended December 31, 2006, 2005 and 2004.
                           
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (£ million)
Revenue(1)(4)
                       
 
Americas
    433       384       306  
 
Europe, the Middle East and Africa
    206       200       186  
 
Asia Pacific
    111       87       74  
 
Central(5)
    55       42       40  
                   
Continuing operations
    805       713       606  
                   
 
Americas
    30       61       189  
 
Europe, the Middle East and Africa
    125       1,082       1,349  
 
Asia Pacific
          54       60  
                   
Discontinued operations(3)
    155       1,197       1,598  
                   
Total
    960       1,910       2,204  
                   
Operating profit before other operating income and expenses(1)(2)
                       
 
Americas
    217       186       149  
 
Europe, the Middle East and Africa
    36       31       11  
 
Asia Pacific
    29       21       17  
 
Central(5)
    (81 )     (65 )     (57 )
                   
Continuing operations
    201       173       120  
                   
 
Americas
    4       12       24  
 
Europe, the Middle East and Africa
    26       143       195  
 
Asia Pacific
          11       7  
                   
Discontinued operations(3)
    30       166       226  
                   
Total
    231       339       346  
                   
 
Footnotes on page 21.

20


 

                           
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (%)
Revenue
                       
 
Americas
    45.1       20.1       13.9  
 
Europe, the Middle East and Africa
    21.5       10.4       8.4  
 
Asia Pacific
    11.6       4.6       3.4  
 
Central(5)
    5.7       2.2       1.8  
                   
Continuing operations
    83.9       37.3       27.5  
                   
 
Americas
    3.1       3.2       8.6  
 
Europe, the Middle East and Africa
    13.0       56.7       61.2  
 
Asia Pacific
          2.8       2.7  
                   
Discontinued operations
    16.1       62.7       72.5  
                   
Total
    100.0       100.0       100.0  
                   
Operating profit before other operating income and expenses
                       
 
Americas
    93.9       69.1       43.1  
 
Europe, the Middle East and Africa
    15.6       11.5       3.2  
 
Asia Pacific
    12.6       7.8       4.9  
 
Central(5)
    (35.1 )     (24.1 )     (16.5 )
                   
Continuing operations
    87.0       64.3       34.7  
                   
 
Americas
    1.7       4.5       6.9  
 
Europe, the Middle East and Africa
    11.3       27.1       56.4  
 
Asia Pacific
          4.1       2.0  
                   
Discontinued operations
    13.0       35.7       65.3  
                   
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 2006: £1 = $1.84; (2005: £1 = $1.83, 2004: £1 = $1.82). In the case of the euro, the translation rate is 2006: £1 = 1.47; (2005: £1 = 1.46, 2004: £1 = 1.47).
 
(2)  Operating profit before other operating income and expenses does not include other operating income and expenses for all periods presented. Other operating income and expenses (charge unless otherwise noted) by region are the Americas (2006: £25 million credit; 2005: £5 million; 2004: £15 million credit); Europe, the Middle East and Africa (2006: £2 million credit; 2005: £12 million; 2004: £57 million); and Asia Pacific (2006: £nil; 2005: £5 million; 2004: £7 million).
 
(3)  Europe, the Middle East and Africa includes discontinued operations for Hotels (2006: £26 million; 2005: £73 million; 2004: £118 million) and Soft Drinks (2006: £nil; 2005: £70 million; 2004: £77 million). The Americas and Asia Pacific discontinued operations all relate to Hotels. Hotels discontinued operations were all owned and leased.
 
(4)  Amounts are reported by origin. See Note 2 of Notes to the Consolidated Financial Statements for details by destination, for which the amounts are not significantly different.
 
(5)  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.

21


 

     Activity Segmentation
      The following table shows revenue and operating profit before other operating income and expenses in pounds sterling by activity and the percentage contribution of each activity for the following periods: years ended December 31, 2006, 2005 and 2004.
                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (£ million)
Revenue(1)(4)
                       
 
Hotels
                       
   
Americas
    433       384       306  
   
Europe, the Middle East and Africa
    206       200       186  
   
Asia Pacific
    111       87       74  
   
Central(5)
    55       42       40  
                   
Continuing operations
    805       713       606  
                   
 
Hotels(3)
                       
   
Americas
    30       61       189  
   
Europe, the Middle East and Africa
    125       411       643  
   
Asia Pacific
          54       60  
 
Soft Drinks
          671       706  
                   
Discontinued operations
    155       1,197       1,598  
                   
Total
    960       1,910       2,204  
                   
Operating profit before other operating income and expenses(1)(2)
                       
 
Hotels
                       
   
Americas
    217       186       149  
   
Europe, the Middle East and Africa
    36       31       11  
   
Asia Pacific
    29       21       17  
   
Central(5)
    (81 )     (65 )     (57 )
                   
Continuing operations
    201       173       120  
                   
 
Hotels(3)
                       
   
Americas
    4       12       24  
   
Europe, the Middle East and Africa
    26       73       118  
   
Asia Pacific
          11       7  
 
Soft Drinks
          70       77  
                   
Discontinued operations
    30       166       226  
                   
Total
    231       339       346  
                   
 
Footnotes on page 23.

22


 

                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (%)
Revenue
                       
 
Hotels
                       
   
Americas
    45.1       20.1       13.9  
   
Europe, the Middle East and Africa
    21.5       10.4       8.4  
   
Asia Pacific
    11.6       4.6       3.4  
   
Central
    5.7       2.2       1.8  
                   
Continuing operations
    83.9       37.3       27.5  
                   
 
Hotels
                       
   
Americas
    3.1       3.2       8.6  
   
Europe, the Middle East and Africa
    13.0       21.5       29.2  
   
Asia Pacific
          2.9       2.7  
 
Soft Drinks
          35.1       32.0  
                   
Discontinued operations
    16.1       62.7       72.5  
                   
Total
    100.0       100.0       100.0  
                   
Operating profit before other operating income and expenses
                       
 
Hotels
                       
   
Americas
    93.9       54.9       43.1  
   
Europe, the Middle East and Africa
    15.6       9.1       3.2  
   
Asia Pacific
    12.6       6.2       4.9  
   
Central
    (35.1 )     (19.2 )     (16.5 )
                   
Continuing operations
    87.0       51.0       34.7  
                   
 
Hotels
                       
   
Americas
    1.7       3.6       6.9  
   
Europe, the Middle East and Africa
    11.3       21.5       34.1  
   
Asia Pacific
          3.2       2.0  
 
Soft Drinks
          20.7       22.3  
                   
 
Discontinued operations
    13.0       49.0       65.3  
                   
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 2006: £1 = $1.84 (2005: $1.83, 2004: £1 = $1.82). In the case of the euro, the translation rate is 2006: £1 = 1.47 (2005: £1 = 1.46, 2004: £1 = 1.47).
 
(2)  Operating profit before other operating income and expenses does not include other operating income and expenses for all periods presented. Other operating income and expenses items (charge unless otherwise noted) by business segment are the Americas (2006: £25 million credit; 2005: £7 million; 2004: £15 million credit); Europe, the Middle East and Africa (2006: £2 million credit; 2005: £10 million; 2004: £57 million); and Asia Pacific (2006: nil million; 2005: £5 million; 2004: £7 million).
 
(3)  Hotels discontinued operations were all owned and leased.
 
(4)  Amounts are reported by origin. See Note 2 of Notes to the Consolidated Financial Statements for details by destination, for which the amounts are not significantly different.
 
(5)  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.

23


 

HOTELS
     Overview
      InterContinental Hotels Group is an international hotel business which owns a portfolio of well-recognized and respected hotel brands, including InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo, with 3,741 franchised, managed, owned and leased hotels and 556,246 guest rooms in nearly 100 countries and territories as at December 31, 2006. Approximately 98.5% of the Group’s rooms are operated under managed and franchised models.
      IHG operates in the global hotel market, which has an estimated total room capacity of 18.8 million rooms. Room capacity has been growing at approximately 3% per annum over the last five years. The hotel market is geographically concentrated with 12 countries accounting for two-thirds of worldwide hotel room supply. The Group has a leadership position (top three by room numbers) in six of these 12 countries — US, UK, Mexico, Canada, Greater China and Australia — more than any other major hotel company.
      The hotel market is, however, a fragmented market with the four largest companies controlling only 11% of the global hotel room supply and the 10 largest controlling less than 21%. The Group is the largest of these companies by room numbers with a 3% market share. The major competitors in this market include other large global hotel companies, smaller hotel companies and independent hotels.
      Within the global market, a relatively low proportion of hotel rooms are branded (see figure 3), but there has been an increasing trend towards branded rooms. For example, Mintel, a market research company, estimates that the proportion of branded rooms in Europe has grown from 15% in 2000 to 25% in 2004. Larger branded companies are therefore gaining market share at the expense of smaller companies and independent hotels. IHG 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. 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.
FIGURE 3
         
Percentage of branded hotel rooms by region   2004
     
North America
    65%  
South America
    20%  
Europe
    25%  
Middle East
    25%  
East Asia
    25%  
 
Source: Mintel (latest data available)
     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, driven by a number of underlying trends:
  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;
 
  globalisation 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.
      Potential negative trends include increased terrorism, increased costs associated with compliance with environmental regulations and economic factors such as rising oil prices. Currently, however, there are no indications that demand is being significantly affected by these factors.

24


 

      Supply growth in the industry is cyclical, averaging between zero and 5% per annum historically. The Group’s profit is partly protected from supply pressure 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 2006, 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 2006, 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 2006 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.

25


 

      The following table shows the number of hotels and rooms owned, leased, managed or franchised by IHG as at December 31, 2006, December 31, 2005 and December 31, 2004.
                                                                 
            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
                                 
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  
2004
    166       38,420       403       98,953       2,971       396,829       3,540       534,202  
      The Group sets quality and service standards for all of its hotel brands (including those operated under management contracts or franchise arrangements) and operates a customer satisfaction and hotel quality measurement system to ensure those standards are met or exceeded. The quality measurement system includes an assessment of both physical property and customer service standards.
     Strategy
      IHG owns, operates and franchises hotels, with its brands represented in nearly 100 countries and territories around the world. The Group’s strategy is to become the preferred hotel company for guests and owners by building the strongest operating system in the industry, focused on the largest markets and segments where scale really counts. During 2006, IHG initiated a number of research projects, the results of which will strengthen the Group’s strategy with respect to brand development, franchising operations and growth opportunities.
      The Group has four stated strategic priorities:
  brand performance — to operate a portfolio of brands attractive to both owners and guests that have clear market positions in relation to competitors;
 
  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 organisation — to create a more efficient organization with strong core capabilities.
      Executing the four strategic priorities is designed to achieve:
  organic growth of at least 50,000 to 60,000 net rooms by the end of 2008 (up 19,246 from 537,000 in June 2005), with specific growth targets for the InterContinental brand and the key Chinese market; and
 
  out-performance of total shareholder return against a competitor set.
      Growth is planned to be attained predominantly from managing and franchising rather than owning and leasing hotels. The managed and franchised model is attractive because it enables the Group to achieve its goals with limited capital investment. With a relatively fixed cost base, such growth yields high incremental margins for IHG, and is primarily how the Group has grown recently. 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.
      A key characteristic of the managed and franchised business model on which the Group has focused 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, 2006, 92% of continuing earnings before interest, tax and regional and central overheads was derived from managed and franchised operations.

26


 

      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, including two leading brands: InterContinental and Holiday Inn;
 
  market coverage — a presence in nearly 100 countries and territories;
 
  scale — 3,741 hotels, 556,246 rooms and 130 million guest stays per annum;
 
  IHG global reservation channels delivering $5.7 billion of global system room revenue in 2006, including $2.0 billion from the internet;
 
  a loyalty program, Priority Club Rewards, contributing $4.4 billion of global system room revenue; and
 
  a strong web presence — holidayinn.com is the industry’s most visited site, 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.

27


 

Segmental Results
      The following table shows revenue and operating profit before other operating income and expenses 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, 2006, 2005 and 2004.
                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (£ million)
Continuing revenue(1)(4)
                       
 
Americas
                       
   
Owned and leased
    115       106       80  
   
Managed
    77       65       30  
   
Franchised
    241       213       196  
                   
      433       384       306  
 
EMEA
                       
   
Owned and leased
    100       110       116  
   
Managed
    71       55       43  
   
Franchised
    35       35       27  
                   
      206       200       186  
 
Asia
                       
   
Owned and leased
    71       59       50  
   
Managed
    36       25       21  
   
Franchised
    4       3       3  
                   
      111       87       74  
 
Central(3)
    55       42       40  
                   
Total
    805       713       606  
                   
Continuing operating profit before other operating income and expenses(1)(2)
                       
 
Americas
                       
   
Owned and leased
    14       14       3  
   
Managed
    27       20       6  
   
Franchised
    208       186       167  
   
Regional overheads
    (32 )     (34 )     (27 )
                   
      217       186       149  
 
EMEA
                       
   
Owned and leased
    (5 )     (5 )     (11 )
   
Managed
    37       31       24  
   
Franchised
    24       26       21  
   
Regional overheads
    (20 )     (21 )     (23 )
                   
      36       31       11  
 
Asia Pacific
                       
   
Owned and leased
    17       11       9  
   
Managed
    21       16       14  
   
Franchised
    3       2       2  
   
Regional overheads
    (12 )     (8 )     (8 )
                   
      29       21       17  
 
Central(3)
    (81 )     (65 )     (57 )
                   
Total
    201       173       120  
                   
 
Footnotes on page 29.

28


 

                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (%)
Continuing revenue
                       
 
Americas
                       
   
Owned and leased
    14.3       14.8       13.2  
   
Managed
    9.6       9.1       5.0  
   
Franchised
    29.9       29.9       32.3  
                   
      53.8       53.8       50.5  
 
EMEA
                       
   
Owned and leased
    12.4       15.4       19.1  
   
Managed
    8.8       7.8       7.1  
   
Franchised
    4.4       4,9       4.5  
                   
      25.6       28.1       30.7  
 
Asia Pacific
                       
   
Owned and leased
    8.8       8.3       8.2  
   
Managed
    4.5       3.5       3.5  
   
Franchised
    0.5       0.4       0.5  
                   
      13.8       12.2       12.2  
 
Central
    6.8       5.9       6.6  
                   
Total
    100.0       100.0       100.0  
                   
Continuing operating profit before other operating income and expenses
                       
 
Americas
                       
   
Owned and leased
    7.0       8.0       2.5  
   
Managed
    13.6       11.4       5.0  
   
Franchised
    103.5       107.9       139.2  
   
Regional overheads
    (16.0 )     (19.7 )     (22.5 )
                   
      108.1       107.6       124.2  
 
EMEA
                       
   
Owned and leased
    (2.5 )     (2.9 )     (9.2 )
   
Managed
    18.4       18.0       20.0  
   
Franchised
    12.0       15.1       17.5  
   
Regional overheads
    (10.0 )     (12.2 )     (19.2 )
                   
      17.9       18.0       9.1  
 
Asia Pacific
                       
   
Owned and leased
    8.4       6.4       7.5  
   
Managed
    10.6       9.2       11.7  
   
Franchised
    1.3       1.3       1.7  
   
Regional overheads
    (6.0 )     (4.8 )     (6.7 )
                   
      14.3       12.1       14.2  
 
Central
    (40.3 )     (37.7 )     (47.5 )
                   
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 2006: £1 = $1.84; (2005: £1 = $1.83, 2004: £1 = $1.82). In the case of the euro, the translation rate is 2006: £1 = 1.47; (2005: £1 = 1.46, 2004: £1 = 1.47).
 
(2)  Operating profit before other operating income and expenses does not include other operating income and expenses for all periods presented. Other operating income and expenses (charge unless otherwise noted) by region are the Americas (2006: £25 million credit; 2005: £5 million; 2004: £15 million credit); Europe, the Middle East and Africa (2006: £2 million credit; 2005: £12 million; 2004: £57 million); and Asia Pacific (2006: £nil; 2005: £5 million; 2004: £7 million).
 
(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.
 
(4)  Amounts are reported by origin. See Note 2 of Notes to the Consolidated Financial Statements for details by destination, for which the amounts are not significantly different.

29


 

     The following table shows revenue and operating profit 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, 2006, 2005 and 2004.
                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    ($ million)
Continuing revenue(1)(4)
                       
 
Americas
                       
   
Owned and leased
    211       195       146  
   
Managed
    143       118       55  
   
Franchised
    443       389       357  
                   
      797       702       558  
 
EMEA
                       
   
Owned and leased
    184       201       211  
   
Managed
    131       100       78  
   
Franchised
    63       64       50  
                   
      378       365       339  
 
Asia Pacific
                       
   
Owned and leased
    131       108       91  
   
Managed
    65       45       38  
   
Franchised
    8       6       5  
                   
      204       159       134  
 
Central(3)
    101       77       74  
                   
Total
    1,480       1,303       1,105  
                   
Continuing operating profit before other operating income and expenses(1)(2)
                       
 
Americas
                       
   
Owned and leased
    26       25       6  
   
Managed
    50       36       12  
   
Franchised
    382       340       304  
   
Regional overheads
    (59 )     (62 )     (50 )
                   
      399       339       272  
 
EMEA
                       
   
Owned and leased
    (9 )     (9 )     (20 )
   
Managed
    68       56       43  
   
Franchised
    44       48       38  
   
Regional overheads
    (36 )     (39 )     (42 )
                   
      67       56       19  
 
Asia Pacific
                       
   
Owned and leased
    31       20       17  
   
Managed
    39       29       25  
   
Franchised
    5       5       3  
   
Regional overheads
    (23 )     (15 )     (15 )
                   
      52       39       30  
 
Central(3)
    (149 )     (118 )     (102 )
                   
Total
    369       316       219  
                   
 
Footnotes on pages 31 and 32.

30


 

                             
    Year ended   Year ended   Year ended
    December 31,   December 31,   December 31,
    2006   2005   2004
             
    (%)
Continuing revenue
                       
 
Americas
                       
   
Owned and leased
    14.3       15.0       13.2  
   
Managed
    9.7       9.0       5.0  
   
Franchised
    29.9       29.9       32.3  
                   
      53.9       53.9       50.5  
 
EMEA
                       
   
Owned and leased
    12.4       15.4       19.1  
   
Managed
    8.8       7.7       7.1  
   
Franchised
    4.3       4.9       4.5  
                   
      25.5       28.0       30.7  
 
Asia Pacific
                       
   
Owned and leased
    8.9       8.3       8.2  
   
Managed
    4.4       3.4       3.4  
   
Franchised
    0.5       0.5       0.5  
                   
      13.8       12.2       12.1  
 
Central
    6.8       5.9       6.7  
                   
Total
    100.0       100.0       100.0  
                   
Continuing operating profit before other operating income and expenses
                       
 
Americas
                       
   
Owned and leased
    7.0       8.1       2.7  
   
Managed
    13.5       10.4       5.5  
   
Franchised
    103.5       98.0       138.8  
   
Regional overheads
    (16.0 )     (17.9 )     (22.8 )
                   
      108.0       98.6       124.2  
 
EMEA
                       
   
Owned and leased
    (2.4 )     5.8       (9.1 )
   
Managed
    18.4       16.4       19.6  
   
Franchised
    11.9       13.5       17.4  
   
Regional overheads
    (9.7 )     (11.0 )     (19.2 )
                   
      18.2       24.7       8.7  
 
Asia
                       
   
Owned and leased
    8.4       5.5       7.8  
   
Managed
    10.6       8.4       11.4  
   
Franchised
    1.3       1.4       1.4  
   
Regional overheads
    (6.2 )     (4.3 )     (6.9 )
                   
      14.1       11.0       13.7  
 
Central
    (40.3 )     (34.3 )     (46.6 )
                   
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 2006: £1 = $1.84; (2005: £1 = $1.83, 2004: £1 = $1.82). In the case of the euro, the translation rate is 2006: £1 = 1.47; (2005: £1 = 1.46, 2004: £1 = 1.47).

31


 

(2)  Operating profit before other operating income and expenses does not include other operating income and expenses for all periods presented. Other operating income and expenses (charge unless otherwise noted) by region are the Americas (2006: £25 million credit; 2005: £5 million; 2004: £15 million credit); Europe, the Middle East and Africa (2006: £2 million credit; 2005: £12 million; 2004: £57 million); and Asia Pacific (2006: £nil; 2005: £5 million; 2004: £7 million).
 
(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.
 
(4)  Amounts are reported by origin. See Note 2 of Notes to the Consolidated Financial Statements for details by destination, for which the amounts are not significantly different.
     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. IHG has alliances with over 40 airlines, which enable members to collect frequent flyer miles, and with external partners such as car hire companies and credit card companies, which provide exposure and access to IHG’s system. Global system rooms sales generated from Priority Club Rewards members during 2006 was $4.4 billion and represented approximately 34% 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 2006, the internet channel continued to show strong growth, with global system rooms sales booked through the internet increasing by 18% to $2.0 billion. Approximately 16% of IHG global system rooms sales is via the internet through various branded websites, such as www.intercontinental.com and www.holiday-inn.com, as well as certified third parties (up from 14% in 2005). 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 86% 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 2006, global system rooms sales booked through these reservation systems (which include company reservation centers, global distribution systems and internet reservations) rose by approximately 21% to $5.7 billion, and the proportion of IHG global system rooms sales booked through IHG’s reservation channels increased from 41% to 44%.
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.

32


 

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 share of the total hotel spend to establish Priority Club Rewards as the number one program in the industry;
 
•  making the direct channels the best available; and
 
•  improving pricing structure.
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. Staybridge Suites operates in the Americas and was launched in the United Kingdom in 2005. Candlewood Suites and Hotel Indigo operate exclusively in the United States.
                 
    December 31, 2006
     
Brands   Room numbers   Hotels
         
InterContinental
    49,599       148  
Crowne Plaza
    75,632       275  
Holiday Inn
    260,470       1,395  
Holiday Inn Express
    143,582       1,686  
Staybridge Suites
    10,953       97  
Candlewood Suites
    14,149       130  
Hotel Indigo
    893       6  
Other
    968       4  
Total
    556,246       3,741  
InterContinental
                                         
    Americas   Americas   EMEA   EMEA    
    total   O & L   total   O & L   Asia Pacific
                     
Average room rate $(1)
    152.75       227.59       164.11       269.15       160.73  
Room numbers(2)
    16,525       2,271       21,423       1,288       11,651  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate. Owned and leased average room rate is for comparable InterContinental hotels.
 
(2)  As at December 31, 2006.
     InterContinental is IHG’s most prestigious hotel brand. The brand aims to meet the tastes of discerning business and leisure travellers. InterContinental hotels are generally located in prime locations in major cities and key resorts around the world. There were 148 InterContinental hotels across 60 countries and territories which represented 9% of all of IHG’s hotel rooms as at December 31, 2006.
      InterContinental hotels are principally owned, leased or managed by the Group. The brand is one of the largest international premium hotel brands based on room numbers and has more than 50 years of heritage. IHG’s competition includes international luxury chains (for example Four Seasons and Ritz Carlton) and upper upscale chains (for example, Marriott, Hilton, Hyatt and Westin).
      During 2006, 14 new InterContinental hotels were added to the portfolio. After removals there was a net gain of 11 in the total number of InterContinental hotels.

33


 

Crowne Plaza
                                         
    Americas   Americas   EMEA   EMEA    
    total   O & L   total   O & L   Asia Pacific
                     
Average room rate $(1)
    111.05       85.24       130.75       111.64       95.21  
Room numbers(2)
    42,604       293       16,440       732       16,588  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate. Owned and leased average room rate is for comparable Crowne Plaza hotels.
 
(2)  As at December 31, 2006.
     Crowne Plaza is IHG’s global upscale hotel brand which had grown to 275 hotels worldwide by December 31, 2006. Defined as “the Place to Meet”, the brand is targeted at the business guest, with a particular focus on executive meetings and business events. Mostly located in principal cities, the upscale Crowne Plaza hotels provide the high level of comfort, amenities, services, facilities and meeting space expected by business and leisure travellers of a full service hotel. Crowne Plaza represented 14% of IHG hotel rooms as at December 31, 2006.
      Approximately 68% of the upscale Crowne Plaza hotels and resorts are franchised hotels. As at December 31, 2006, 56% of Crowne Plaza brand properties were in the Americas. The key competitors in this segment include Sheraton, Marriott, Hilton, Double-Tree, Wyndham and Radisson.
      During 2006, 45 Crowne Plaza hotels were added to the portfolio while five were removed, resulting in a net increase of 40 hotels.
Holiday Inn
                                         
    Americas   Americas   EMEA   EMEA    
    total   O & L   total   O & L   Asia Pacific
                     
Average room rate $(1)
    91.35       93.67       105.70       92.86       73.82  
Room numbers(2)
    186,067       1,882       50,628       915       23,775  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate. Owned and leased average room rate is for comparable Holiday Inn hotels.
 
(2)  As at December 31, 2006.
     Holiday Inn is one of the world’s most recognized hotel brands, with a global reputation for full service, comfort and value. Holiday Inn International was acquired in 1988, with the remaining North American business of Holiday Inn being acquired in 1990. The Holiday Inn brand is targeted at the mid-market guest and is the Group’s largest global hotel brand based on room numbers. The Holiday Inn brand continues to expand and evolve globally to provide convenient and productive facilities for business travellers as well as memorable holiday experiences for families.
      There were 1,395 Holiday Inn hotels located in more than 70 countries and territories which represented 47% of all IHG’s hotel rooms as at December 31, 2006. The brand is predominantly franchised. As at December 31, 2006, 71% of the Holiday Inn branded hotels were located in the Americas.
Holiday Inn Express
                         
    Americas   EMEA    
    total   total   Asia Pacific
             
Average room rate $(1)
    87.46       91.82       42.86  
Room numbers(2)
    123,718       18,109       1,755  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate. Owned and leased average room rate is for comparable Express hotels.
 
(2)  As at December 31, 2006.

34


 

     Holiday Inn Express is a rapidly growing, fresh and uncomplicated brand, offering limited-service comfort, convenience and good value. IHG recognized the need for a brand in this category in the early 1990s and subsequently developed Holiday Inn Express to extend the reach of the Holiday Inn brand and enter the midscale limited service market. The brand aims to provide the room quality of midscale hotels where guests enjoy smart bedrooms, contemporary bathrooms and complimentary breakfast.
      There were 1,686 Holiday Inn Express hotels worldwide, which represented 26% of IHG’s hotel rooms as at December 31, 2006. Holiday Inn Express is one of the largest brands in the US midscale limited service sector based on room numbers, and approximately 86% of the Holiday Inn Express branded rooms are located in the Americas. Holiday Inn Express hotels are almost entirely franchised. Holiday Inn Express also has a solid and growing brand presence in the UK market where it faces competition from a variety of local market brands and independent hotels.
      During 2006, 145 new Holiday Inn Express hotels were added to the portfolio, while 49 hotels were removed from the portfolio, resulting in a net gain of 96 hotels. A further 299 franchise agreements were signed, adding to the system pipeline.
Staybridge Suites
         
    Americas
    total
     
Average room rate $(1)
    100.53  
Room numbers(2)
    10,953  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate.
 
(2)  As at December 31, 2006.
     Staybridge Suites is IHG’s organically developed long-stay upscale brand that offers guests a home away from home. The rooms offer more space than the typical hotel room, offering studios and one and two bedroom suites, complete with kitchens and living rooms, work stations and high-speed internet access, along with breakfast. As at December 31, 2006, there were 97 Staybridge Suites hotels, all of which are located in the Americas, representing 2% of all IHG’s hotel rooms. The Staybridge Suites brand is primarily operated under franchised and managed models. The primary competitors include Residence Inn, Homewood, Summerfield and Hawthorne. On April 6, 2005 the Group announced the launch of Staybridge Suites in the United Kingdom.
      During 2006, 12 hotels were added to the portfolio with two removals.
     Candlewood Suites
         
    Americas
    total
     
Average room rate $(1)
    67.27  
Room numbers(2)
    14,149  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate.
 
(2)  As at December 31, 2006.
     The Candlewood Suites brand was acquired on December 31, 2003. Candlewood Suites is a mid-scale extended-stay brand which complements Staybridge Suites’ upside positioning. Candlewood Suites is an established brand of carefully designed and purpose-built hotels created for stays of a week or longer with studio and one-bedroom suites featuring well-equipped kitchens, spacious work areas and an array of convenient amenities. As at December 31, 2006 there were 130 Candlewood Suites hotels. The major owner of Candlewood Suites properties is HPT and the Group manages all 76 of HPT’s Candlewood Suites properties under a 20 year agreement. At the end of 2006, Candlewood Suites represented 2% of all of the Group’s rooms.

35


 

     Hotel Indigo
      In April 2004, the Group launched its seventh brand, Hotel Indigo, which is a new, innovative brand, designed for the style-conscious traveller who seeks the ambience of a boutique hotel with the benefits and consistencies of a global hotel operation. Inspired by lifestyle retailing, Hotel Indigo features inviting service, inspiring artwork, casual gourmet restaurants, 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, 2006 there were six Hotel Indigo hotels, with 893 rooms.
         
    Americas
    total
     
Average room rate $(1)
    100.77  
Room numbers(2)
    893  
 
(1)  For the year ended December 31, 2006; quoted at constant US$ exchange rate.
 
(2)  As at December 31, 2006.
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. In terms of its continuing operating profit before central overheads and other operating income and expenses, the Americas represented 77%, EMEA represented 13% and the Asia Pacific region represented 10% in the year ended December 2006.
      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)
    71       19       10  
Hotel level operating profit (before central overheads and other operating income and expenses)(2)
    77       13       10  
 
(1)  As at December 31, 2006.
 
(2)  For the year ended December 31, 2006.
     The following table shows information concerning the geographical locations and ownership of IHG’s hotels as at December 31, 2006.
                                                                   
        Management contract        
    Owned or leased   and joint ventures   Franchised   Total
                 
    Hotels   Rooms   Hotels   Rooms   Hotels   Rooms   Hotels   Rooms
                                 
United States
                                                               
 
InterContinental
    4       1,914       10       4,103       3       852       17       6,869  
 
Crowne Plaza
                14       5,439       108       30,224       122       35,663  
 
Holiday Inn
    3       758       26       8,639       817       152,758       846       162,155  
 
Holiday Inn Express
                1       252       1,430       115,138       1,431       115,390  
 
Staybridge Suites
    2       233       39       4,765       51       5,356       92       10,354  
 
Candlewood Suites
                77       9,340       53       4,809       130       14,149  
 
Hotel Indigo
                2       305       4       588       6       893  
                                                 
Total
    9       2,905       169       32,843       2,466       309,725       2,644       345,473  
                                                 

36


 

                                                                   
        Management contract        
    Owned or leased   and joint ventures   Franchised   Total
                 
    Hotels   Rooms   Hotels   Rooms   Hotels   Rooms   Hotels   Rooms
                                 
Rest of Americas
                                                               
 
InterContinental
    1       357       11       3,498       20       5,801       32       9,656  
 
Crowne Plaza
    1       293       3       737       29       5,911       33       6,941  
 
Holiday Inn
    2       1,124       4       1,844       135       20,944       141       23,912  
 
Holiday Inn Express
                            75       8,328       75       8,328  
 
Staybridge Suites
                2       335       3       264       5       599  
 
Candlewood Suites
                                               
 
Hotel Indigo
                                               
                                                 
Total
    4       1,774       20       6,414       262       41,248       286       49,436  
                                                 
Total Americas
                                                               
 
InterContinental
    5       2,271       21       7,601       23       6,653       49       16,525  
 
Crowne Plaza
    1       293       17       6,176       137       36,135       155       42,604  
 
Holiday Inn
    5       1,882       30       10,483       952       173,702       987       186,067  
 
Holiday Inn Express
                1       252       1,505       123,466       1,506       123,718  
 
Staybridge Suites
    2       233       41       5,100       54       5,620       97       10,953  
 
Candlewood Suites
                77       9,340       53       4,809       130       14,149  
 
Hotel Indigo
                2       305       4       588       6       893  
                                                 
Total
    13       4,679       189       39,257       2,728       350,973       2,930       394,909  
                                                 
United Kingdom
                                                               
 
InterContinental
    1       447                               1       447  
 
Crowne Plaza
                6       1,530       9       1,938       15       3,468  
 
Holiday Inn
                58       9,973       46       6,483       104       16,456  
 
Holiday Inn Express
                1       120       106       10,949       107       11,069  
 
Staybridge Suites
                                               
 
Candlewood Suites
                                               
                                                 
Total
    1       447       65       11,623       161       19,370       227       31,440  
                                                 
Europe
                                                               
 
InterContinental
    1       470       23       7,972       3       951       27       9,393  
 
Crowne Plaza
    3       732       6       1,351       32       7,644       41       9,727  
 
Holiday Inn
    3       915       9       2,059       174       26,393       186       29,367  
 
Holiday Inn Express
    1       153       9       1,005       54       5,778       64       6,936  
 
Staybridge Suites
                                               
 
Candlewood Suites
                                               
                                                 
Total
    8       2,270       47       12,387       263       40,766       318       55,423  
                                                 

37


 

                                                                   
        Management contract        
    Owned or leased   and joint ventures   Franchised   Total
                 
    Hotels   Rooms   Hotels   Rooms   Hotels   Rooms   Hotels   Rooms
                                 
The Middle East and Africa
                                                               
 
InterContinental
    1       371       33       10,264       4       948       38       11,583  
 
Crowne Plaza
                11       3,041       1       204       12       3,245  
 
Holiday Inn
                18       3,360       9       1,445       27       4,805  
 
Holiday Inn Express
                            1       104       1       104  
 
Staybridge Suites
                                               
 
Candlewood Suites
                                               
 
Other
                                               
                                                 
Total
    1       371       62       16,665       15       2,701       78       19,737  
                                                 
Total EMEA
                                                               
 
InterContinental
    3       1,288       56       18,236       7       1,899       66       21,423  
 
Crowne Plaza
    3       732       23       5,922       42       9,786       68       16,440  
 
Holiday Inn
    3       915       85       15,392       229       34,321       317       50,628  
 
Holiday Inn Express
    1       153       10       1,125       161       16,831       172       18,109  
 
Staybridge Suites
                                               
 
Candlewood Suites
                                               
 
Other
                                               
                                                 
Total
    10       3,088       174       40,675       439       62,837       623       106,600  
                                                 
Far East and Australasia (Asia Pacific)
                                                               
 
InterContinental
    1       495       24       8,789       8       2,367       33       11,651  
 
Crowne Plaza
                44       13,806       8       2,782       52       16,588  
 
Holiday Inn
    1       198       70       20,101       20       3,476       91       23,775  
 
Holiday Inn Express
                7       1,618       1       137       8       1,755  
 
Staybridge Suites
                                               
 
Candlewood Suites
                                               
 
Other
                4       968                   4       968  
                                                 
Total
    2       693       149       45,282       37       8,762       188       54,737  
                                                 

38


 

                                                                   
        Management contract        
    Owned or leased   and joint ventures   Franchised   Total
                 
    Hotels   Rooms   Hotels   Rooms   Hotels   Rooms   Hotels   Rooms
                                 
Total
                                                               
 
InterContinental
    9       4,054       101       34,626       38       10,919       148       49,599  
 
Crowne Plaza
    4       1,025       84       25,904       187       48,703       275       75,632  
 
Holiday Inn
    9       2,995       185       45,976       1,201       211,499       1,395       260,470  
 
Holiday Inn Express
    1       153       18       2,995       1,667       140,434       1,686       143,582  
 
Staybridge Suites
    2       233       41       5,100       54       5,620       97       10,953  
 
Candlewood Suites
                77       9,340       53       4,809       130       14,149  
 
Hotel Indigo
                2       305       4       588       6       893  
 
Other
                4       968                   4       968  
                                                 
Total
    25       8,460       512       125,214       3,204       422,572       3,741       556,246  
                                                 
     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 2,930 hotels, the Americas represented the bulk of hotels and approximately 77% of the Group’s continuing operating profit before central costs and other operating income and expenses during the year ended December 31, 2006. 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 623 hotels at the end of 2006, EMEA represented approximately 13% of the Group’s continuing operating profit before central costs and other operating income and expenses during the year ended December 31, 2006. Profits are primarily generated from hotels in the United Kingdom, continental European gateway cities and the Middle East portfolio.
     Asia Pacific
      Asia Pacific represented 10% of the Group’s rooms and 10% of the Group’s operating profit before central costs and other operating income and expenses during the year ended December 31, 2006. IHG has a strong and growing presence in Asia Pacific, comprising 188 hotels in total. Greater China is expected to generate significant growth in the hotel and tourism industry over the next decade. As at December 31, 2006 the Group had 65 hotels in Greater China and a further 55 in development.
     Room Count and System Pipeline
      The IHG global system grew significantly during 2006 ending the fiscal year at 3,741 hotels and 556,246 rooms, 135 hotels and 18,713 rooms higher than at December 31, 2005 (see Figure 4). During 2006, 286 hotels with 42,841 rooms were added to the system, while 151 hotels with 24,128 rooms were removed from the system. Of the hotels removed from the system, 126 (18,310 rooms) were in the Americas.
      One of the key elements of the asset disposal program is the retention of management contracts for the hotels sold. Of those sold between Separation and December 31, 2006, management contracts or franchise agreements were retained for 156 hotels. Overall, the number of owned and leased rooms fell by 7,025 while the number of managed and franchised rooms in the system grew by 3,965 rooms and 21,773 rooms respectively.

39


 

      At the end of 2006, the number of rooms in the pipeline (contracts signed but hotels and rooms yet to enter the system) was 1,241, an increase of 40% from 2005 (see figure 5). This positions the Group well to achieve its stated goal of organic growth of at least 50,000 to 60,000 net rooms in the period June 2005 to December 2008. Whilst there is no guarantee that all of the pipeline will enter the system in that period, a number of initiatives are in place to both secure new deals and to reduce the time between a hotel signing with IHG and opening.
      The growth in pipeline was fuelled by record level signings during 2006; 102,774 rooms were signed which represents an increase of over 100% of the average between 2001 and 2005. This partly reflects the increased investment in development resource particularly in the Americas and Asia Pacific.
      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.
FIGURE 4
                                                   
    Hotels   Rooms
         
        Change       Change
Global hotel and room count at December 31, 2006   2006   2005   over 2005   2006   2005   over 2005
                         
Analyzed by brand:
                                               
 
InterContinental
    148       137       11       49,599       46,262       3,337  
 
Crowne Plaza
    275       235       40       75,632       65,404       10,228  
 
Holiday Inn
    1,395       1,435       (40 )     260,470       267,816       (7,346 )
 
Holiday Inn Express
    1,686       1,590       96       143,582       133,554       10,028  
 
Staybridge Suites
    97       87       10       10,953       9,915       1,038  
 
Candlewood Suites
    130       112       18       14,149       12,683       1,466  
 
Hotel Indigo
    6       3       3       893       497       396  
 
Other
    4       7       (3 )     968       1,402       (434 )
                                     
Total
    3,741       3,606       135       556,246       537,533       18,713  
                                     
Analyzed by ownership type:
                                               
 
Owned and leased
    25       55       (30 )     8,460       15,485       (7,025 )
 
Managed
    512       504       8       125,214       121,249       3,965  
 
Franchised
    3,204       3,047       157       422,572       400,799       21,773  
                                     
Total
    3,741       3,606       135       556,246       537,533       18,713  
                                     

40


 

FIGURE 5
                                                   
    Hotels   Rooms
         
        Change       Change
Global pipeline at December 31, 2006   2006   2005   over 2005   2006   2005   over 2005
                         
Analyzed by brand:
                                               
 
InterContinental
    36       27       9       13,211       9,353       3,858  
 
Crowne Plaza
    60       54       6       17,113       13,514       3,599  
 
Holiday Inn
    299       204       95       44,774       31,035       13,739  
 
Holiday Inn Express
    574       429       145       55,520       38,066       17,454  
 
Staybridge Suites
    120       79       41       12,605       8,195       4,410  
 
Candlewood Suites
    128       83       45       11,723       7,467       4,256  
 
Hotel Indigo
    24       8       16       3,045       882       2,163  
                                     
Total
    1,241       884       357       157,991       108,512       49,479  
                                     
Analyzed by ownership type:
                                               
 
Owned and leased
          2       (2 )           574       (574 )
 
Managed
    139       98       41       41,648       27,805       13,843  
 
Franchised
    1,102       784       318       116,343       80,133       36,210  
                                     
Total
    1,241       884       357       157,991       108,512       49,479  
                                     
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 IHG’s hotels in nearly 100 countries and territories 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, Cendant Corporation, Four Seasons Hotels Inc. and Accor S.A.
Key Relationships
      IHG maintains effective business relationships across all aspects of its operations. However, 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, the largest 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 International Association of Holiday Inns (“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.
      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

41


 

Group’s 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.
      On January 25, 2006 IHG announced a restructured management agreement with FelCor, covering all of the hotels (15,790 rooms) owned by FelCor and managed by IHG. Seventeen hotels (6,301 rooms) were retained by FelCor and managed by IHG, under revised contract terms (the contract duration was extended to 2025 and the incentive fees on all the hotels have been rebased). HPT purchased seven of the hotels (2,072 rooms) from FelCor for $160 million, which IHG continues to manage under a separate management agreement. There was no increase in the guarantees to HPT (described in “Item 10. Additional Information — Material Contracts”) as a result of this transaction.
      On February 10, 2006, the Group announced the sale of its entire shareholding in FelCor for $180.5 million in cash, ($19 per share). This sale followed the renegotiation of the management agreement with FelCor.
      On October 28, 2006 IHG announced the signing of a hotel operating joint venture agreement with ANA. IHG invested £10 million for a majority stake in the joint venture increasing IHG’s portfolio in Japan from 12 hotels (3,686 rooms) to 25 hotels (8,623 rooms). As part of the transaction, ANA signed a 15 year management contract for its 13 owned and leased hotels (4,937 rooms).
Key Performance Indicators (KPIs)
      In addition to the traditional profit measures, the management team at IHG monitor the Group and regional performance of the business through a range of financial and non-financial KPIs, the most significant of which include:
  total gross revenue — measure of the scale and reach of IHG’s brands;
 
  revenue per available room (RevPAR) — measure of underlying hotel revenue with year-on-year performance being measured by the RevPAR movement against the prior year;
 
  hotel and room count — measure of the size of IHG’s portfolio; and
 
  pipeline of hotels and rooms — measure of demand and growth potential for IHG’s brands.
      Data for the calculation of KPIs is provided from IHG and underlying hotel records.

42


 

RevPAR
      The following tables present RevPAR statistics for the years ended December 31, 2006 and 2005.
      Owned and leased, and managed statistics are for comparable hotels, and include only those hotels in the IHG system as of December 31, 2006 and owned and leased, or managed by the Group since January 1, 2005.
      The comparison with 2005 is at constant US$ exchange rates.
                                                                             
    Owned & leased comparable   Managed comparable   Franchised
             
        Change vs       Change vs       Change vs
    2006   2005   2005   2006   2005   2005   2006   2005   2005
                                     
Americas
                                                                       
 
InterContinental
                                                                       
   
Occupancy
    78.5 %     73.5 %     5.0 % pts     68.7 %     67.2 %     1.5 % pts.     61.7 %     59.8 %     1.9 % pts.
   
Average daily rate
  $ 227.59     $ 216.58       5.1 %   $ 157.11     $ 145.82       7.7 %   $ 117.50     $ 106.53       10.3 %
   
RevPAR
  $ 178.63     $ 159.19       12.2 %   $ 107.89     $ 97.96       10.1 %   $ 72.50     $ 63.73       13.8 %
 
Crowne Plaza
                                                                       
   
Occupancy
    72.4 %     66.1 %     6.3 % pts.     75.4 %     74.5 %     1.0 % pts.     62.7 %     61.5 %     1.2 % pts.
   
Average daily rate
  $ 85.24     $ 73.41       –16.1 %   $ 135.26     $ 120.07       12.7 %   $ 106.38     $ 98.39       8.1 %
   
RevPAR
  $ 61.75     $ 48.52       27.3 %   $ 102.05     $ 89.42       14.1 %   $ 66.74     $ 60.53       10.3 %
 
Holiday Inn
                                                                       
   
Occupancy
    69.2 %     70.6 %     1.4 % pts.     67.7 %     69.0 %     –1.3 % pts.     62.5 %     61.9 %     0.6 % pts.
   
Average daily rate
  $ 93.67     $ 89.72       4.4 %   $ 98.56     $ 92.33       6.7 %   $ 90.86     $ 85.20       6.6 %
   
RevPAR
  $ 64.79     $ 63.33       2.3 %   $ 66.76     $ 63.76       4.7 %   $ 56.77     $ 52.75       7.6 %
 
Holiday Inn Express
                                                                       
   
Occupancy
                      74.8 %     75.1 %     –0.3 % pts.     68.0 %     66.7 %     1.4 % pts.
   
Average daily rate
                    $ 133.55     $ 119.12       12.1 %   $ 87.36     $ 80.52       8.5 %
   
RevPAR
                    $ 99.91     $ 89.51       11.6 %   $ 59.44     $ 53.68       10.7 %
 
Staybridge Suites
                                                                       
   
Occupancy
    66.7 %     73.7 %     –7.0 % pts.     76.4 %     76.8 %     –0.5 % pts.     72.9 %     73.2 %     –0.4 % pts.
   
Average daily rate
  $ 91.53     $ 73.18       –25.1 %   $ 104.22     $ 95.25       9.4 %   $ 97.34     $ 91.23       6.7 %
   
RevPAR
  $ 61.06     $ 53.93       13.2 %   $ 79.59     $ 73.17       8.8 %   $ 70.92     $ 66.80       6.2 %
 
Candlewood Suites
                                                                       
   
Occupancy
                      75.7 %     75.0 %     0.7 % pts.     66.1 %     69.5 %     –3.4 % pts.
   
Average daily rate
                    $ 66.50     $ 61.03       8.9 %   $ 69.22     $ 64.45       7.4 %
   
RevPAR
                    $ 50.31     $ 45.76       9.9 %   $ 45.72     $ 44.77       2.1 %
 
Hotel Indigo
                                                                       
   
Occupancy
                      69.0 %     55.9 %     13.2 % pts.     39.2 %     42.4 %     –3.3 % pts.
   
Average daily rate
                    $ 127.05     $ 115.19       10.3 %   $ 86.02     $ 84.44       1.9 %
   
RevPAR
                    $ 87.70     $ 64.35       36.3 %   $ 33.70     $ 35.85       –6.0 %

43


 

                                                                             
    Owned & leased comparable   Managed comparable   Franchised
             
        Change vs       Change vs       Change vs
    2006   2005   2005   2006   2005   2005   2006   2005   2005
                                     
EMEA
                                                                       
 
InterContinental
                                                                       
   
Occupancy
    70.6 %     69.9 %     0.7 % pts.     65.4 %     60.9 %     4.5 % pts.     71.3 %     68.5 %     2.8 % pts.
   
Average daily rate
  $ 269.15     $ 223.15       20.6 %   $ 155.76     $ 145.66       6.9 %   $ 173.14     $ 141.33       22.5 %
   
RevPAR
  $ 190.08     $ 156.08       21.8 %   $ 101.92     $ 88.71       14.9 %   $ 123.46     $ 96.87       27.4 %
 
Crown Plaza
                                                                       
   
Occupancy
    70.4 %     68.8 %     1.6 % pts.     75.2 %     73.7 %     1.5 % pts.     67.3 %     64.5 %     2.8 % pts.
   
Average daily rate
  $ 111.64     $ 104.66       6.7 %   $ 140.25     $ 129.91       8.0 %   $ 126.50     $ 119.16       6.2 %
   
RevPAR
  $ 78.59     $ 71.99       9.2 %   $ 105.53     $ 95.74       10.2 %   $ 85.13     $ 76.84       10.8 %
 
Holiday Inn
                                                                       
   
Occupancy
    70.7 %     66.2 %     4.5 % pts.     73.6 %     71.2 %     2.4 % pts.     65.6 %     64.5 %     1.1 % pts.
   
Average daily rate
  $ 92.86     $ 94.18       –1.4 %   $ 111.58     $ 106.62       4.7 %   $ 103.50     $ 92.46       11.9 %
   
RevPAR
  $ 65.66     $ 62.37       5.3 %   $ 82.12     $ 75.90       8.2 %   $ 67.87     $ 59.64       13.8 %
 
Holiday Inn Express
                                                                       
   
Occupancy
    70.1 %     63.9 %     6.3 % pts.     63.8 %     56.6 %     7.2 % pts.     70.8 %     68.8 %     2.0 % pts.
   
Average daily rate
  $ 78.12     $ 79.01       –1.1 %   $ 76.04     $ 71.68       6.1 %   $ 92.62     $ 88.39       4.8 %
   
RevPAR
  $ 54.79     $ 50.45       8.6 %   $ 48.49     $ 40.56       19.5 %   $ 65.59     $ 60.85       7.8 %
                                                                             
    Owned & leased comparable   Managed comparable   Franchised
             
        Change vs       Change vs       Change vs
    2006   2005   2005   2006   2005   2005   2006   2005   2005
                                     
Asia Pacific
                                                                       
 
InterContinental
                                                                       
   
Occupancy
    72.5 %     65.9 %     6.6 % pts.     71.1 %     71.0 %     0.1 % pts.     70.8 %     68.0 %     2.8 % pts.
   
Average daily rate
  $ 340.73     $ 284.50       19.8 %   $ 146.55     $ 140.56       4.3 %   $ 159.64     $ 135.26       18.0 %
   
RevPAR
  $ 247.07     $ 187.39       31.8 %   $ 104.23     $ 99.80       4.4 %   $ 113.03     $ 92.01       22.8 %
 
Crowne Plaza
                                                                       
   
Occupancy
                      78.6 %     76.8 %     1.8 % pts.     77.7 %     74.6 %     31.1 % pts.
   
Average daily rate
                    $ 94.52     $ 87.95       7.5 %   $ 98.31     $ 91.29       7.7 %
   
RevPAR
                    $ 74.27     $ 67.56       9.9 %   $ 76.41     $ 68.13       12.2 %
 
Holiday Inn
                                                                       
   
Occupancy
    78.6 %     76.9 %     1.7 % pts.     76.6 %     75.8 %     0.8 % pts.     69.5 %     71.3 %     –1.8 % pts.
   
Average daily rate
  $ 104.63     $ 92.06       13.7 %   $ 75.35     $ 69.25       8.8 %   $ 66.17     $ 63.98       3.4 %
   
RevPAR
  $ 82.24     $ 70.76       16.2 %   $ 57.72     $ 52.47       10.0 %   $ 45.97     $ 45.62       0.8 %
 
Holiday Inn Express
                                                                       
   
Occupancy
                      77.2 %     77.8 %     –0.6 % pts.     65.4 %     67.3 %     –1.9 % pts.
   
Average daily rate
                    $ 39.38     $ 37.44       5.2 %   $ 53.81     $ 52.20       3.1 %
   
RevPAR
                    $ 30.39     $ 29.11       4.4 %   $ 35.19     $ 35.13       0.2 %
 
Other
                                                                       
   
Occupancy
                      67.1 %     70.1 %     –3.0 % pts.                  
   
Average daily rate
                    $ 74.73     $ 72.21       3.5 %                  
   
RevPAR
                    $ 50.17     $ 50.64       –0.9 %                  
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.

44


 

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 (or, where appropriate IHL) 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 Limited (formerly Six Continents PLC)
      InterContinental Hotels Group Services Company
      InterContinental Hotels Group (Management Services) Limited
  InterContinental Hotels Group Operating Corporation (incorporated and operates principally in the United States)
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, 2006. Approximately 40% of the properties by value were directly owned, with 55% 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, 2006   and Africa   Americas   Asia Pacific   Total
                 
    (£ million)
Hotels
    278       289       172       739  
                         
      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 21 hotels.
      In the year ended December 31, 2006 property, plant and equipment have been written down by £nil million (2005, £7 million) following an impairment review of certain hotel assets based on current market trading conditions. Fair value was measured by reference to recent transactions for hotel assets in these markets.

45


 

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.
      We have a wide range of environmental responsibilities and a unique opportunity to lead the world’s hospitality industry in environmental innovation.
      As we pursue our strategic growth and continue to develop our environmental practice, we aim to minimise our negative effects on the environment. We are committed to providing updated information to stakeholders on:
  •  developments in global environmental policy;
  •  how we establish management responsibility and accountability for environmental performance;
  •  how we evaluate and manage our hotels’ environmental footprint;
  •  new projects and developments; and
  •  performance benchmarking against best practice.
      In 2006 we improved data collection and reporting to increase our 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, we intend to benchmark these achievements across our business so that we can set clear targets for improvement.
      In September 2006 we created the new role of Senior Vice President with responsibility for developing and implementing the Group’s Corporate Social Responsibility (“CSR”) policies and practices. This position reports directly to Richard Winter in his capacity as the IHG Executive Committee member responsible for the development of our global CSR strategy. A comprehensive review of IHG’s current position on CSR was undertaken and a revised strategy was considered and approved by the Board in December 2006.
      Following research throughout 2006, we now have a much better understanding of our main risks and opportunities. The Group’s immediate priorities for action are environmental management and support for the communities in which we operate. The travel and tourism industry is coming under increasing pressure to address its impact on the environment and society and become more sustainable. We must address this challenge as 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. We will be launching several new initiatives in 2007 and will encourage our 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.
      Addressing our risks and opportunities in a cohesive way has required us to develop a more integrated CSR strategy — one that is consistent with our Winning Ways. We have created a global team, representing all parts of our business, to manage our CSR agenda and to develop detailed future plans.
      The Group’s reporting systems will also be strengthened in 2007 so that we can collect better data and set ourselves appropriate performance targets.
      Group companies incur expenditure on technical advice, services and equipment in addressing the environmental laws and regulations enacted in the countries in which they operate. In 2006, such expenditure was not material in the context of their Financial results.

46


 

ITEM 4A. UNRESOLVED STAFF COMMENTS
      None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
INTRODUCTION
Business and Overview
      The Group is a worldwide owner, manager and franchisor of hotels and resorts. Through its various subsidiaries, the Group owned, managed, leased or franchised 3,741 hotels and 556,246 guest rooms in nearly 100 countries and territories around the world, as at December 31, 2006. The Group’s brands include InterContinental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Holiday Inn Hotels & Resorts, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo. 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, 2006, the Hotels business reported growth in all regions at the revenue and operating profit lines for continuing operations. The 2006 regional increases were driven by RevPAR growth of approximately 10% across the 3,741 hotels and were primarily the result of higher room rates.
      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, our 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 other operating income and expenses, 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 UNDER IFRS AND US GAAP
      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, inventories, investments, property, plant and equipment, goodwill and intangible assets, income taxes, financing operations, frequent 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.

47


 

      The Group’s critical accounting policies are set out below.
Goodwill, intangible assets, and property, plant and equipment
      Under IFRS, 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 annual review for impairment.
      Under US GAAP, goodwill arising on acquisitions prior to July 1, 2001 was capitalized and amortized over its estimated useful life, not exceeding 40 years. From October 1, 2002, goodwill and indefinite life intangible assets are not amortized but are reviewed annually for impairment.
      Under both IFRS and US GAAP, the Company uses discounted cash flow models to test goodwill and indefinite life intangibles for impairment on an annual basis, or more frequently if there are indicators of impairment. The discounted cash flow models require assumptions about the timing and amount of net cash inflows, economic projections, cost of capital and terminal values. Each of these can significantly affect the value of the assets.
      Under both IFRS and US GAAP, finite lived intangible assets are capitalized and amortized over their anticipated life.
      Under both IFRS and US GAAP, the carrying value of property, plant and equipment and finite lived intangible assets are assessed for indicators of impairment. The Company evaluates the carrying value of its long-lived assets based on its plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected capital expenditure plans. Changes to the Company’s plans, including decisions to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.
      Under IFRS, property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Assets that do not generate independent cash flows are combined into cash-generating units. If carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their 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. Under US GAAP, the assessment of an asset’s carrying value is by reference in the first instance to undiscounted cashflows. To the extent that undiscounted cashflows do not support carrying value, the fair value of assets must be calculated and the difference to the current carrying value charged to the income statement.
      During 2006, under IFRS the Company recorded an impairment of its property, plant and equipment of £3 million, relating to an asset held for sale. For the purposes of US GAAP, no impairment was required.
Sale of real estate
      Under IFRS, the Company recognises the sales proceeds and related profit or loss on disposal on completion of the sales process. The Group considers the following questions in determining whether revenue and profit should be recorded:
  does the Company have a continuing managerial involvement of the degree associated with asset ownership;
 
  has the Company transferred the significant risks and rewards associated with asset ownership;
 
  can the Company reliably measure the proceeds; and

48


 

  will the Company actually receive the proceeds.
      For US GAAP, the Company accounts for sales of real estate in accordance with FAS 66 “Accounting for Sales of Real Estate”. If there is significant continuing involvement with the property, any gain on sale is deferred and is recognized over the life of the continuing involvement, normally a long-term management contract retained on the property. The deferral of gains on such sales totaled £nil in 2006, £5 million in 2005 and £nil in 2004.
Income taxes
      Under IFRS, 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-term temporary differences. Under US GAAP, deferred tax is computed, in accordance with FAS No. 109 “Accounting for Income Taxes”, on temporary differences between the tax bases and book values of assets and liabilities which will result in taxable or tax deductible amounts arising in future years. Deferred tax assets under IFRS are recognized to the extent that it is regarded as probable that the deductible temporary differences can be realized. Under US GAAP, deferred tax assets are recognized in full and a valuation allowance is made to the extent that it is not more likely than not that they will be realized. Under both IFRS and US GAAP, 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.
      Under both IFRS and US GAAP, 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
      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 sheets in the Consolidated Financial Statements and is estimated using actuarial methods based on statistical formulas that project timing of future point redemption based on historical levels to give eventual redemption rates and points values. The future redemption liability amounted to £180 million at December 31, 2006.
Pensions and other post-employment benefit plans
      Under IFRS, the Company applies IAS 19 “Employee Benefits”. Under US GAAP, the Company has adopted FAS 158 “Employer’s Accounting for Defined Benefit Pension Plans and Other Post-Retirement Plans” as at December 31, 2006, amending the accounting methodology under FAS 87 “Employer’s Accounting for Pensions” and FAS 106 “Employer’s Accounting for Post-Retirement Benefits other than Pensions” on a prospective basis.
      These accounting standards require the Company to make assumptions including, but not limited to, future asset returns, rates of inflation, discount rates, 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.

49


 

OPERATING RESULTS
Accounting Principles
      The following discussion and analysis is based on the Consolidated Financial Statements of the Group, which are prepared in accordance with IFRS. The principal differences between IFRS and US GAAP as they relate to the Group are discussed in Note 32 of Notes to the Consolidated Financial Statements.
      The Group was required to produce its first set of audited financial statements in accordance with IFRS for the year ending December 31, 2005.
      For the year ended December 31, 2006 the results include special items totaling a net credit of £238 million (2005 £297 million — see “year ended December 31, 2006 compared to year ended December 31, 2005 — Special Items”). For comparability of the periods presented, some performance indicators in this Operating and Financial Review and Prospects discussion have been calculated after eliminating these special items. Such indicators are prefixed with “adjusted”. A reconciliation to the amounts under IFRS including such special items is included in Note 9 of Notes to the Consolidated Financial Statements.

50


 

Year ended December 2006 compared with year ended December 2005
                   
    Year ended   Year ended
    December 31,   December 31,
    2006   2005
         
    (£ million)
GROUP RESULTS
               
Revenue:
               
Continuing operations
               
 
Hotels
    805       713  
Discontinued operations
               
 
Hotels
    155       526  
 
Soft Drinks
          671  
             
Total revenue
    960       1,910  
             
Operating profit before other operating income and expenses:
               
Continuing operations
               
 
Hotels
    201       173  
Discontinued operations
               
 
Hotels
    30       96  
 
Soft Drinks
          70  
             
Total operating profit before other operating income and expenses
    231       339  
Other operating income and expenses
    27       (22 )
             
Operating profit
    258       317  
Interest
    (11 )     (33 )
             
Profit before tax
    247       284  
Tax
    41       (80 )
             
Profit after tax
    288       204  
Gain on disposal of assets, net of tax
    117       311  
             
Profit available for the year
    405       515  
             
Earnings per ordinary share:
               
 
Basic
    104.1p       95.2p  
 
Adjusted
    42.9p       38.2p  
 
Adjusted - continuing operations
    37.5p       22.5p  
             
      IHG revenue from continuing operations for the year ended December 31, 2006 was £805 million (2005 £713 million). Operating profit before other operating income and expenses from continuing operations for the year ended December 31, 2006 was £201 million (2005 £173 million).
     Other operating income and expenses
      Other operating income and expenses for the year ended December 31, 2006 totaled £27 million and included the gain on the sale of the Group’s investment in FelCor.
      In 2005 other operating income and expenses totaled £(22) million and included a £13 million restructuring charge, a £9 million charge relating to property damage from fire and natural disasters, a £7 million impairment charge on property, plant and equipment and a £7 million credit related to the curtailment of employee benefits following the UK hotels disposal.

51


 

      Other operating income and expenses are treated as special items by reason of their size or incidence and are excluded from the calculation of adjusted earnings per share in order to provide a more meaningful comparison of performance.
     Net Financing Costs
      Net financing costs decreased from £33 million in 2005 to £11 million in 2006, primarily as a result of significantly lower average debt levels in the year (£92 million in 2006 compared to £700 million in 2005). Financing costs included £10 million (2005 £5 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. The increase over 2005 arises from growth in the scheme membership and higher interest rates. Net financing costs in 2006 also included £4 million in respect of the InterContinental Boston finance lease. Prior year financing costs included £9 million in respect of the discontinued Soft Drinks operations.
     Taxation
      The effective rate of tax on profit before tax, excluding the impact of special items, was 24%. By also excluding the impact of prior year items, which are included wholly within continuing operations, the equivalent effective tax rate would be 36%. This rate is higher than the UK statutory rate of 30% due mainly to overseas profits (predominantly in the United States) being subject to statutory rates higher than the UK statutory rate, unrelieved losses and other disallowable expenses. The equivalent effective rates for 2005, were 29% and 38% respectively.
      Taxation within special items totaled a £94 million credit (2005 £8 million credit). In 2006 and 2005, this represented, primarily, the release of provisions which were special by reason of their size or incidence, relating to tax matters which were settled during the year, or in respect of which the statutory limitation period had expired. In 2006, taxation special 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 2006 was £49 million (2005 £91 million) including £6 million in respect of disposals.
     Gain on Disposal of Assets
      The gain on disposal of assets, net of related tax, totaled £117 million in 2006 (2005 £311 million) and primarily comprised the gain on the sale of seven InterContinental hotels to Morgan Stanley Real Estate Funds (“MSREF”). The gain on disposal of assets in 2005 mainly comprised a net gain on disposal of Soft Drinks of £284 million and a net gain on hotel asset disposals of £27 million.
     Earnings
      Basic earnings per share for 2006 were 104.1 pence, compared with 95.2 pence in 2005. Adjusted earnings per share were 42.9 pence against 38.2 pence in 2005. Adjusted earnings per share for continuing operations were 37.5 pence, 67% up on last year.

52


 

Highlights for the year ended December 31, 2006
      The following is a discussion of the year ended December 31, 2006 compared with the year ended December 31, 2005.
Continuing Hotels Results
                           
    Year ended   Year ended    
    December 31,   December 31,    
    2006   2005   Change
             
        %
    (£ million)    
Revenue:
                       
 
Americas
    433       384       12.8  
 
EMEA
    206       200       3.0  
 
Asia Pacific
    111       87       27.6  
 
Central
    55       42       31.0  
                   
      805       713       12.9  
                   
Operating profit before other operating income and expenses:
                       
 
Americas
    217       186       16.7  
 
EMEA
    36       31       16.1  
 
Asia Pacific
    29       21       38.1  
 
Central
    (81 )     (65 )     24.6  
                   
      201       173       16.2  
                   
      Revenue. Continuing Hotels revenue increased £92 million (12.9%) from £713 million for the year ended December 31, 2005, to £805 million for the year ended December 31, 2006.
      Operating profit. Continuing Hotels operating profit before other operating income and expenses for the year ended December 31, 2006 was £201 million, up 16.2% from £173 million for year ended December 31, 2005.

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Americas
Continuing Americas Results
                           
    Year ended   Year ended    
    December 31,   December 31,    
    2006   2005   Change
             
        %
    ($ million)    
Revenue:
                       
 
Owned and leased
    211       195       8.2  
 
Managed
    143       118       21.2  
 
Franchised
    443       389       13.9  
                   
      797       702       13.5  
                   
Operating profit before other operating income and expenses:
                       
 
Owned and leased
    26       25       4.0  
 
Managed
    50       36       38.9  
 
Franchised
    382       340       12.4  
                   
      458       401       14.2  
Regional overheads
    (59 )     (62 )     (4.8 )
                   
Total $ million
    399       339       17.7  
                   
Sterling equivalent £ million(i)
    217       186       16.7  
                   
 
(i)  The results have been translated into pounds sterling at weighted average rates of exchange for the year. The translation rates are fiscal 2006: £1 = $1.84 (2005: £1 = $1.83).
     For the year ended December 31, 2006, revenue and operating profit from continuing operations increased by 13.5% to $797 million and 17.7% to $399 million, respectively. Underlying trading performance across all ownership types was strong, although the pace of RevPAR growth achieved in the first half of the year was not maintained throughout the second half of the year.
      Continuing owned and leased revenue and operating profit increased by 8.2% to $211 million and 4.0% to $26 million respectively. Owned and leased InterContinental branded hotels achieved RevPAR growth in excess of 12% over 2005, driven by gains in both daily rates and occupancy levels. The owned and leased results were impacted, as expected, by a $6 million loss at the recently opened InterContinental Boston. Excluding this loss, the combined impact of RevPAR growth and operating efficiencies led to a 28% increase in operating profit from continuing owned and leased hotels.
      Managed revenues increased by 21.2% to $143 million during the year as a result of strong underlying trading, restructured management agreements, an increased number of hotels under management contracts and the full year benefit of contracts negotiated during 2005 as part of the hotel disposal program. RevPAR growth in the managed hotels was strong across most brands. Holiday Inn growth levels were impacted during the fourth quarter by hotel refurbishments (nine of 28 hotels). Managed revenues include $80 million (2005 $70 million) from properties that are structured, for legal reasons, as operating leases but with the same characteristics as management contracts.
      Managed operating profit increased by 38.9% to $50 million including $9 million (2005 $9 million) from the managed properties held as operating leases and $3 million from the receipt of business interruption proceeds following hurricane damage in 2005. As a consequence of the 2005 hurricane season, ongoing insurance costs increased significantly, reducing managed operating profit in 2006 by an incremental $3 million.

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      Franchised revenue and operating profit increased by 13.9% to $443 million and 12.4% to $382 million respectively, driven by RevPAR growth of 9.2%, net room count growth of 4% and fees associated with record levels of signings. The RevPAR gains were achieved across all brands despite high prior year comparables. Holiday Inn Express and Crowne Plaza both reported double digit RevPAR growth, driven by higher average daily rates.
      Americas regional overheads were 4.8% lower in 2006, primarily as a result of lower claims in the Group-funded employee healthcare program.
      Americas net hotel and room count grew by 96 hotels (8,303 rooms) to 2,930 hotels (394,909 rooms). The net growth includes openings of 222 hotels (26,613 rooms) led by demand for Holiday Inn Express 128 hotels (11,155 rooms). Although the regions’ net growth was predominantly achieved in the US markets, Mexico represented over 10% of the expansion. The net growth also included removals of 126 hotels (18,310 rooms), of which Holiday Inn hotels represented 56% (74% of rooms).
      The Americas pipeline continued to achieve record growth levels and totaled 1,012 hotels (105,685 rooms) at December 31, 2006. Signing levels outpaced prior year as demand for the new Holiday Inn prototype and Holiday Inn Express continued to accelerate throughout 2006. During the year 61,673 room signings were completed, compared to 49,765 room signings in 2005. This level of growth demonstrates strong demand for IHG brands and represents a key driver of future profitability.
Europe, Middle East and Africa
          Continuing EMEA Results
                           
    Year ended   Year ended    
    December 31,   December 31,    
    2006   2005   Change
             
    (£ million)
        %
Revenue:
                       
 
Owned and leased
    100       110       (9.1 )
 
Managed
    71       55       29.1  
 
Franchised
    35       35        
                   
      206       200       3.0  
                   
Operating profit before other operating income and expenses:
                       
 
Owned and leased
    (5 )     (5 )      
 
Managed
    37       31       19.4  
 
Franchised
    24       26       (7.7 )
                   
      56       52       7.7  
Regional overheads
    (20 )     (21 )     (4.8 )
                   
Total £ million
    36       31       16.1  
                   
Dollar equivalent $ million(i)
    67       56       19.6  
                   
 
(i)  The results have been translated into US dollars at weighted average rates of exchange for the year. The translation rates are 2006: $1 = £0.54 (2005: $1 = £0.55).
     In the owned and leased estate, continuing revenues declined by £10 million to £100 million as a result of the major refurbishment at the InterContinental London Park Lane. The hotel reopened in November 2006 following a 13 month closure and is expected to be fully operational by Spring 2007. Continuing operating loss remained in line with 2005. However, excluding the impact of the InterContinental London Park Lane in 2005 and 2006, the continuing owned and leased operating profit increased by £5 million, driven by enhanced trading performance at the InterContinental Paris Le Grand where RevPAR growth was more than 25% over 2005.

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      Managed revenues and operating profit increased by 29.1% to £71 million and 19.4% to £37 million respectively. The growth was driven by the impact of management contracts negotiated in 2005 and 2006 as part of the hotel disposal program in the UK and Europe, together with strong RevPAR growth in the key regions including Continental Europe and the Middle East.
      Franchised revenue of £35 million was in line with 2005 revenues, whilst operating profit decreased by £2 million to £24 million. The prior year included £7 million in liquidated damages for the termination of franchise contracts in South Africa. Excluding the impact of this, franchised operating profit increased by 26.3% as a result of strong RevPAR growth across the UK and Continental Europe and increased room count. The increased room count was driven by the negotiation of franchise contracts in Continental Europe as part of the hotel disposal program and further expansion in the region.
      During 2006, EMEA hotel and room count grew by 13 hotels (1,181 rooms). The net growth included the opening of 31 hotels (4,823 rooms) and the removal of 18 hotels (3,642 rooms), including exits on a limited number of managed hotels, as agreed at the time of the UK portfolio disposal in May 2005.
      The pipeline in EMEA increased by 57 hotels (7,779 rooms) to 143 hotels (22,057 rooms). The growth included a record level of 13,321 room signings, driven by demand for Holiday Inn and Holiday Inn Express in the UK, Continental Europe and South Africa, and for all brands in the Middle East and Russia.
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Asia Pacific