InterContinental Hotels Group
Annual Report 2004

Plain-text annual report

A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 0 4 www.ihgplc.com INTERCONTINENTAL BRITVIC SOFT DRINKS LIMITED HOTELS GROUP PLC 67 Alma Road Windsor Berkshire SL4 3HD T +44 (0) 1753 410 100 F +44 (0) 1753 410 101 Britvic House Broomfield Road Chelmsford Essex CM1 1TU T +44 (0) 1245 261 871 F +44 (0) 1245 267 147 Annual report and financial statements 2004 Financial highlights Group operating profit up 17%. Strong trading with Hotels operating profit up 26% from £200m to £251m in the year, up 36% on a constant currency basis. Americas operating profit up 13% from $262m to $296m. EMEA operating profit up 29% from £92m to £119m. Asia Pacific operating profit up 105% from $19m to $39m. Soft Drinks revenue up 5% from £674m to £706m. Adjusted earnings per share grew by 56% to 32.5p. Full year dividend raised by 6% from 13.5p to 14.3p per share.* Significant hotel sales announced, totalling £1.75bn, out of total announced for disposal of £2.1bn. This is over 50% of total net book value of assets at time of Separation from Six Continents of £3.9bn. Returns of funds to shareholders totalling £1bn announced in the year, with £767m returned to date. Further £1bn return of funds announced, subject to capital restructuring and completion of disposals. Refinancing of Group’s existing bank facility with a new £1.6bn facility, lowering cost of borrowing and increasing financial flexibility. Continued strong capital control. £257m spent in the year, down 27% on the £354m spent in 2003. Note: Operating profit is shown before exceptional items; 2003 comparatives are unaudited pro forma figures for the 12 months ended 31 December 2003. * Excluding special interim dividend paid in December 2004. Contents 1 Operating and financial review 42 Accounting policies 14 International financial reporting information 45 Notes to the financial statements 22 Directors’ report 24 Corporate governance 28 Audit committee report 29 Remuneration report 38 Financial statements – Group profit and loss account – Statement of total recognised Group gains and losses – Note of historical Group profits and losses – Reconciliation of movement in shareholders’ funds – Group cash flow statement – Balance sheets 67 US GAAP information 72 Directors’ responsibilities in relation to financial statements 73 Report of the independent auditors 74 Four year review 76 Glossary 77 Shareholder profile and forward-looking statements Operating and financial review InterContinental Hotels Group 2004 1 On 15 April 2003, following shareholder and regulatory approval, Six Continents PLC separated into two new groups, InterContinental Hotels Group PLC (IHG) comprising the Hotels and Soft Drinks businesses, and Mitchells & Butlers plc (MAB), comprising the Retail and Standard Commercial Property Development businesses (the Separation). This operating and financial review provides a commentary on the performance of the Hotels and Soft Drinks businesses of InterContinental Hotels Group PLC (the Group) for the financial year ended 31 December 2004. To assist shareholders, unaudited pro forma comparatives for the 12 months ended 31 December 2003 are provided. REPORTING BASIS Soft Drinks turnover increased by 4.7% despite the summer of In 2003, in order to bring its financial reporting timetable into line 2004 experiencing poorer weather than the very favourable with other major European and US hotel companies, IHG changed summer conditions of 2003. This growth was boosted by 2004 its financial year end from 30 September to 31 December. The including an extra week’s trading, 2004 being a 53 week financial statutory financial period covered by these financial statements year for Soft Drinks. is therefore the 12 months ended 31 December 2004, with comparatives for the 15 months ended 31 December 2003. The comparatives include the results of MAB up until the Separation. GROUP RESULTS IHG operating profit before exceptional items was £331m compared with £283m for the 12 months ended 31 December 2003. Hotels operating profit increased by 25.5% to £251m while Soft Drinks fell by £3m to £80m. IHG turnover for the 12 months ended 31 December 2004 Exceptional items after tax netted to income of £68m and included was £2,204m compared with £2,161m for the 12 months ended an operating exceptional charge before tax of £19m and a non- 31 December 2003. operating exceptional charge before tax of £80m. Further details In the Hotels business all regions reported revenue and profit are given in Exceptional Items below. growth in US dollar terms as the hotel industry showed some Basic earnings per share for the 12 months ended 31 December recovery from the impact of global insecurity, Severe Acute 2004 was 42.1p (2.6p for the 15 months ended 31 December Respiratory Syndrome (SARS) and depressed travel experienced 2003). Adjusted earnings per share, after excluding the distorting in 2003. The relative strength of sterling against the US dollar effect of exceptional items, was 32.5p for the year, compared with (weighted average US dollar exchange rate to sterling for the year 20.8p pro forma adjusted earnings per share for the 12 months was $1.82 against $1.63 for 2003) converted a 13.0% growth in ended 31 December 2003. Dividends for 2004 totalled 86.3p Hotels turnover expressed in US dollars to a 0.7% growth when including a 72.0p special dividend paid in December 2004. expressed in sterling. If currency exchange rates had been the same in 2004 as in the 12 months ended 31 December 2003, In addition to the special dividend, in the 12 months ended 31 December 2004, IHG repurchased 46.4 million shares Hotels turnover growth would have been 5.9%. returning a further £255m to shareholders. 2 InterContinental Hotels Group 2004 Operating and financial review Summary Results Turnover: Hotels Soft Drinks IHG MAB Total Operating profit before non-operating exceptional items: Hotels Soft Drinks Operating exceptional items – Hotels IHG MAB Total EBITDA† Earnings per share (pence): Basic Adjusted† 12 months ended 15 months ended 31 Dec 2004 Audited £m 31 Dec 2003* Unaudited £m Actual currency change % Constant currency change % 31 Dec 2003 Audited £m 1,498 706 2,204 – 2,204 251 80 (19) 312 – 312 529 42.1p 32.5p 1,487 674 2,161 – 2,161 200 83 – 283 – 283 481 – 20.8p 0.7 4.7 2.0 – 2.0 25.5 (3.6) – 10.2 – 10.2 10.0 – 56.3 5.9 4.7 5.6 – 5.6 36.1 (3.6) – 17.0 – 17.0 16.0 – – 1,870 820 2,690 793 3,483 251 95 (51) 295 137 432 786 2.6p 39.1p# * The results for the 12 months ended 31 December 2003 are unaudited pro forma figures. † Earnings before interest, tax, depreciation and amortisation (EBITDA) and adjusted earnings per share exclude all exceptional items. # Restated to show exceptional tax credits on a basis consistent with 2004. GROUP STRATEGY On 17 December 2004, IHG announced the sale of 13 hotels, The Group continued to follow the clear strategy established on with 3,946 rooms in the United States, Puerto Rico and Canada, Separation. The key priorities of this strategy are: to Hospitality Properties Trust (HPT). Net proceeds totalled • to strengthen the core business through focus on brand differentiation and system delivery; • to grow the managed and franchised fee income business in key markets; • to develop the organisation and its people; • to continue the asset disposal programme; and • to return funds to shareholders. Specific activities in 2004 are discussed below under Asset Disposals, Return of Funds, Reorganisation and Refinancing of Group Debt. ASSET DISPOSALS During 2004, IHG continued the asset disposal programme commenced in 2003. Since Separation in April 2003, 121 hotels were sold for total proceeds of approximately £1.75bn. $425m, before transaction costs, equivalent to net book value. The transaction is expected to complete in the first quarter of 2005. IHG will continue to manage the hotels under a 25 year management contract with HPT. IHG has two consecutive options to extend the contracts for 15 years each, giving a total potential contract length of up to 55 years. On 28 February 2005, IHG announced the acquisition by Strategic Hotel Capital, Inc. of 85% interests in two hotels in the United States. IHG will receive approximately $287m in cash before transaction costs, based upon a total value of $303.5m, $12m in excess of net book value. This transaction is expected to complete in the first half of 2005. IHG will continue to manage these hotels under a 20 year management contract with three options to extend for a further ten years each. InterContinental Hotels Group 2004 3 Of the 20 hotels in the Americas that were placed on the market in July 2004, five remain unsold. Progress on the disposal plans for these hotels is at varying stages. On 10 March 2005, IHG announced the sale of 73 hotels in the United Kingdom to LRG Acquisition Limited, a consortium comprising Lehman Brothers Real Estate Partners, GIC Real Estate and Realstar Asset Management. Proceeds totalled £1.0bn before transaction costs, £22m below net book value. This transaction is expected to complete in the second quarter of 2005. IHG will continue to manage 63 of these hotels under a 20 year management contract with two consecutive options to extend the contract for a further five years each. The remaining ten hotels will be under a temporary management agreement with IHG. With the transactions above and other smaller transactions since Separation in April 2003, IHG has sold or announced the sale of 121 hotels with proceeds of approximately £1.75bn and has on the market a further 16 hotels with a net book value of £0.4bn. RETURN OF FUNDS In March 2004 IHG announced an on-market share repurchase programme for £250m. By 20 December 2004 the programme was completed with, in total, 45.6 million shares repurchased at an average price of 548p per share. In September 2004 IHG announced a further £750m return of funds to shareholders. A special dividend of £501m was paid to shareholders on 17 December 2004, followed by an associated share consolidation. A further £250m share repurchase programme commenced in December 2004, and by 31 December 2004 a further 0.8 million shares had been repurchased at an average price per share of 651p (total £5m). By 10 March 2005, a total of 2.5 million shares had been repurchased under the second repurchase programme at an average price per share of 647p (total £16m). Following the announcement of the sale of 73 hotels in the United Kingdom, IHG intends to return a further £1bn to shareholders. This will require a capital restructuring to enable the release of funds arising from the receipt of disposal proceeds, details of which will be contained in a circular to shareholders in due course. Subject to receipt of shareholder approval, completion of disposal transactions and there being no material adverse change in market conditions, it is planned to complete the restructuring by the end of June 2005 and to return funds to shareholders as soon as practicable thereafter. REORGANISATION A fundamental review of the organisation of IHG was completed early in 2003. By December 2004 the planned changes had been implemented. It was originally anticipated that the reorganisation would deliver annualised savings by December 2004 of $100m against the budgeted 2003 base. Actual savings against the 2003 base, delivered by the end of December 2004, were estimated to be $120m. 4 InterContinental Hotels Group 2004 Operating and financial review Hotels Results Turnover: Americas EMEA Asia Pacific Central Operating profit before exceptional items: Americas EMEA Asia Pacific Central * Unaudited pro forma results, see page 12. 12 months ended 3 months ended 3 months ended* 31 Dec 2004 £m 31 Dec 2003* Change % £m 31 Mar 2004 £m 30 June 2004 £m 30 Sept 2004 £m 31 Dec 2004 £m 31 Mar 2003 £m 30 June 2003 £m 30 Sept 2003 £m 31 Dec 2003 £m 495 829 134 40 525 807 114 41 1,498 1,487 (5.7) 2.7 17.5 (2.4) 0.7 163 119 21 (52) 251 161 92 12 (65) 200 1.2 29.3 75.0 (20.0) 25.5 115 190 33 10 348 32 16 6 (10) 44 131 214 31 11 387 48 34 3 (16) 69 125 212 31 9 377 46 34 5 (9) 76 124 213 39 10 386 37 35 7 (17) 62 127 175 29 10 341 32 13 4 (20) 29 139 198 19 11 367 50 19 (3) (20) 46 133 217 28 9 387 47 36 3 (10) 76 126 217 38 11 392 32 24 8 (15) 49 HOTELS Performance Following a difficult 2003 which saw the lead-up to and outbreak of war in Iraq, SARS, and depressed global travel, the global hotel industry experienced some recovery in 2004. IHG experienced significantly improved performance in North America, Asia Pacific and the United Kingdom although parts of Continental Europe continued to be weak. Hotels turnover increased by 0.7% in sterling terms but this was impacted by the sterling to US dollar exchange rate. Expressed in US dollars, turnover grew by 13.0% with particularly strong growth in the United Kingdom, the Middle East and Asia Pacific. Hotels operating profit before exceptional items was £251m, an increase of 25.5% on the pro forma figure for the 12 months ended 31 December 2003. Again, there was significant overall growth in US dollar terms in Europe, Middle East and Africa (EMEA) (up by 45%) and Asia Pacific (up by 105%). At constant currency exchange rates, Hotels operating profit before exceptional items increased by 36%. InterContinental Hotels Group 2004 5 Hotels Rooms Change 2004 over 2003 Change 2004 over 2003 132 215 1,484 1,512 79 109 9 3,540 166 403 2,971 3,540 (3) 44,516 61,627 13 (45) 278,787 57 126,035 9,189 8 – 12,407 1,641 (10) 20 534,202 (5) 38,420 98,953 (20) 45 396,829 20 534,202 (530) 3,145 (8,982) 5,737 968 (162) (2,292) (2,116) (1,039) (4,487) 3,410 (2,116) Scale The number of hotels in the IHG system increased by a net 20 hotels during 2004 whilst the number of rooms fell by 2,116. This was a result of the continuing trend of adding Holiday Inn Express hotels to the system (a net increase of 57 hotels with 5,737 rooms), whilst Holiday Inns continued to leave the system primarily as a result of IHG initiated action against poor owners or quality issues. During 2004 a net 45 Holiday Inns with 8,982 rooms left the system, of which 35 hotels with 7,889 rooms were in the Americas. The trend in hotel room additions is encouraging and the focus remains on driving net growth in the total system. At the gross FIGURE 1 Total system size at 31 December 2004 Analysed by brand: InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Staybridge Suites Candlewood Suites Other brands level, 188 hotels with 24,138 rooms were added to the system Total Analysed by ownership type: Owned and leased Managed Franchised Total during 2004, and the pipeline of hotels signed and waiting to enter the system at 31 December 2004 was 673 hotels with 82,897 rooms, up from 544 hotels with 71,226 rooms a year previously. Reservation Systems and Priority Club Rewards IHG continued to leverage its global reservation systems and global loyalty programme. In 2004, over $4.0bn of room revenue was delivered through IHG’s reservation channels, a 23% increase on 2003, and this represented 38% of total system rooms revenue, an increase of 2.2 percentage points on the previous 12 months. Internet channel bookings increased, with revenue growth over 2003 of 44%. Approximately 13% of total IHG system room revenue is sold via the internet, with an increasing proportion now booked on IHG websites (81% in 2004 against 77% in 2003). IHG made significant progress during 2004 in establishing 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 IHG standard, 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. By the end of 2004, IHG had certified over 200 third-party distributors including Travelocity, Travelocity Business and Priceline. IHG’s loyalty programme, Priority Club Rewards, continued to grow with 23.7 million members at 31 December 2004, an increase of 23% on the previous year. Revenue generated from Priority Club Rewards members was 18.0% higher than in 2003 and represented 30% of IHG total system room revenue. 6 InterContinental Hotels Group 2004 Operating and financial review Americas Results Turnover: Owned and leased Managed Franchised Operating profit before exceptional items: Owned and leased Managed Franchised Regional overheads Total Sterling equivalent $m £m 12 months ended Americas 31 Dec 2004 $m 31 Dec 2003 $m Change % The largest profit generating stream in the Americas is the franchised business, with 2,550 hotels and 333,157 rooms. 490 55 357 902 39 12 304 355 (59) 296 481 46 327 854 32 7 279 318 (56) 262 1.9 19.6 9.2 5.6 21.9 71.4 9.0 11.6 5.4 13.0 Operating profit increased from $279m in 2003 to $304m in 2004, a 9.0% increase. All brands posted strong revenue per available room (RevPAR) growth over 2003, with Holiday Inn 5.0% up, Holiday Inn Express 7.1% up, Crowne Plaza 4.5% up and Staybridge Suites 11.3% up. In the owned and leased estate, strong growth in trading, particularly at the InterContinental hotels in New York and Chicago, resulted in operating profit growth of $7m to $39m in 2004. Comparable owned and leased RevPAR saw strong growth on 2003; InterContinental was up by 8.1%, Crowne Plaza by 6.9% and Holiday Inn by 5.6%. In April 2004 the InterContinental Central Park (New York) was sold, and in November 2004 the InterContinental Buckhead, Atlanta, a newly built hotel, was 163 161 1.2 opened. Managed operating profit increased from $7m in 2003 to $12m in 2004 with all brands experiencing strong RevPAR growth on 2003. The manager-owner relationship with HPT strengthened during the year as agreement was reached for HPT to purchase a further 13 hotels from IHG with long-term contracts for IHG to manage the hotels under IHG brands. Following completion of this transaction, 119 hotels owned by HPT are managed by IHG. Americas regional overheads increased marginally, principally as a result of specific strategic initiatives and bonus payments. 3,086 Total Americas operating profit was $296m, a 13.0% increase 968 (162) (605) on the pro forma operating profit for the 12 months ended 31 December 2003 of $262m. The weakness of the US dollar to sterling meant that in sterling terms, Americas operating profit (2,178) was £163m, 1.2% up on 2003. FIGURE 2 Americas system size at 31 December 2004 Analysed by brand: InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Staybridge Suites Candlewood Suites Other brands Total Analysed by ownership type: Owned and leased Managed Franchised Total Analysed by geography: United States Rest of Americas Total 44 116 1,074 1,357 79 109 4 2,783 28 205 2,550 2,783 2,496 287 2,783 Hotels Rooms Change 2004 over 2003 Change 2004 over 2003 (2) 15,088 14 2,410 (7,889) 33,645 10 (35) 205,500 36 109,882 9,189 8 – 12,407 616 (2) 15 386,327 – 9,842 43,328 (17) 32 333,157 15 386,327 (28) (4,383) 2,233 (2,178) (34) 333,590 52,737 49 15 386,327 (12,378) 10,200 (2,178) FIGURE 3 Americas RevPAR movement on previous year InterContinental Owned and leased (comparable) Holiday Inn Franchised Holiday Inn Express Franchised 12 months ended 31 Dec 2004 8.1% 5.0% 7.1% InterContinental Hotels Group 2004 7 12 months ended 31 Dec 2004 £m 31 Dec 2003 £m Change % 759 43 27 829 97 24 21 142 (23) 119 746 38 23 807 77 19 18 114 (22) 92 1.7 13.2 17.4 2.7 26.0 26.3 16.7 24.6 4.5 29.3 216 149 45.0 £m $m Hotels Rooms Change 2004 over 2003 Change 2004 over 2003 62 63 329 153 1 608 126 99 383 608 209 283 116 608 (1) 20,292 1 15,747 (550) 58 (11) 53,568 (1,429) 21 15,921 2,651 222 (2) 8 105,750 (788) (58) (3) (2) 25,570 24,921 13 55,259 8 105,750 5 3 28,865 48,526 28,359 – 8 105,750 (748) (562) 1,252 (58) (188) (269) 399 (58) Operating profit before exceptional items: Europe, Middle East and Africa (EMEA) Turnover for EMEA for 2004 was £829m, £22m higher than for the 12 months ended 31 December 2003. Owned and leased turnover grew by £13m despite the loss of £42m turnover compared to 2003 as a result of hotels being sold. Trading conditions across the region varied; UK hotels experienced strong growth in RevPAR throughout the year and the performance in the Middle East and Africa business was strong. Continental Europe was more mixed with Paris in particular slower to recover from the adverse conditions in 2003. In the owned and leased estate, RevPAR in the United Kingdom Holiday Inn estate continued to grow over previous periods. For the year Holiday Inn UK RevPAR was up by 8.0% over 2003. London hotels in particular experienced strong growth in RevPAR over 2003 (up by 16.0%) as they were slower to recover than the UK regional hotels which had seen some recovery from mid-2003. EMEA Results Turnover: Owned and leased Managed Franchised Owned and leased Managed Franchised Regional overheads Total Holiday Inn UK regional hotel RevPAR was up by 4.7%. Dollar equivalent InterContinental owned and leased RevPAR on a comparable basis was 1.0% up on 2003. InterContinental owned and leased turnover and operating profit was boosted by a full year’s trading FIGURE 4 from the InterContinental Le Grand Paris, which was closed for refurbishment for part of 2003. Owned and leased operating profit finished £20m ahead of 2003 with the InterContinental Le Grand Paris contributing £12m of the increase. Managed operating profit in EMEA rose by £5m to £24m. This EMEA system size at 31 December 2004 Analysed by brand: InterContinental Crowne Plaza was driven by hotels in the Middle East where over half of EMEA’s Holiday Inn managed hotels are located. Overall, Middle East managed Holiday Inn Express RevPAR increased by 8.8% for InterContinental, 8.8% for Crowne Other brands Plaza and 6.4% for Holiday Inn. Liquidated damages of Total approximately £4m were received from the early termination of Analysed by ownership type: the management contract for the InterContinental Barcelona. Owned and leased Overall EMEA franchise RevPAR was 6.1% up on 2003 and there was a net increase in system size of 13 hotels. As a result, EMEA franchise operating profit was £3m ahead of 2003 at £21m. Total EMEA regional overheads increased by £1m, reflecting the benefits of the reorganisation, partly offset by bonus awards for 2004. During the year, a number of UK hotels were sold, including the Crowne Plaza Manchester Midland, Holiday Inn Teeside, Holiday Inn Sheffield West, Holiday Inn Crawley and the Holiday Inn Preston. Managed Franchised Total Analysed by geography: United Kingdom Rest of Europe Middle East and Africa Total FIGURE 5 EMEA RevPAR movement on previous year (comparable) InterContinental Owned and leased Crowne Plaza Owned and leased Holiday Inn UK London Holiday Inn UK Region 12 months ended 31 Dec 2004 1.0% 4.9% 16.0% 4.7% 8 InterContinental Hotels Group 2004 Operating and financial review Asia Pacific Results Turnover: Owned and leased Managed Franchised Operating profit before exceptional items: Owned and leased Managed Franchised Regional overheads Total Sterling equivalent $m £m 201 38 5 244 31 25 3 59 (20) 39 154 26 5 185 18 15 4 37 (18) 19 30.5 46.2 – 31.9 72.2 66.7 (25.0) 59.5 11.1 105.3 21 12 75.0 FIGURE 6 Asia Pacific system size at 31 December 2004 Analysed by brand: InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Other brands Total Analysed by ownership type: Owned and leased Managed Franchised Total Analysed by geography: Australia, New Zealand, South Pacific Greater China Rest of Asia Pacific Total Hotels Rooms Change 2004 over 2003 Change 2004 over 2003 26 36 81 2 4 149 12 99 38 149 44 44 61 149 – 2 1 – (6) (3) (2) (1) – 9,136 12,235 19,719 232 803 42,125 3,008 30,704 8,413 (3) 42,125 (5) 9,650 – 2 16,222 16,253 (3) 42,125 6 677 336 – (899) 120 (263) 458 (75) 120 (646) (41) 807 120 12 months ended Asia Pacific 31 Dec 2004 $m 31 Dec 2003 $m Change % Asia Pacific’s results improved significantly in 2004 as the region made a recovery from the negative impacts in 2003 of the war in Iraq, SARS and the terrorist bombing in Bali. Turnover grew by 32% to $244m with a significant increase in both owned and leased turnover (up by $47m) and managed turnover (up by $12m). The owned and leased estate operating profit grew by $13m to $31m with a significant contribution from the InterContinental Hong Kong. RevPAR at the InterContinental Hong Kong increased by over 50% on 2003 and, with high operational gearing, this led to a substantially improved profit. In the last quarter of the year the hotel was running at an occupancy of over 85% and RevPAR was up by 29% over 2003. In total, owned and leased RevPAR across the region was up by 47%. Asia Pacific managed hotel RevPAR also increased in comparison with 2003; InterContinental increased by 18%, Crowne Plaza by 23% and Holiday Inn by 24%. Operating profit increased by $10m to $25m. Asia Pacific regional overheads were $2m higher than 2003, principally as a result of infrastructure costs to support further planned expansion in Greater China. In addition to the 44 IHG hotels already open and operating in Greater China, there are another 53 management agreements signed or under negotiation which will increase IHG’s presence and leadership in the China hotel market. In the year, the Holiday Inn Newcastle and the Holiday Inn Adelaide were sold with proceeds being broadly in line with net book value. InterContinental Hotels Group 2004 9 Central Turnover Gross central costs Net central costs 12 months ended 31 Dec 2004 £m 40 (92) (52) 31 Dec 2003 £m 41 (106) (65) Change % (2.4) (13.2) (20.0) £m Dollar equivalent $m (93) (105) (11.4) Overheads Americas EMEA Asia Pacific Net Central Central and Regional overheads 12 months ended 31 Dec 2004 $m 31 Dec 2003 $m 59 42 20 93 214 56 36 18 105 215 Change % 5.4 16.7 11.1 (11.4) (0.5) Soft Drinks Turnover Operating profit before exceptional items 12 months ended 31 Dec 2004 £m 31 Dec 2003 £m Change % 706 80 128 674 83 124 4.7 (3.6) 3.2 Central Central support function costs totalled £52m in 2004, £13m down on 2003. The reduction primarily reflects the continued drive to reduce overhead costs. US dollar denominated costs also benefited from being converted at a weaker US dollar to sterling exchange rate. Regional and central overheads were flat year on year, reflecting significant savings achieved given inflationary pressures, new initiatives and the payment of bonuses in 2004. EMEA overheads expressed in US dollars were 16.7% higher than 2003 primarily due to the impact of exchange rates; in sterling, the increase was 4.5%. Including regional costs charged directly to income streams, total gross overheads were 2.0% below 2003 levels when compared at constant exchange rates. SOFT DRINKS Strategy In March 2004, Soft Drinks secured a new long-term Exclusive Bottling Agreement (EBA) with PepsiCo Inc. This agreement is for 15 years and will automatically be extended for a further five years on an Initial Public Offering of the business. As part of the EBA, the shareholding of Britannia Soft Drinks Ltd (BSD) was restructured with IHG’s direct shareholding being reduced to 47.5% whilst its interest in the total business remained unchanged; IHG continues to control and consolidate the results of BSD. The shareholders in BSD also agreed to consider an Initial Public Offering of BSD between 1 January 2005 and 31 December 2008 if market conditions are suitable. Soft Drinks continued to invest in its key brands and in new product innovation. During 2004, BSD acquired the Ben Shaw’s water business, further increasing BSD’s presence in the UK’s expanding water market and providing additional capacity. Performance Soft Drinks turnover increased by 4.7% to £706m, a strong performance against a 2003 result that benefited from a particularly favourable summer. Volume growth was 1.5% with strong growth in on-premise volume up 7.3%, driven by account gains during the year. Soft Drinks increased its share of the take-home market although volumes were lower as the market volume fell below 2003. EBITDA Pepsi achieved a take-home cola market share of 20%. Turnover growth benefited from an extra week’s trading; 2004 included 53 weeks’ trading compared with 52 weeks in 2003. Operating profit for Soft Drinks was £80m, £3m down on 2003. Operating profit in 2003, however, was boosted by an estimated £5m from the exceptionally good summer weather. Although 2004 operating profit benefited from an extra week’s trading, incremental costs associated with a move to a more standalone basis, additional depreciation, increased pension costs and continued investment both in brand support and infrastructure costs, left profit £3m down on last year. Operating cash flow for Soft Drinks was £73m compared with £71m for the 12 months ended 31 December 2003. Net capital expenditure was £70m against £55m in 2003 with significant expenditure on a Business Transformation Programme. 10 InterContinental Hotels Group 2004 Operating and financial review EXCEPTIONAL ITEMS TAXATION Following a review of the hotel estate, tangible fixed assets The tax charge on ordinary activities excluding exceptional items have been written down by £48m; £28m has been charged was 16% for 2004. The equivalent effective rate for the IHG Group as an operating exceptional item and £20m reverses previous excluding MAB was 24% for the 15 months ended 31 December revaluation gains. Other operating exceptional items included a charge of £11m related to the delivery of the further restructuring of the Hotels business in conjunction with the asset disposal programme, and 2003, following restatement in respect of exceptional tax credits on a basis consistent with 2004. Net tax paid in the 12 months ended 31 December 2004 reflected tax repayments received during the period and the impact of exceptional costs. other operating income of £20m relating to the adjustment to Excluding the effect of exceptional items and prior year items, the market valuation of the Group’s investment in FelCor Lodging Group’s tax rate for the 12 months ended 31 December 2004 was Trust Inc. Non-operating exceptional items included a profit of £15m realised on the sale of hotels, a £74m provision for loss on disposal of assets in the Americas and the United Kingdom and a £10m provision against the value of certain fixed asset investments. 36%. The equivalent for the IHG Group was 37% for the 15 months ended 31 December 2003. The difference from the UK statutory rate of 30% arose primarily due to overseas profits being taxed at rates higher than the UK statutory rate. CAPITAL EXPENDITURE AND CASH FLOW IHG’s operating cash flow for 2004 was £364m compared with Non-operating exceptional items also included a net exceptional £411m for the 12 months ended 31 December 2003 (pro forma). interest charge of £11m. This related mainly to refinancing costs, Net capital expenditure was £151m, including £257m capital including the premium paid on the repurchase of the Group’s 2010 €600m Eurobonds of £17m, net of exceptional interest income which included £14m received on tax refunds. The release of provisions relating to tax matters which were settled during the year or in respect of which the relevant statutory limitation period has expired, the recognition of deferred tax assets in respect of losses, and tax on the current year exceptional items has resulted in an exceptional tax credit of £167m. Operating and non-operating exceptional items, together with their related tax credits, have been excluded in the calculation of adjusted earnings per share. additions and £106m disposal proceeds, principally from the sale of hotels. Hotels gross capital expenditure was £187m, lower than expected as £38m was deferred until 2005 following delays in the timing of some projects. Major items of expenditure in 2004 included the InterContinental Buckhead, Atlanta, refurbishment expenditure on the Holiday Inn UK estate and refurbishment expenditure on the InterContinental hotels in London, Cannes and Frankfurt. Net interest paid was £41m, and tax payments totalled £35m. Dividend payments totalled £626m including the special dividend paid in December 2004. The repurchase of shares totalled £257m. REFINANCING OF GROUP DEBT In November 2004 the Group refinanced its existing bank facility with a new £1.6bn facility. The new facility comprises a £1.1bn five year tranche and a £0.5bn 364 day tranche with an option to extend for one year. As part of this refinancing exercise the Group repurchased its euro and sterling denominated bonds. INTEREST EARNINGS AND DIVIDEND Basic earnings per share for the year was 42.1p. Adjusted earnings per share, removing the distorting effect of exceptional items, was 32.5p compared with a pro forma figure for the 12 months ended 31 December 2003 of 20.8p. This represents an increase of over 50%. The Board has proposed a final dividend per share of 10.0p; with the interim dividend of 4.3p, the normal dividend for the The net interest charge for the year (pre-exceptionals) was £22m compared to a £39m pro forma interest charge for the 12 months year totalled 14.3p. A special dividend of 72.0p was paid in December 2004. ended 31 December 2003. The reduction was principally due to lower average debt levels and the weaker US dollar. The exceptional interest charge totalled £11m as analysed in Exceptional Items. InterContinental Hotels Group 2004 11 SHARE PRICE AND MARKET CAPITALISATION The share price in 2004 fluctuated between 479.17p and 690.81p and closed at 647.50p on 31 December 2004. This compares with the share price immediately following the Separation in April 2003 of 372.55p. At 31 December 2004, the market capitalisation of IHG was £4.03bn. TREASURY MANAGEMENT FIGURE 7 Treasury policy is to manage financial risks that arise in relation to underlying business needs. The activities of the treasury function are carried out in accordance with Board approved policies and are subject to regular internal audit. The treasury function does not operate as a profit centre. Treasury activities include money market investments, spot and forward foreign exchange instruments, currency options, currency swaps, interest rate swaps and options, and forward rate agreements. One of the primary objectives of the Group’s treasury risk management policy is to protect the financial covenant ratios in the loan documentation against the adverse impact of movements in interest rates and foreign exchange rates. Movements in foreign exchange rates, particularly the US dollar and euro, can affect the Group’s reported profit, net assets and interest cover. To hedge this translation exposure as far as is reasonably practical, borrowings are taken out in foreign currencies (either directly or via currency swaps), which broadly match those in which the Group’s major net assets are Interest risk profile of gross debt for major currencies At fixed rates At variable rates FIGURE 8 Net debt Borrowings: Sterling US Dollar Euro Australian Dollar Hong Kong Dollar Other 31 Dec 2004 % 27 73 31 Dec 2003 % 59 41 31 Dec 2004 £m 31 Dec 2003 £m 247 335 799 86 69 2 24 952 772 77 84 26 Cash and current asset investments Total (422) (1,366) 1,116 569 denominated. Note: all shown after the effect of currency swaps. Interest rate exposure is managed within parameters that stipulate that fixed rate borrowings should normally account for no less than 25%, and no more than 75%, of net borrowings for each major currency. This is achieved through the use of interest rate swaps and options and forward rate agreements. Based on the year end net debt position (figure 8), and given the underlying maturity profile of investments, borrowings and hedging instruments at that date, a one percentage point rise in US dollar interest rates would increase the net interest charge by approximately £2m, whilst a one percentage point rise in euro interest rates would increase the net interest charge by £6m. Foreign exchange transaction exposure is managed by the forward purchase or sale of foreign currencies or the use of currency options. Most significant exposures of the Group are in currencies that are freely convertible. FIGURE 9 Facilities Committed Uncommitted Total 31 Dec 2004 £m 1,697 64 31 Dec 2003 £m 962 80 1,761 1,042 12 InterContinental Hotels Group 2004 Operating and financial review Medium and long-term borrowing requirements at 31 December The US based InterContinental Hotels Plan is closed to new 2004 were met through the syndicated bank facilities. Short-term members and pensionable service no longer accrues for current borrowing requirements are principally met from drawing under employee members. On an FRS 17 basis, at 31 December 2004 bilateral bank facilities. the Plan had a deficit of $19m. Credit risk on treasury transactions is minimised by operating a policy on the investment of surplus funds that generally restricts counterparties to those with an A credit rating or better, or those providing adequate security. Limits are also set with individual counterparties. Most of the Group’s surplus funds are held in the United Kingdom or United States and there are no material funds where repatriation is restricted as a result of foreign exchange regulations. The Group is in compliance with all of the financial covenants in its loan documentation, none of which represents a material restriction on funding or investment policy in the foreseeable future. UNAUDITED PRO FORMA FINANCIAL INFORMATION Following shareholder and regulatory approval, on 15 April 2003, Six Continents PLC separated into two new groups, InterContinental Hotels Group PLC comprising the Hotels and Soft Drinks businesses, and Mitchells & Butlers plc comprising the Retail and Standard Commercial Property Developments businesses. As a result of the Separation, Six Continents PLC became part of IHG. The pro forma financial information for the 12 months ended 31 December 2003 comprises the results of those companies that form IHG following the Separation, as if IHG had been in existence since 1 October 2001. The information is provided as In September 2004 the Group announced its intention to continue guidance only; it is not audited and, as pro forma information, it its share repurchase programme into 2005 for a further £250m. does not give a full picture of the financial position of the Group. The precise timing of purchases will be dependent upon, amongst The key assumptions used in the preparation of the information other things, market conditions. Purchases have commenced are as follows: under the existing authority from shareholders which will be renewed at the Annual General Meeting. Any shares repurchased under this programme will be cancelled. i. The pro forma information has been prepared using accounting policies consistent with those used in the historic IHG interim and year end financial statements. ACCOUNTING POLICIES The financial statements have been prepared using accounting policies unchanged from the previous year. ii. Pro forma interest has been calculated to reflect the post Separation capital structure of the Group as if it had been in place at 1 October 2001, using interest rate differentials applicable under the post Separation borrowing agreements The Group will be required to produce its first set of audited and excluding facility fee amortisation. Dividend payments financial statements in line with International Financial Reporting have been assumed at the expected ongoing level. iii.The unaudited pro forma tax charge is based on a rate of tax for IHG of 25.0% applied to unaudited pro forma profit before taxation. iv.Adjustments have been made, where appropriate, to exclude any arrangements with the Mitchells & Butlers Group. v. Pro forma earnings per share is based on pro forma profit available for shareholders divided by 734 million shares, being the issued share capital of IHG on Separation. Standards (IFRS) for the year ending 31 December 2005. This will require an opening balance sheet to be prepared under IFRS as at 1 January 2004, and a full profit and loss account, balance sheet and cash flow statement for the year ended 31 December 2004 for comparative purposes. The transition to IFRS reporting will result in a number of changes in the reported financial statements, notes thereto and accounting principles (see details in ‘International financial reporting information’ on pages 14-21). PENSIONS IHG operates three main schemes; the InterContinental Hotels UK Pension Plan, the Britvic Pension Plan, and the US based InterContinental Hotels Pension Plan. The InterContinental Hotels UK Pension Plan and the Britvic Pension Plan were both established with effect from 1 April 2003. On a Financial Reporting Standard (FRS) 17 ‘Retirement Benefits’ basis, at 31 December 2004 the Plans had a deficit of £20m and £108m respectively. In October 2004 £51m was paid into the InterContinental Hotels UK Pension Plan, whilst £1m was paid into the Britvic Pension Plan in January 2004. The defined benefits sections of both these Plans are generally closed to new members. InterContinental Hotels Group 2004 13 12 months ended 31 Dec 2003* Unaudited £m 2,161 (1,659) 502 (219) 283 (39) 244 (61) 183 (30) 153 31 Dec 2004 Audited £m 2,204 (1,652) 552 (221) 331 (22) 309 (50) 259 (28) 231 32.5p 20.8p 331 198 529 1 (11) 75 (71) (8) 515 (187) 106 (70) 364 283 198 481 (2) (19) 61 – (10) 511 (299) 254 (55) 411 PROFIT AND LOSS ACCOUNT Turnover – continuing operations Cost of sales Gross operating profit Administrative expenses Operating profit Net interest charge Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Minority equity interests Retained profit for the period Adjusted earnings per ordinary share OPERATING CASH FLOW Operating profit Depreciation and amortisation Earnings before interest, taxation, depreciation and amortisation Decrease/(increase) in stocks Increase in debtors Increase in creditors Special pension contributions Provisions expended and non-cash items Operating activities Capital expenditure – Hotels Disposal proceeds Capital expenditure – Soft Drinks Operating cash flow The above statements exclude all exceptional items as being non-recurring. * Pro forma results, see page 12. 14 InterContinental Hotels Group 2004 International financial reporting information The Group will be required to produce its first set of audited In accordance with IFRS 1, the Group is entitled to a number of financial statements in line with International Financial Reporting voluntary and mandatory exemptions from full restatement, which Standards (‘IFRS’) for the year ending 31 December 2005. This have been adopted as follows: will require an opening balance sheet to be prepared under IFRS as at 1 January 2004, and a full profit and loss account, balance sheet and cash flow statement for the year ended 31 December Business combinations The basis of accounting for pre-transition combinations under UK GAAP has not been revisited. The initial 2004 for comparative purposes. The transition to IFRS reporting will result in a number of changes in the presentation of reported financial statements, notes thereto and accounting principles. Historically, the Group financial statements have been prepared in accordance with accounting principles generally accepted in the United Kingdom (UK GAAP). The following explanatory notes carrying amount of assets and liabilities acquired in such business combinations is deemed to be equivalent to cost. Property, plant and equipment The Group has elected to retain UK GAAP carrying values of freehold and leasehold hotels including revaluations as deemed cost at transition. Employee benefits The cumulative actuarial gains and losses on defined benefit pension schemes and similar post-retirement and reconciliations describe the differences between IFRS and benefits at transition date have been recognised in full in equity. UK GAAP reporting for the financial year 2004 as well as for the IFRS opening balance sheet at 1 January 2004. The comparative figures are presented in accordance with UK GAAP, and are identical to the full year information disclosed previously. Foreign currencies The Group has elected not to recognise separately cumulative foreign exchange movements up to the transition date, and from 1 January 2004 onwards, to recognise foreign exchange differences on the retranslation of foreign The following financial information should be read in conjunction subsidiaries in a separate reserve within equity. with ‘IFRS accounting policies’ below which describe the IFRS policies followed by the Group. Share-based payments IFRS 2 ‘Share-based Payment’ has been applied to all grants of equity instruments after 7 November 2002 The effects of the transition are explained on the following pages that had not vested at 1 January 2005. which include balance sheet reconciliations at the date of transition and at 31 December 2004 and a reconciliation of the profit and loss account for the year ending 31 December 2004. IFRS accounting policies BASIS OF ACCOUNTING The financial statements are prepared in accordance with NEW ACCOUNTING POLICIES The Group has adopted the transitional requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ and IFRS 2 ‘Share-based Payment’ from 1 January 2004. BASIS OF CONSOLIDATION The Group financial statements comprise the financial statements of the Company and entities controlled by the Company. International Financial Reporting Standards (IFRS). The results of those businesses acquired or disposed of are The financial statements are prepared on an historic cost basis, except for certain items of property, plant and equipment held at deemed cost under the transitional rules of IFRS. consolidated for the period during which they were under the Group’s control. INVESTMENT IN ASSOCIATES The principle IFRS accounting policies of the Group are set out An associate is an entity over which the Group has the ability to below. FIRST TIME ADOPTION OF IFRS The Group has adopted IFRS from 1 January 2004 (‘date of transition’) with the exception of IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’, which are adopted with effect from 1 January 2005 in accordance with the requirements of IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’. exercise significant influence, but not control, through participation in the financial and operating policy decisions of the entity. Associates are accounted for using the equity method, unless the investment is held for sale (see below). Using the equity method, the Group’s investment is recorded at cost adjusted by the Group’s share of post acquisition profits and losses. ASSETS HELD FOR SALE Assets and liabilities are classified as held for sale when their carrying amount will be recovered principally through a sale transaction, rather than continuing use, and a sale is highly probable. InterContinental Hotels Group 2004 15 Assets designated as held for sale are held at the lower of Under IAS 39 and UK GAAP, finance charges including issue carrying amount at designation and fair value less costs to sell. costs are charged to the profit and loss account using an Depreciation is not charged against tangible assets classified as held for sale. FOREIGN CURRENCIES effective interest rate method. Finance costs not settled in the period are included within the outstanding loan balance. Derivative financial instruments and hedging Under IFRS, non- hedging derivatives and other treasury instruments are carried Transactions in foreign currencies are recorded at the exchange on the balance sheet at fair value. Movements in fair value are rates ruling on the dates of the transactions. Assets and liabilities recognised in the profit and loss account. denominated in foreign currencies are translated into sterling at the relevant rates of exchange ruling at the balance sheet date. Derivatives designated as hedging instruments are accounted for in line with the nature of the hedging arrangement. Documentation The results of foreign operations are translated into sterling at outlining the measurement and effectiveness of a hedging weighted average rates of exchange for the period. arrangement is maintained throughout the life of the hedge Exchange differences arising from the retranslation of opening net assets and the net result for the year denominated in foreign currencies are transferred to the Group’s translation reserve within equity. Other exchange differences are taken to the profit and loss account. relationship. Any ineffective element of a hedge arrangement is recognised in the profit and loss account. GOODWILL Goodwill arises on consolidation as the excess of the cost of acquisition over the fair value at the date of acquisition of assets Goodwill arising on the acquisition of a foreign entity is treated acquired of a subsidiary, associate or jointly controlled entity. as an asset of that foreign operation and is translated into sterling at the relevant closing rate. Goodwill is recognised as an asset and tested annually for impairment. Goodwill is not amortised. FINANCIAL INSTRUMENTS Negative goodwill is recognised immediately in the profit and The Group has adopted both IAS 32 ‘Financial Instruments: loss account. Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ from 1 January 2005. Goodwill arising on acquisitions prior to 30 September 1998 was eliminated against shareholders’ funds under UK GAAP; it has not Under the transition rules of IFRS 1, IAS 32 and IAS 39 are not been reinstated. On disposal of a business, any such goodwill applied to comparative balances; in 2005, comparative balances relating to the business will not be taken into account in will be presented in accordance with UK GAAP. determining the profit or loss on disposal. Trade debtors Trade debtors are recorded at their original amount less an allowance for any doubtful accounts. An allowance for doubtful accounts is made when collection of the INTANGIBLE ASSETS Acquired through a business combination On acquisition of an entity, intangible assets which are separately identifiable and arise full amount is no longer considered probable. from a legal or contractual right are recognised at fair value and Investments On adoption of IAS 39 non-current investments are classified as available for sale and held at fair value. Gains and amortised on a straight line basis over a period appropriate to the type of asset. losses from fair value changes are recognised within equity. Impairment losses are recognised within the profit and loss Other intangible assets Amounts paid to hotel owners to secure management contracts and franchise agreements are capitalised account. and amortised over the shorter of the contracted period and Until 1 January 2005, such investments were recorded in 10 years. accordance with UK GAAP at cost less any provision for impairment. Internally generated development costs are capitalised when Trade creditors Under both IAS 39 and UK GAAP, trade creditors are non-interest bearing and are stated at their nominal value. Bank and other borrowings Under both IAS 39 (subject to the hedging policies outlined below) and UK GAAP, borrowings are stated at proceeds received plus any unamortised issue costs. forecast related revenues exceed attributable forecast development costs. In the circumstance of a hotel or other asset being sold to a purchaser who then enters into a management or franchise contract with the Group, this is accounted for as an exchange of assets and the profit or loss on disposal is determined by comparing the net book value of the asset sold to the total consideration received, which includes an estimate of the fair value of the contract. 16 InterContinental Hotels Group 2004 International financial reporting information PROPERTY, PLANT AND EQUIPMENT Deferred tax assets are recognised to the extent that it is Freehold and leasehold land and buildings are stated at cost, regarded as probable that the deductible temporary differences except as allowed under the IFRS 1 transition rules, less can be utilised. The recoverability of all deferred tax assets is depreciation and any impairment. reassessed at each balance sheet date. All other fixed assets are stated at cost less depreciation and Deferred tax is calculated at the tax rates that are expected to impairment. Borrowing costs are not capitalised. Repairs and apply in the periods in which the asset or liability will be settled. maintenance costs are expensed as incurred. Under the transition rules of IFRS 1, the Group has elected to use previous UK GAAP carrying values, including revaluations, as deemed cost at transition. Freehold land is not depreciated. All other tangible fixed assets are depreciated to a residual value over their estimated useful LEASES Operating lease rentals are charged to the profit and loss account on a straight line basis over the term of the lease. PENSIONS Defined contribution plans Payments to defined contribution schemes are charged to the profit and loss account as they fall due. lives, namely: Freehold buildings Leasehold buildings 50 years lesser of unexpired term of lease and 50 years Defined benefit plans Any excess or shortfall of scheme assets, measured at fair value, over scheme liabilities, measured using the projected unit credit method, is recognised in the balance sheet. Fixtures, fittings and equipment Plant and machinery 3-25 years 4-20 years All depreciation and amortisation is charged on a straight line basis. IMPAIRMENT At each balance sheet date the Group reviews all assets to determine if there are any indicators of impairment. If indicators of impairment exist then the recoverable amount of an asset or cash generating unit (CGU) is estimated. Where individual assets do not generate cash flows independent from other assets, the Group reviews the carrying value and recoverable amount of a CGU. This is the smallest group of assets where independent cash flows are produced. Intangible assets with an indefinite life and goodwill are tested for impairment at least annually by comparing carrying values with Actuarial gains and losses are recognised in reserves in the year in which they arise. Past service cost is recognised immediately when the related benefits have vested. When benefits are not fully vested, these costs are recognised on a straight line basis over the remaining vesting period. Actuarial valuations are normally carried out every three years. SELF INSURANCE The Group is self insured for various levels of general liability, workers’ compensation and employee medical and dental coverage. Insurance reserves include projected settlements for known and incurred but not reported claims. Projected settlements are estimated based on historical trends and actuarial data. recoverable amounts. STOCKS If the recoverable amount of an asset or CGU is less than its carrying amount, the difference is recognised in the profit and loss account as an impairment loss. Stocks are stated at the lower of cost and net realisable value. Cost includes direct purchase costs and other overheads incurred in bringing these stocks to their present location and condition. Cost is determined by a first-in, first-out method. DEFERRED TAXATION Net realisable value represents estimated selling price less Deferred tax assets and liabilities are recognised in respect of marketing and selling costs. all temporary differences between the tax base and carrying value of assets and liabilities. Those temporary differences recognised REVENUE RECOGNITION include accelerated capital allowances, unrelieved tax losses, unremitted profits from overseas where the Group does not control remittance, gains rolled over into replacement assets, gains on previously revalued properties and other short-term temporary differences. Revenue is derived from the following sources: owned and leased properties; management fees; franchise fees; sale of soft drinks and other revenues which are ancillary to the Group’s operations. Generally, revenue represents sales (excluding VAT and similar taxes) of goods and services, net of discounts, provided in the normal course of business and recognised when services have been rendered. The following is a description of the composition of revenues of the Group. InterContinental Hotels Group 2004 17 Owned and leased revenue – derived from hotel operations, SHARE-BASED PAYMENTS including the rental of rooms and food and beverage sales from In accordance with the transitional provisions of IFRS 2 ‘Share- a worldwide network of owned and leased hotels operated under based Payment’ the Group has elected to apply IFRS 2 to grants, the Group’s brand names. Revenue is recognised when rooms options and other equity instruments granted after 7 November are occupied and food and beverage is sold. 2002 not vested at 1 January 2004. Management fees – earned from hotels managed by the Group, The Group issues equity settled share-based payments to certain usually under long-term contracts with the hotel owner. employees through incentive schemes and a Save As You Earn Management fees include a base fee, which is generally a (SAYE) scheme. The fair value of these share-based payments percentage of hotel revenue, and an incentive fee, which is is expensed on a straight line basis over the vesting period of generally based on the hotel’s profitability. Revenue is recognised the equity instrument, based on the Group’s best estimate of the in accordance with the contract. number of shares that will vest. Franchise fees – received in connection with the franchise of the Fair value is based on option pricing models and the terms and Group’s brand names, usually under long-term contracts with the conditions of the option schemes. hotel owner. The Group charges franchise royalty fees as a percentage of room revenue. Revenue is recognised when PROPOSED DIVIDEND earned. Dividends of £81m (2003 £86m) were proposed before the balance sheet date. Soft Drinks – sales (excluding VAT and similar taxes) of goods and services, net of discounts, provided in the normal course of business. Revenue is recognised when sales are made. LOYALTY PROGRAMME The hotel loyalty programme, Priority Club Rewards, enables members to earn points, funded through hotel assessments, during each stay at an InterContinental Hotels Group hotel and redeem points at a later date for free accommodation or other benefits. The future redemption liability is included in creditors less than, and greater than, one year and is estimated using actuarial methods which estimate eventual redemption rates and points values. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash comprises cash in hand and demand deposits. Cash equivalents are short-term highly liquid investments with a maturity of less than 90 days that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts repayable on demand are a component of cash equivalents. 18 InterContinental Hotels Group 2004 International financial reporting information Accounting policy differences between UK GAAP and International Financial Reporting Standards (IFRS) The Group financial statements are prepared in accordance with accounting principles generally accepted in the United Kingdom (UK GAAP) which differ from IFRS. The significant differences, as they apply to the Group, are summarised below. Assets held for sale Under UK GAAP there is no held for sale definition and no reclassification is required. amortised over the average expected service life of current employees on a straight line basis. Scheme assets and liabilities are not recognised on the Group’s balance sheet. Under IFRS, the cost of providing defined benefit retirement benefits is recognised over the service life of scheme members. This cost is calculated by an independent qualified actuary, based on estimates of long-term rates of return on scheme assets and discount rates on scheme liabilities. Any excess or deficit of scheme assets over scheme liabilities is recorded as an asset or liability, respectively, in the Group’s balance sheet to the extent that it does not relate to unrecognised Under IFRS, assets are classified as held for sale when their value actuarial gains and losses. will be recovered through a sale transaction rather than continuing use, and management consider a sale to be highly probable. Each year the scheme net assets or liabilities are adjusted for actuarial gains and losses which are recognised directly in Assets classified as held for sale are held at the lower of their reserves. carrying value and fair value less costs to sell. No depreciation or amortisation is charged on assets held for sale. Discontinued operations Under UK GAAP, operations are classified as discontinued when the sale or termination of operations is completed before the earlier of three months after year end or approval of the financial statements. In addition, the operations concerned must have a material effect on the nature and focus of operations resulting in either a withdrawal from a particular class of business or geographical market or a material reduction in turnover in a continuing market. Under IFRS, the results of operations arising from assets classified as held for sale are classified as discontinued operations when the results relate to a separate line of business, or geographical area of operations, or where there is a coordinated plan to dispose of a separate line of business or geographical area of operations. Discontinued operations are shown as a separate figure, net of tax, on the face of the profit and loss account. Goodwill Under UK GAAP, goodwill is amortised over 20 years and tested for impairment annually. Under IFRS, goodwill is subject to annual impairment testing and is not amortised. Impairment Under UK GAAP, impairment is measured for an income-generating unit when indicators of impairment exist. All assets are reviewed for indicators of impairment at the balance sheet date. Under IFRS, all assets are reviewed for evidence of the existence of impairment indicators at each reporting date. Assets with an indefinite life (such as goodwill) are subject to impairment testing at least annually. Pension costs Under UK GAAP, the Group provides for the cost of retirement benefits based upon a consistent percentage of employees’ pensionable pay as recommended by independent qualified actuaries. Variations in regular pension costs are Share-based payment Under IFRS, the fair value of all share- based payments is expensed over the vesting period of the related equity instruments, based on the Group’s best estimate of the number of shares that will vest. Fair value is determined by an option pricing model applied to all share-based payments granted after 7 November 2002. Deferred taxation Under UK GAAP, deferred tax is provided on all timing differences, subject to certain exceptions. Accordingly, deferred tax is not provided on revaluation gains and gains rolled over into replacement assets unless there exists a binding agreement for sale, nor on unremitted earnings of investments except to the extent of accrued dividends or where there exists a binding agreement to distribute earnings. Under IFRS, deferred tax is recognised on all temporary differences between the tax base and carrying value of assets and liabilities, including those arising from revaluation of assets, on gains rolled over into replacement assets and on unremitted earnings of investments where the Group does not control the timing of distributions. In addition, IFRS requires the tax base of assets and liabilities to be determined by management’s current intended use and the intended manner of realisation of the asset or liability. Cash and cash equivalents Under UK GAAP, there is no equivalent definition. Under IFRS, cash equivalents are defined as short-term highly liquid investments with a maturity of less than 90 days that are readily convertible into a known amount of cash. Dividends Under UK GAAP, dividends are recognised as an expense in the period in which they are declared. Under IFRS, dividends are recognised as an appropriation of reserves in the period in which they are approved. InterContinental Hotels Group 2004 19 Reconciliation of earnings under UK GAAP to IFRS for the year ended 31 December 2004 Operating profit before exceptional items £m 331 10 (6) (4) – 15 – – 346 228 118 Turnover £m 2,204 – – – – – – – 2,204 1,602 602 Interest £m (22) – – – – – – – (22) (22) – Exceptional items £m 68 – – – (6) – 74 6 142 118 24 Tax £m (50) (1) 2 3 – (5) – (5) (56) (18) (38) Profit after tax £m 327 9 (4) (1) (6) 10 74 1 410 306 104 Earnings available for Minority interest shareholders £m £m (28) (1) 2 – – – – – (27) (27) – 299 8 (2) (1) (6) 10 74 1 383 279 104 As reported under UK GAAP Remove goodwill amortisation Pension accounting adjustments Share-based payment adjustments Impairment of previously revalued assets Depreciation adjustment of held for sale assets Adjustment to provision for loss on disposal of operations IFRS tax adjustments Under IFRS Continuing operations Discontinued operations Key indicators Net debt EBITDA before exceptional items Basic earnings per share Reconciliation of basic EPS to adjusted EPS Basic EPS under UK GAAP Exclude exceptional items under UK GAAP Adjusted EPS under UK GAAP IFRS adjustments: Remove goodwill amortisation Pension accounting adjustments Share-based payment adjustments Depreciation adjustment of held for sale assets IFRS tax adjustments Minority share of above adjustments Adjusted EPS under IFRS UK GAAP £m IFRS £m (1,116) (1,116) 529 42.1p 519 53.9p Pence per ordinary share 42.1 (9.6) 32.5 1.4 (0.8) (0.6) 2.1 (0.8) 0.1 33.9 £m 299 (68) 231 10 (6) (4) 15 (6) 1 241 20 InterContinental Hotels Group 2004 International financial reporting information Reconciliation of UK GAAP balance sheet to IFRS balance sheet at 1 January 2004 As reported under UK GAAP Reclassify proposed dividends Pension accounting adjustments Deferred tax adjustments Reclassifications Under IFRS at 1 January 2004 Non current assets £m 4,281 – – – 30 4,311 Current assets £m Current liabilities £m Non current liabilities £m Minority interests £m Net assets £m 999 – (47) – (30) 922 (1,085) (1,478) (163) 2,554 86 – – – (999) – (131) (163) – (1,772) – 57 (17) – (123) 86 (121) (180) – 2,339 Reconciliation of UK GAAP balance sheet to IFRS balance sheet at 31 December 2004 As reported under UK GAAP Reclassify proposed dividends Remove goodwill amortisation Pension accounting adjustments Deferred tax adjustments Reclassify assets as held for sale Reclassifications Under IFRS at 31 December 2004 Non current assets £m 4,017 – 10 – – 15 31 4,073 Current assets £m 757 – – (110) – – (31) 616 Current liabilities £m Non current liabilities £m Minority interests £m Net assets £m (1,013) (1,634) (150) 1,977 81 – – – – – (932) – – (125) (134) 74 – (1,819) – (1) 75 (22) – – (98) 81 9 (160) (156) 89 – 1,840 Equity £m (2,554) (86) 121 180 – (2,339) Equity £m (1,977) (81) (9) 160 156 (89) – (1,840) InterContinental Hotels Group 2004 21 Independent auditors’ report on the International financial reporting information Independent auditors’ report to InterContinental Hotels Group BASIS OF AUDIT OPINION PLC on the International financial reporting information We conducted our audit in accordance with United Kingdom We have audited the International financial reporting information of InterContinental Hotels Group PLC (“the Company”) and its subsidiaries (together, “the Group”) which comprises the Reconciliation of earnings under UK GAAP to IFRS for the year ended 31 December 2004, Reconciliation of UK GAAP balance sheet to IFRS balance sheet at 1 January 2004 and the Reconciliation of UK GAAP balance sheet to IFRS balance sheet at 31 December 2004, together with the related accounting policies note. Auditing Standards issued by the Auditing Practices Board. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the preliminary IFRS financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the opening balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the preliminary IFRS financial statements. We believe that our audit provides a reasonable basis for our opinion. This report is made solely to the Company in accordance with our engagement letter. Our audit work has been undertaken so that EMPHASIS OF MATTER we might state to the Company those matters we are required to Without qualifying our opinion, we draw attention to the fact that state to them in an auditors' report and for no other purpose. To the accounting policies note explains why there is a possibility the fullest extent permitted by law, we do not accept or assume that the preliminary IFRS financial statements may require responsibility to anyone other than the Company for our audit adjustment before constituting the final IFRS financial statements. work, for this report, or for the opinions we have formed. Moreover, we draw attention to the fact that, under IFRS only a RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND information and explanatory notes can provide a fair presentation ERNST & YOUNG LLP of the Company’s financial position, results of operations and These preliminary IFRS financial statements are the responsibility cash flows in accordance with IFRS. complete set of financial statements with comparative financial of the Company’s directors and have been prepared as part of the Company’s conversion to IFRS. They have been prepared in OPINION accordance with the basis set out in the accounting policies note, In our opinion, the preliminary IFRS financial statements for the which describes how IFRS has been applied under IFRS 1, including year ended 31 December 2004 have been prepared, in all material the assumptions management has made about the standards and respects, in accordance with the basis set out in the accounting interpretations expected to be effective, and the policies expected policies note, which describes how IFRS have been applied under to be adopted, when management prepares its first complete set IFRS 1, including the assumptions management has made about of IFRS financial statements as at 31 December 2005. the standards and interpretations expected to be effective, and the Our responsibility is to express an independent opinion, based on our audit, on the preliminary IFRS financial statements. We read policies expected to be adopted, when management prepares its first complete set of IFRS financial statements as at 31 December 2005. the other information accompanying the preliminary IFRS financial Ernst & Young LLP statements and consider whether it is consistent with the London preliminary IFRS financial statements. This other information 9 March 2005 comprises Accounting policy differences between UK GAAP and International Financial Reporting Standards (IFRS). We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the preliminary IFRS financial statements. Our responsibilities do not extend to any other information. 22 InterContinental Hotels Group 2004 Directors’ report The directors present their report for the financial year ended Great emphasis is placed on employee communication, 31 December 2004. ACTIVITIES OF THE GROUP particularly on matters relating to the Group’s business and its performance. Communication channels include global management conferences, team meetings, informal briefings, The principal activities of the Group are in hotels and resorts, with in-house publications, and intranets. Regular feedback is obtained worldwide interests through franchising, management, ownership through employee focus groups and employee opinion surveys, and leasing, and in the manufacture and distribution of soft drinks the results of which are utilised in developing management in the United Kingdom. policies and best practice. A European Forum brings together senior managers and employee representatives from EU countries BUSINESS REVIEW AND FUTURE DEVELOPMENTS to discuss pan-European issues. The Operating and Financial Review on pages 1 to 13, together with the Chairman’s Review and the business reviews presented INVESTORS IN PEOPLE in the Annual Review and Summary Financial Statement provide The Group continues to support Investors in People (IIP). A number information about the Group’s businesses, their financial of UK and European hotels have accreditation against the performance during the year and likely developments. rigorous IIP standard set for communicating goals and objectives to employees and for ensuring that they are given the skills SEPARATION OF SIX CONTINENTS required to deliver business strategies. InterContinental Hotels Group PLC became the holding company for the Group on completion of the Separation of Six Continents HEALTH AND SAFETY PLC and the listing of IHG shares on 15 April 2003. The Group strives to provide and maintain a safe environment for all employees, customers and other visitors to its premises and to RETURN OF SHAREHOLDERS’ FUNDS AND comply with relevant health and safety legislation. In addition, all SHARE CONSOLIDATION Group companies: During the year the Company completed a £250m share repurchase programme. A further £250m share repurchase programme began in December 2004 and is planned for completion during 2005. Additionally £501m was returned to shareholders on 17 December 2004 by way of a special interim dividend of 72.0p per share. This special dividend was accompanied by a consolidation of the Company’s ordinary share capital on the basis of 25 new ordinary shares for every • aim to protect the health of employees with suitable, specific, work-based strategies; • seek to minimise the risk of injury from Company activity; • ensure that through senior management participation, sufficient resources and information are made available and suitable management systems are in place to address health and safety matters; and 28 existing ordinary shares, effective from 13 December 2004. • encourage the involvement of employees and aim for continual The nominal value of the new shares is 112p per share. improvement in health and safety matters through a formal RESULTS AND DIVIDENDS The profit on ordinary activities before taxation was £210m. In addition to the special dividend, an interim dividend of 4.3p per share was paid on 18 October 2004. The directors are recommending a final dividend of 10.0p per share to be paid on 3 June 2005 to shareholders on the Register at close of business on 1 April 2005. Total dividends for the year will amount to £592m. EMPLOYEES IHG employed an average of 29,659 people worldwide in the year ended 31 December 2004. structure with a reporting and review process. Compliance with Group policy is monitored and audited centrally and health and safety reports are included within the bi-annual risk management reports which are produced for the Board. FORMER SIX CONTINENTS SHARE SCHEMES Under the terms of the Separation of Six Continents PLC in 2003, holders of options under the Six Continents Executive Share Option Schemes were given the opportunity to exchange their Six Continents options for equivalent value new options over IHG shares. During the year 7,429,736 such options were exercised, leaving a total of 12,568,562 such options outstanding at prices The Group is committed to providing equality of opportunity to all ranging from 308.48p to 593.29p. employees without discrimination and continues to be supportive of the employment and advancement of disabled persons. During the year employees throughout the UK undertook training in respect of Part 3 of the Disability Discrimination Act 1995, which came into effect on 1 October 2004. Following Separation, the Six Continents shares held by the Trustee of the Six Continents Employee Profit Share Scheme on behalf of beneficiaries were exchanged for IHG and Mitchells & Butlers shares. During 2004, the Trust released 776,252 IHG shares out of profits previously appropriated to them by the IHG supports employee participation in the success of its Six Continents PLC Board in 2001. At 31 December 2004, 659,665 businesses through share ownership. IHG shares were held by the Trustee on behalf of beneficiaries. Under the terms of the Six Continents Special Deferred Incentive Plan 59,217 IHG shares were transferred to employees in 2004, reflecting entitlements existing prior to the Separation. InterContinental Hotels Group 2004 23 INTERCONTINENTAL HOTELS GROUP SHARE PLANS During 2004, 631,717 IHG shares were awarded under the Britvic Share Incentive Plan to be retained in Trust by Hill Samuel ESOP Trustee Limited as free and partnership shares on behalf of 2,620 DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE During the year, IHG has maintained cover for its directors and officers and those of its subsidiary companies under a directors’ and officers’ liability insurance policy, as permitted eligible employees, subject to the Plan rules. by section 310(3) of the Companies Act 1985. In 2004, options were granted under the Executive Share Option Plan to 180 employees over 6,951,420 IHG shares at 494.17p per share. During 2004, conditional rights over 2,665,390 IHG shares were awarded to employees under the Performance Restricted Share Plan. A number of employees participated in the Short Term Deferred Incentive Plan during the year and conditional rights over 232,700 IHG shares were awarded to participants. A number of participants CODE OF ETHICS The Board has adopted a specific Code of Ethics for senior financial officers, consistent with the Company’s existing Guidelines for Proper Business Conduct. CORPORATE SOCIAL RESPONSIBILITY IHG believes that Corporate Social Responsibility makes sound business sense, and seeks to embed good practice throughout the Group. are eligible to receive an award in IHG shares on 16 March 2005. IHG’s commitment to environmental, community and ethical No options were granted under the Sharesave Plan during the year. Neither the Hotels Group Share Incentive Plan nor the US Employee Stock Purchase Plan were operated during the year. matters and to developing its people is described more fully in the Annual Review and Summary Financial Statement. IHG’s Corporate Social Responsibility policies are published on the Company’s website. SHARE CAPITAL During the year, 3,931,494 new IHG shares were issued under employee share schemes and, following the share capital consolidation, the ordinary share capital at 31 December 2004 consisted of 622,068,047 IHG shares of 112p each. CHARITABLE DONATIONS IHG continues to support community initiatives and charitable causes and during the year donated £0.7m. In addition to these cash contributions, employees are encouraged to give their time and skills to a variety of causes and IHG makes donations in kind, 46,385,981 IHG shares were purchased and cancelled during such as hotel accommodation. Taking these contributions into the year. Of these, 44,635,981 were £1 shares, purchased at account, total donations in 2004 are estimated at £1.1m. an average price of 546p per share. These shares represented approximately 6% of the issued share capital of the Company at POLITICAL DONATIONS the start of the year and were purchased and cancelled under the The Group made no political donations during the year and authorities granted by shareholders at the Annual General Meetings proposes to maintain its policy of not making such payments. of the Company held in 2003 and 2004. As at 9 March 2005 a further 3,500,000 112p shares have been purchased at an average GOING CONCERN price of 648p per share, representing approximately 0.50% of the The financial statements which appear on pages 38 to 66 issued share capital of the Company immediately after the share have been prepared on a going concern basis as, after making capital consolidation. These shares were purchased and cancelled appropriate enquiries, the directors have a reasonable expectation using the authority granted by shareholders at an Extraordinary that the Group has adequate resources to continue in operational General Meeting held on 10 December 2004. This authority remains existence for the foreseeable future. in force until the Annual General Meeting 2005 and a resolution to renew the authority will be put to shareholders at that Meeting. AUDITORS SUBSTANTIAL SHAREHOLDINGS not been disclosed to the auditors. The directors are not aware of any relevant information which has As at 9 March 2005, the Company has been notified by shareholders of the following substantial interests (3% or more) in its ordinary share capital: Legal & General Group Plc 3.89% Lloyds TSB Group Plc 3.44% Ernst & Young LLP have expressed their willingness to continue in office as auditors of the Company and their reappointment will be put to members at the Annual General Meeting. ANNUAL GENERAL MEETING The Notice convening the Annual General Meeting to be held at POLICY ON PAYMENT OF SUPPLIERS 10.30am on Wednesday, 1 June 2005 is contained in a circular IHG PLC is a holding company and has no trade creditors. sent to shareholders with this Report. Group companies aim to adhere to the payment terms agreed with suppliers. Payments are contingent on the supplier providing By order of the Board goods or services to the required standard, and purchasing is sometimes coordinated between Group undertakings. Richard Winter Company Secretary 9 March 2005 24 InterContinental Hotels Group 2004 Corporate governance COMBINED CODE COMPLIANCE risk of failure to achieve business objectives and it must be The Board is committed to compliance with the principles set out recognised that it can only provide reasonable and not absolute in the Combined Code on Corporate Governance (‘the Code’) assurance against material misstatement or loss. In that context, and, in the opinion of the Board, the Company has complied with the review, in the opinion of the Board, did not indicate that the the Code requirements as they apply for the year ended system was ineffective or unsatisfactory. 31 December 2004 with the exception only of the item highlighted in this report. To comply with the Group’s US obligations, arising from the Sarbanes-Oxley Act 2002, a project is being conducted to As InterContinental Hotels Group PLC’s shares are listed on identify, evaluate and test critical internal financial controls across the New York Stock Exchange (‘NYSE’), the Company is subject all our business units. This should enable representations to be to the rules of the NYSE, US securities laws and the rules of made regarding the effectiveness of internal financial controls the Securities and Exchange Commission (‘SEC’). A statement when the Group is required to report in compliance with these outlining the differences between the Company’s corporate US obligations. governance practices and those followed by US companies may be found on the Company’s website at www.ihgplc.com/investors as required by the SEC. With regard to insurance against risk, it is not practicable to insure against every risk to the fullest extent. The insurance market remains difficult both as to breadth and cost of coverage and in The Board is responsible for the Group’s system of internal control some cases external insurance is not available at all or not at an and risk management and for reviewing its effectiveness. In order economic price. The Group regularly reviews both the type and to discharge that responsibility, the Board has established the amount of external insurance that it buys, bearing in mind the procedures necessary to apply the Code, including clear availability of such cover, its price and the likelihood and operating procedures, lines of responsibility and delegated magnitude of the risks involved. authority. Business performance is managed closely and, in particular, the Board, the Executive Committee and the Regional Executive Committees have established processes, as part of the normal good management of the business, to monitor: • strategic plan achievement, through a comprehensive series of Group and regional strategic reviews; BOARD AND COMMITTEE STRUCTURE To support the principles of good corporate governance, the Board and Committee structure operates as set out below. THE BOARD The Board’s current composition of the non-executive Chairman, four executive and five non-executive directors meets the • financial performance, within a comprehensive financial requirement of the Combined Code for at least half the Board, planning and accounting framework; excluding the Chairman, to be independent non-executive • capital investment performance, with detailed appraisal and authorisation processes; and directors. In the Board’s view, all of the current non-executive directors satisfy the tests set out in the Code for independence. • risk management, (through an ongoing process, which has been The Board is responsible to the shareholders for the strategic in place up to the date of the accounts) providing assurance direction, development and control of the Group. It therefore through reports from both the Head of Risk Management and approves strategic plans and capital and revenue budgets. the Head of Internal Audit that the significant risks faced by the It reviews significant investment proposals and the performance Group are being identified, evaluated and appropriately managed, of past investments and maintains an overview and control of having regard to the balance of risk, cost and opportunity. the Group’s operating and financial performance. It monitors In addition, the Audit Committee receives: • reports from the Head of Internal Audit on the work carried out under the annual internal audit plan, including an annual report on the operation of the monitoring processes set out above to support the Board’s annual statement on internal control; and • reports from the external auditor. the Group’s overall system of internal controls, governance and compliance. The Board ensures that the necessary financial and human resources are in place for the Group to meet its objectives. The Board has established a schedule of matters which are reserved for its attention and decision. The Board adopts objective criteria for the appointment of directors, and the roles of the Chairman and of the Chief Executive have been defined in writing and approved by the Board. The Board has conducted a review of the effectiveness of the system of internal control during the year ended 31 December 2004, taking account of any material developments which have taken place since the year end. The review was carried out through the monitoring process set out The Board has responsibility for the planned and progressive refreshing of the Board and its Committees. It establishes and regularly reviews its policy in both of these areas and it is the Nomination Committee’s responsibility to evaluate formally the required skills, knowledge and experience of the Board, in a above, which accords with the Turnbull Guidance. The system of structured way. internal control is designed to manage, rather than eliminate, the InterContinental Hotels Group 2004 25 Seven regular Board meetings are scheduled each year and Directors’ biographical details are set out on page 27 of the further meetings are held as needed. Seven Board meetings were Annual Review and Summary Financial Statement 2004. These held during 2004. These were attended by all directors with the include their main commitments outside the Company. exception that Ralph Kugler and Sir Howard Stringer could not attend one meeting each. Despite being unable to attend a meeting, these directors were provided with all the papers and information relating to the meeting and were able to discuss matters arising with the Chairman and the Chief Executive. The IHG PLC director appointed during the year (David Kappler) has participated in an induction programme designed to meet his individual needs and to introduce him to, and familiarise him with, the principal activities of the Group and with central and regional management. A comprehensive induction programme has All directors are briefed by means of comprehensive papers in also been designed for Andrew Cosslett, the newly appointed advance of Board meetings and by presentations at meetings. Chief Executive. These induction programmes accord with the Their understanding of the Group’s operations is enhanced by guidelines referred to in the Combined Code. The updating of regular business presentations outside Board meetings and visits all directors’ skills and knowledge is a progressive exercise. to the regions. At least one Board meeting a year is held overseas. This is accomplished at Board and strategy meetings, through A formal performance evaluation of the Board, its Committees and directors was undertaken by the Chairman and the presentations and visits to the Company’s hotels and other business premises, and through contact with employees at all levels. Senior Independent Director shortly after the year end. The Andrew Cosslett and David Kappler, having been appointed as evaluation was conducted in accordance with the suggestions directors since the last Annual General Meeting, will retire and stand for good practice contained in the Higgs Report, and by way for appointment at the Annual General Meeting on 1 June 2005. of private discussions with each director, having regard to In addition, Robert C Larson, having attained the age of 70, will the potential for performance improvement. The Chairman’s retire and stand for reappointment. Special notice has been duly performance was reviewed by the Senior Independent Director, given to the Company in connection with the resolution to this taking account of the views of all the other directors. Feedback effect that will be proposed to the Annual General Meeting. was provided to the Board through a formal report. The evaluation Richard Hartman, Ralph Kugler and Richard Solomons will also concluded that the range of experience and skills of the current retire by rotation and stand for reappointment at the Annual directors provides a sound basis for an effective and unified General Meeting. The Notice of Annual General Meeting provides Board. All the main Committees are ably led by their respective further information about the directors standing for appointment Chairmen and all have addressed the issues and business and reappointment. Details of the executive directors’ service matters requiring their attention and decisions during the year, contracts are set out on page 32. The non-executive Chairman diligently and robustly. The conclusion was that all individual and the five independent non-executive directors have letters directors continue to perform effectively. Attention will be given to of appointment. any matters arising from the evaluation process. It is intended that a comprehensive evaluation will take place annually. CHAIRMAN The following were directors of the Company during the year: David Webster Non-executive Chairman Position Richard North* Chief Executive Richard Solomons Finance Director Richard Hartman Managing Director, Date of original appointment 15.4.03 10.2.03 10.2.03 15.4.03 David Webster was non-executive Chairman throughout the year. He retired as a director and Chairman of Safeway plc on 8 March 2004. He assumed the additional role of interim Chief Executive following the Company’s announcement that Richard North was to step down as a director and as Chief Executive at the end of September 2004. For the remainder of 2004, the roles of Chairman and Chief Executive were not fulfilled by separate individuals, as required by the Combined Code. However, this Europe, Middle East & Africa was a temporary situation and David Webster stood down as Stevan Porter President, the Americas 15.4.03 David Kappler Non-executive director and Senior Independent Director Ralph Kugler Non-executive director Robert C Larson Non-executive director David Prosser Non-executive director Sir Howard Stringer Non-executive director * Resigned on 30 September 2004. 21.6.04 15.4.03 15.4.03 15.4.03 15.4.03 On 3 February 2005, Andrew Cosslett was appointed as Chief Executive of the Company. interim Chief Executive on the appointment of Andrew Cosslett as Chief Executive with effect from 3 February 2005. David Webster was appointed non-executive Chairman of Makinson Cowell Limited on 12 October 2004. The Board is satisfied that this will have no adverse impact on the successful fulfilment of his commitment to the Company. 26 InterContinental Hotels Group 2004 Corporate governance The Chairman carries responsibility for ensuring the efficient meeting. This is unavoidable from time to time, particularly given operation of the Board and its Committees, for seeing that the other corporate and international responsibilities of the very corporate governance matters are addressed, and for experienced individuals concerned. They also spend significant representing the Company externally and communicating time outside these formal meetings on the Company’s business, particularly with shareholders. He also ensures that directors reviewing proposals and projects, and generally overseeing its receive a full, formal and tailored induction to the Company and affairs. Any such occasional non-attendance is exceptional and its businesses and that all directors are fully informed of relevant the Board is satisfied that all directors remain committed to their matters, working closely with the Chief Executive and the roles and responsibilities. Company Secretary. The Chairman also meets regularly with the non-executive directors, without executive directors present. COMPANY SECRETARY CHIEF EXECUTIVE All directors have access to the advice and services of the Company Secretary, Richard Winter. His responsibilities include Andrew Cosslett was appointed Chief Executive on 3 February 2005. ensuring good information flows to the Board and its Committees He has responsibility to recommend to the Board and to implement and between senior management and the non-executive directors. the Company’s strategic objectives. He is responsible for the He facilitates the induction of directors, the regular updating and executive management of the Group. refreshing of their skills and knowledge, and he assists them in fulfilling their duties and responsibilities. Through the Chairman, SENIOR INDEPENDENT DIRECTOR he is responsible for advising the Board on corporate governance David Prosser was the Company’s Senior Independent Director and generally for keeping the Board up to date on all legal, until the appointment of David Kappler as a non-executive director regulatory and other developments. The Company Secretary acts on 21 June 2004. David Kappler is now the Company’s Senior as secretary to each of the main Board Committees. Independent Director. His responsibilities include being available to liaise with shareholders who have issues to raise. He meets at COMMITTEES least annually with non-executive and executive directors, without Each Committee of the Board has written terms of reference which the Chairman present, to review the performance of the Chairman. have been approved by the Board. NON-EXECUTIVE DIRECTORS The Company’s team of experienced independent non-executive directors represent a strong source of advice and judgement. There are five such directors, in addition to the non-executive Chairman, each of whom has significant external commercial experience. The non-executive directors, including the Chairman, met frequently during the year to discuss the Company’s business and management. Executive Committee This Committee is chaired by the Chief Executive. It consists of the executive directors and senior executives from the Group and the regions and usually meets monthly. Following the resignation of Richard North as a director and as Chief Executive on 30 September 2004, David Webster chaired the Executive Committee for the remainder of the year. Andrew Cosslett now chairs the Committee. Its role is to consider and manage a range of important strategic and business issues facing the Group. It is responsible for monitoring the performance In the Board’s view, David Prosser meets the criteria for of the regional Hotels businesses and the Britvic business and is independence as set out in the Combined Code, notwithstanding authorised to approve capital and revenue investment within his role as Group Chief Executive of Legal & General Group Plc, levels agreed by the Board. It reviews and recommends to the a major shareholder in the Company. The Combined Code requires Board the most significant investment proposals. During 2004, a that, for independence, an individual should be independent detailed senior management succession planning exercise was in character and judgement and free from any business or other undertaken by the Executive Committee. It is intended to conduct relationship which could materially interfere with the exercise of his/her independent judgement. David Prosser’s appointment was not linked in any way to Legal & General’s share interest and he does not take part in decision-making by that company on specific investments. such formal exercises regularly. Audit Committee The Audit Committee is chaired by David Kappler who has significant recent and relevant financial experience and is the Committee’s financial expert. He took over the role of Chairman of the Committee following his appointment to the Non-executive directors have the opportunity of continuing Board and as Senior Independent Director on 21 June 2004. professional development during the year and of gaining further In accordance with the Combined Code, David Webster stood insight into the Company’s business. During 2004, visits to down as Chairman and member of the Audit Committee as soon as operating premises (including hotels across the brand portfolio) David Kappler was appointed. All other members were appointed were undertaken. In addition, the training requirements of the to the Committee on their original appointment as directors in 2003. non-executive directors were reviewed during the year and will During 2004, the Committee consisted of all the non-executive be kept under review. There have been occasions when individual non-executive directors have been unable to attend a Board or Committee directors, excluding the Chairman of the Company, and is scheduled to meet at least four times a year. The Committee met five times in the year. Messrs Kugler and Larson and Sir Howard Stringer were unable to attend one meeting each. The Audit Committee’s role is described on page 28. InterContinental Hotels Group 2004 27 Remuneration Committee The Remuneration Committee, chaired by David Prosser, consists of all the non-executive directors, SHAREHOLDER RELATIONS The Company reports formally to shareholders twice a year when its excluding the Chairman of the Company, and meets at least three half-year and full-year results are announced. The Chief Executive times a year. Its role is described on page 29. The Committee met and the Finance Director give presentations on these results to six times during the year. Messrs Kugler and Larson and institutional investors, analysts and the media. In addition, there Sir Howard Stringer were unable to attend one meeting each. are telephone conferences after the release of the first and third Nomination Committee The Nomination Committee’s quorum comprises any three non-executive directors although, where quarter results and the data used in these presentations and conferences is placed on the website www.ihgplc.com possible, all non-executive directors are present. It is chaired The Company also has a programme of meetings throughout the by the Chairman of the Company. Its terms of reference reflect year with its major institutional shareholders, which provides an the principal duties of a Nomination Committee proposed as good opportunity to discuss, using publicly available information, the practice and referred to in the Combined Code. The Committee is progress of the business, its performance, plans and objectives. responsible for nominating, for the approval of the Board, The Chairman, the Senior Independent Director and other candidates for appointment to the Board, and also for succession non-executive directors are available to meet with major planning. The Committee generally engages external consultants shareholders to understand their issues and concerns and to to advise on candidates for Board appointments, and did so in discuss governance and strategy. Any new director is available connection with the appointments of Messrs Cosslett and Kappler. for meetings with major shareholders as a matter of course. Candidate profiles and objective selection criteria were prepared in advance of these engagements. The Committee also assists the Board in identifying and developing the role of the Senior Independent Director. The Committee met formally five times during the year. Robert C Larson was unable to attend one meeting. Sir Howard Stringer was unable to attend two meetings. Disclosure Committee The Disclosure Committee, chaired by the Group’s Financial Controller, and comprising the Company Secretary and other senior executives, reports to the Chief Executive and the Finance Director, and to the Audit Committee. Its duties include ensuring that information required to be disclosed in reports pursuant to UK and US accounting, statutory or listing requirements, fairly represent the Group’s position in all material respects. General Purposes Committee The General Purposes Committee comprises any two executive directors or any one executive Additionally, the Annual General Meeting provides a useful interface with private shareholders, many of whom are also customers. The Chairmen of the Audit, Remuneration and Nomination Committees are available at those meetings to answer questions. The availability to shareholders of information about the Group is maintained through the website. A formal external review of shareholder opinion is presented to the Board on an annual basis and both the Executive Committee and the Board receive regular updates on shareholder relations activities. FURTHER INFORMATION The terms of reference of the Audit, Remuneration, Nomination and Disclosure Committees are available on the Company’s website www.ihgplc.com or from the Company Secretary’s office director together with a senior officer from an agreed and on request. The terms and conditions of appointment of restricted list of senior executives. It is always chaired by a non-executive directors are also available on request. director. It attends to business of a routine nature and to the administration of matters, the principles of which have been agreed previously by the Board or an appropriate Committee. RE-ELECTION OF DIRECTORS The Company ensures that directors submit themselves for re-election at least every three years. The proposals for reappointments at the 2005 Annual General Meeting are set out in the Notice of Annual General Meeting, sent to shareholders with this Report. INDEPENDENT ADVICE There is an agreed procedure by which members of the Board may take independent professional advice in the furtherance of their duties and they have access to the advice and services of the Company Secretary. 28 InterContinental Hotels Group 2004 Audit committee report The Audit Committee assists the Board in observing its During the year, the Committee’s deliberations included the responsibilities in relation to the integrity of the Group’s financial following matters: statements and associated announcements, the adequacy of internal control and risk management systems and the appointment and work of the internal and external auditors. The role of the Audit Committee, including the powers and responsibilities delegated by the Board, is summarised below and in full in its terms of reference, a copy of which is available on the Company’s website or in writing on request. The Committee’s composition, the dates of appointment and the attendance of its members throughout 2004 are set out on page 26. The Committee’s Chairman and financial expert, David Kappler, • quarterly, interim and full year financial results; • the scope and cost of the external audit; • any non-audit work carried out by the Group’s external auditor and trends in the non-audit fees in accordance with the Committee’s policy to ensure the safeguarding of audit independence and objectivity; • the external auditor’s interim and full year reports; • the effectiveness of the external auditor and consideration of their reappointment; is a chartered management accountant and until April 2004 was • the scope of the annual internal audit plan, the Internal Audit Chief Financial Officer of Cadbury Schweppes plc. He also chairs department’s approach to delivering assurance, its resourcing the Audit Committees of two other UK public limited companies. and the results of its reviews; The Committee’s principal responsibilities are to: • the effectiveness of the Internal Audit function; • review the Company’s public statements on internal control and • any major changes in the Group’s internal controls; corporate governance compliance prior to their consideration by • the co-ordination of the internal and external audit functions; the Board; • review the Company’s processes for detecting and addressing fraud, misconduct and control weaknesses and to consider the Company’s response to any such occurrence, including overseeing the process enabling the anonymous submission of concerns; • the Group’s framework for the identification and control of major risks, and the results of the Group risk review process; • corporate governance developments in the UK and the US; • reports from the Head of Group Risk Management on the activities of that function; • review reports from management, internal audit and external audit concerning the effectiveness of internal control, financial • monitoring of the Group’s International Financial Reporting Standard conversion exercise; reporting and risk management processes; • overseeing the Group’s Sarbanes-Oxley Act compliance work; • review with management and the external auditor any financial • the disclosure controls and procedures operated by the Group, statements required under UK or US legislation before with reference to periodic reports from the Chairman of the submission to the Board; Disclosure Committee; • establish, review and maintain the role and effectiveness of the • periodic reports on any allegations made via the Group’s Internal Audit function, including overseeing the appointment of whistleblowing procedures and the effectiveness of these the Head of Internal Audit; procedures; • assume responsibility for the appointment, compensation, • any material litigation involving the Group. resignation, dismissal and the overseeing of the external auditor, including review of the external audit, its cost and effectiveness; • pre-approve non-audit work to be carried out by the external auditor and the fees to be paid for that work along with the monitoring of the external auditor’s independence; • adopt and oversee a specific Code of Ethics for the senior financial officers, which is consistent with the Company’s overall Guidelines for Proper Business Conduct. The Company’s public financial statements are reviewed by the Audit Committee in advance of their consideration by the Board. Adequate time is allowed between the Committee’s review and the Board’s approval for any actions or further work requested by the Committee to be completed. The Audit Committee maintains its policy, introduced in 2003, whereby all proposals for the provision of non-audit services by the external auditor must be pre-approved by the Audit Committee The Committee discharges its responsibilities, as defined in its or its delegated member. At all times the overriding consideration terms of reference, through a series of Audit Committee meetings is to ensure that the provision of non-audit services does not throughout the year at which detailed reports are presented for impact the external auditor’s independence and objectivity. review. The Committee commissions reports, either from external advisers, the Head of Internal Audit, or Company management, after consideration of the Company’s major risks or in response to developing issues. The external auditor attends its meetings as does the Head of Internal Audit, both of whom have the opportunity to meet privately with the Committee, in the absence of Company management, at the conclusion of each meeting. David Kappler Chairman of the Audit Committee 9 March 2005 Remuneration report InterContinental Hotels Group 2004 29 This report has been prepared by the Remuneration Committee 2 POLICY ON REMUNERATION and has been approved by the Board. It complies with OF NON-EXECUTIVE DIRECTORS Schedule 7A to the Companies Act 1985, which incorporates Non-executive directors, including the Chairman, have letters of the Directors’ Remuneration Report Regulations 2002, and also appointment. Their appointment and subsequent reappointment is with the Combined Code applicable for the 2004 financial year. subject to election and re-election by shareholders. This report will be put to shareholders for approval at the forthcoming Annual General Meeting. 1 THE REMUNERATION COMMITTEE During the year, the Committee comprised the following non-executive directors: David Prosser – Chairman David Kappler (from 21.6.04) Ralph Kugler Robert C Larson+ Sir Howard Stringer No member of the Committee has any personal financial interest, other than as a shareholder, in the matters to be decided by the Committee. The Committee met six times in the year. Messrs Kugler and Larson and Sir Howard Stringer were unable to attend one meeting each. Non-executive directors are paid a fee which is approved by the Board on the recommendation of the executive directors, having taken account of the fees paid in other companies of a similar complexity, and the skills and experience of the individual. Higher fees are payable to the Chairman of the Remuneration Committee and to the Senior Independent Director, who chairs the Audit Committee, reflecting the additional responsibilities of these roles. Remuneration levels were reviewed during 2004. In view of the significant increased demands on non-executive directors as a result of increasing corporate governance requirements, including in respect of US obligations, non-executive directors’ remuneration was increased with effect from 1 January 2005. 3 POLICY ON REMUNERATION OF EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES The following policy has applied throughout the year and will apply in future years, subject to ongoing review. The Committee advises the Board on overall remuneration policy. The Committee also determines, on behalf of the Board, and 3.1 Total level of remuneration The Committee aims to ensure that remuneration packages are with the benefit of advice from external consultants and members offered which: of the Human Resources department, the remuneration of the executive directors and other members of the Executive Committee. • attract high quality executives in an environment where compensation levels are based on global market practice; Those who provided material advice or services to the Committee • provide appropriate retention strength against loss of key during the year were: executives; Jim Larson+ – Executive Vice President, Human Resources • drive aligned focus and attention to key business initiatives David House – Senior Vice President & Head of Reward and appropriately reward their achievement; David Webster – Chairman Richard North – Chief Executive Linklaters Towers Perrin Inc. + No family relationship between Robert C Larson and Jim Larson. The Executive Vice President, Human Resources has direct access to the Chairman of the Committee. Messrs J Larson and • support equitable treatment between members of the same executive team; and • facilitate global assignments and relocation. The Committee is aware that, as a UK listed company, IHG PLC’s incentive arrangements may be expected to recognise UK investor guidelines. However, given the global nature of the Hotels business, an appropriate balance needs to be drawn in the design of relevant remuneration packages between domestic House, who are Human Resource professionals and employees, and international expectations. have advised the Committee on all aspects of the Group’s reward policies and structures. Towers Perrin Inc., an external consultancy, advised the Committee on reward structures and levels applicable in the markets relevant to the Group. Towers Perrin Inc. did not provide any other services to the Group. Linklaters provided other legal services to the Group. Messrs J Larson and House, Linklaters and Towers Perrin Inc. were originally appointed by the Group. The terms of reference of Towers Perrin Inc. are available from the Company Secretary’s office on request. 3.2 The main components The Group has performance-related reward policies. These are designed to provide the appropriate balance between fixed remuneration and variable ‘risk’ reward, which is linked to the performance of both the Group and the individual. Group performance-related measures are chosen carefully to ensure a strong link between reward and true underlying financial performance, and emphasis is placed on particular areas requiring executive focus. 30 InterContinental Hotels Group 2004 Remuneration report Individual performance is measured through an assessment of increase in the UK Retail Prices Index (RPI) for the same period comprehensive business unit deliverables, demonstrated leadership for one-third of the options granted to vest; 12 percentage points behaviours, modelling the Group values and the achievement over the increase in RPI for the same period for two-thirds of the of specific Key Performance Objectives. At the executive level, options granted to vest; and 15 percentage points over the Key Performance Objectives are linked directly to the Group’s increase in RPI for the same period for the full award to vest. strategic priorities. At a minimum, the individual performance The options lapse if the performance condition is not met. This of the executive directors is assessed on an annual basis. remains a realistic but challenging condition in the current economic The normal policy for executive directors is that, using ‘target’ or ‘expected value’ calculations, their performance-related incentives will equate to approximately 70% of total annual remuneration climate. The achievement or otherwise of the performance condition is assessed, based on the Group’s published results; such assessment is then reviewed by the external auditor. (excluding benefits). Executive directors were granted options on 1 April 2004 as The main components of remuneration are: Basic salary The salary for each executive director is based on individual performance and on information from independent shown in the table on page 35. It is the current intention for similar performance conditions to apply to options granted in 2005 and later years. professional sources on the salary levels for similar jobs in groups Executive share options are not pensionable. of comparable companies. Internal relativities and salary levels in the wider employment market are also taken into account. Executive directors are entitled to participate in all-employee share schemes. Options granted under the IHG Sharesave Plan In addition, benefits are provided to executive directors in are not subject to performance conditions and are not pensionable. accordance with the policy applying to other executives in their geographic location. Performance restricted shares The Performance Restricted Share Plan allows executive directors and eligible employees to receive Annual performance bonus Within the Short Term Deferred Incentive Plan, challenging performance goals are set and these share awards, subject to the satisfaction of a performance condition, set by the Committee, which is normally measured over must be achieved before the maximum bonus becomes payable. a three-year period. Awards are normally made annually and, These goals include both personal objectives and targets linked except in exceptional circumstances, will not exceed three times to the Group’s financial performance. For executive directors, the annual salary for executive directors. In determining the level of maximum bonus opportunity is 100% of salary, with 30% linked to awards within this maximum limit, the Committee takes into personal objectives, 35% to adjusted earnings per share and 35% account the level of executive share options granted to the same to earnings before exceptional items, interest and taxation. The person. The grant of awards is restricted so that in each year the bonus will normally be paid in IHG PLC shares and deferred. aggregate of (i) 20% of the market value of the executive share Matching shares may also be awarded up to 0.5 times the options and (ii) 33% of the market value of performance restricted deferred amount. Such awards are conditional on the directors’ shares, will not exceed 130% of annual salary, taking the market continued employment with the Group until the release date. The value in each case as at the date of grant. shares will normally be released in equal amounts at the end of each of the three years following deferral. The executive directors will be expected to hold all shares earned from the Group’s remuneration plans while the value of their holding is less than twice their basic salary or three times in the case of the Chief Executive. Bonuses are not pensionable. Executive share options The Committee believes that share ownership by executive directors and senior executives For the 2004/06 cycle, performance will be measured by reference to: • the increase in IHG PLC Total Shareholder Return (‘TSR’) over the performance period relative to 10 identified comparator companies; Accor, De Vere, Hilton Group, Hilton Hotels Corp., Host Marriott, Marriott Hotels, Millennium & Copthorne, NH Hotels, Sol Melia and Starwood Hotels; and • the increase in IHG Return On Capital Employed (‘ROCE’) over the performance period. strengthens the link between the individual’s personal interest In respect of TSR performance, 10% of the award will be released and that of the shareholders. Grants of options are normally made for the achievement of 6th place within the TSR group and 50% annually and, except in exceptional circumstances, will not, in any of the award will be released for the achievement of 1st or 2nd year, exceed three times annual salary for executive directors. place. In respect of ROCE performance, 10% of the award will A performance condition has to be met before options can be exercised. The performance condition is set by the Committee. For options granted in 2004, the Company’s adjusted earnings per share over the three-year period ending 31 December 2006 must increase by at least nine percentage points over the be released for the achievement of 70% growth and 50% of the award will be released for the achievement of 141.6% growth. Vesting between all stated points will be on a straight line basis. The awards lapse if the performance conditions are not met. InterContinental Hotels Group 2004 31 Implementation of the elements of the IHG strategy that can 3.4 Policy on external appointments significantly impact ROCE will be complete during the life of The Company recognises that its directors may be invited to existing Performance Restricted Share Plan cycles. The Committee become non-executive directors of other companies and that such considers that it is now time to review this performance measure. duties can broaden experience and knowledge, and benefit the Benefits under the Performance Restricted Share Plan are not pensionable. business. Executive directors are, therefore, allowed to accept one non-executive appointment (excluding positions where the director is appointed as the Company’s representative), subject to During the year, IHG has remained within its headroom limits Board approval, as long as this is not likely to lead to a conflict of for the issue of new shares under share incentive schemes. interest, and to retain the fees received. Richard North received As at 31 December 2004, the Company’s position under the £25,091 during the year for his services as a non-executive director. Association of British Insurers’ guidelines (that dilution under David Webster received £20,000 during the year for his services discretionary schemes should not exceed 5% in 10 years) was as a non-executive director. that shares equivalent to only 3.74% of ordinary share capital had been allocated. Against the guideline that overall dilution under all schemes should not exceed 10% in 10 years, IHG had allocated only 3.96%. These figures exclude obligations which are to be settled with shares purchased in the market. 3.5 Performance graph Throughout the year the Company has been a member of the FTSE 100 index. The graph below measures the performance of Six Continents PLC up to Separation, and subsequently the performance of IHG PLC, assuming dividends are reinvested, 3.3 Companies used for comparison compared with the total shareholder return performance achieved In assessing levels of pay and benefits, IHG compares the by the FTSE 100 companies. packages offered by different groups of comparator companies. These groups are chosen having regard to participants’: • size – turnover, profits and the number of people employed; • diversity and complexity of businesses; • geographical spread of businesses; • industry type; and • relevance as: a) a potential recruitment target b) a potential threat in respect of attracting IHG talent. External consultants are used to advise the Committee on the structure and level of pay and benefits in IHG’s markets. Total Shareholder Return: InterContinental Hotels Group v FTSE 100 200 180 160 140 120 100 80 60 40 20 ) 0 0 1 = 9 9 9 1 r e b o t c O – h t n o m e h t r o f x e d n i e g a r e v a n a e M ( 0 Oct 1999 IHG PLC shares listed 15.4.03 Oct 2000 Oct 2001 Oct 2002 Jan 2004 Jan 2005 InterContinental Hotels Group PLC – total shareholder return index (Six Continents PLC up to 14 April 2003) FTSE 100 – total shareholder return index Source: Datastream 32 InterContinental Hotels Group 2004 Remuneration report 3.6 Contracts of service a) Policy The Remuneration Committee’s policy is for executive directors to have rolling contracts with a notice period of 12 months. Prior to the Separation of Six Continents PLC Richard Hartman, Richard North, Stevan Porter and Richard Solomons entered into service agreements with a notice period of 12 months. Following the year end, Andrew Cosslett entered into a service agreement with an initial notice period of 24 months, reducing month by month to 12 months after 12 months. All new appointments are intended to have 12 month notice periods. However, on occasion, to complete an external recruitment successfully, a longer initial period reducing to 12 months may be used, following guidance in the Combined Code. No provisions for compensation for termination following change of control, or for liquidated damages of any kind, are included in the current directors’ contracts. In the event of any early b) Directors’ contracts Directors Andrew Cosslett Richard Hartman Stevan Porter Richard Solomons Richard North Contract Effective Date Unexpired Term/ Notice Period 3.2.05 15.4.03 15.4.03 15.4.03 15.4.03 23 months 12 months 12 months 12 months Terminated Richard North’s service contract provided for a notice period of 12 months. The severance arrangements which were entered into following his resignation on 30 September 2004 provided for him to receive a payment of one month’s basic salary in each month up to September 2005, subject to mitigation in the event of his taking up an alternative appointment. Details of his entitlements in respect of the Executive Share Option Plan, the Short Term Deferred Incentive Plan, the Performance Restricted Share Plan, and pension, are contained in the appropriate tables in the termination of an executive director’s contract the policy is to seek audited part of this report. to minimise any liability. David Webster took over as interim Chief Executive on 15 September 2004 following announcement that Richard North would resign as a director of the Company on 30 September 2004. David Webster’s remuneration in his capacity as interim Chief Executive is exclusive of his remuneration in his capacity as non-executive Chairman of the Company, which is the subject of a letter of appointment, with effect from 1 January 2004. David Webster’s appointment as Chairman is subject to six months’ notice. Non-executive directors, Ralph Kugler, Robert C Larson, David Prosser and Sir Howard Stringer signed letters of appointment effective from the listing of IHG PLC. David Kappler signed a letter of appointment effective from 21 June 2004. All non-executive directors’ appointments are subject to re-election at the Annual General Meeting at which they retire by rotation. 3.7 Policy regarding pensions UK-based executive directors and senior employees participate on the same basis in the executive section of the InterContinental Hotels UK Pension Plan and, if appropriate, the InterContinental Executive Top-Up Scheme. Stevan Porter and senior US-based executives participate in US retirement benefits plans. Executives in other countries, who do not participate in these plans, will participate in local plans, or the InterContinental Hotels Group International Savings & Retirement Plan. The Company is considering its detailed response to the new pension regime resulting from the Finance Act 2004 and applying from April 2006. Currently, the pension arrangements for UK-based executive directors and other senior employees provide benefits from both the tax-approved InterContinental Hotels UK Pension Plan and the unfunded InterContinental Executive Top-Up Scheme. After 2006 it may be possible to amend these plans to continue to provide, tax efficiently, similar benefits in total, but in some cases with a different split of benefits between the two plans. The Company’s approach will be finalised during 2005. The information provided in the following pages of this report has been audited by Ernst & Young LLP. InterContinental Hotels Group 2004 33 Basic salaries Performance payments and fees £000 £000 Total emoluments excluding pensions Benefits £000 1.1.04 to 31.12.04 £000 1.10.02 to 31.12.03 £000 638 476 360 372 148 35 42 42 50 42 275 – 2,480 553 – – – – – – – – – – 57 299 8 28 – – – – – – 1 – 553 – 393 1,248 1,183 775 368 400 148 35 42 42 50 42 276 – 3,426 663 510 497 – – 30 53 35 53 57 2,987 6,068 4 DIRECTORS’ EMOLUMENTS Executive directors Richard North1 Richard Hartman Stevan Porter2 Richard Solomons David Webster3 Non-executive directors David Kappler4 Ralph Kugler5 Robert C Larson6 David Prosser7 Sir Howard Stringer6 David Webster8 Former directors9 Total 1 Resigned as a director and as Chief Executive on 30 September 2004 and ceased employment with the Group on 31 December 2004. The emoluments shown are for the full year. Richard North’s performance payment relates to his participation in the Short Term Deferred Incentive Plan which, in accordance with plan rules, must be paid in cash due to his employment ending. He remains eligible to participate in the Short Term Deferred Incentive Plan for the 2005 performance year. Any award will be made in cash and pro-rated to 30 September 2005. 2 Emoluments for Stevan Porter include £10,731 that were chargeable to UK income tax. 3 Fees paid to David Webster represent £41,667 per month payable to him in his capacity as interim Chief Executive with effect from 15 September 2004. 4 Became Senior Independent Director and Chairman of the Audit Committee on 21 June 2004 for which a fixed fee of £65,000 pa was paid. With effect from 1 January 2005, David Kappler receives a total annual fee of £80,000. 5 All fees due to Ralph Kugler are paid to Unilever. With effect from 1 January 2005, Ralph Kugler’s fee as a non-executive director is £50,000 pa. 6 Both Robert C Larson and Sir Howard Stringer served as non-executive directors of Six Continents PLC during the period up to 15 April 2003 for which they each received a fee of £23,000. With effect from 1 January 2005, Robert C Larson and Sir Howard Stringer each receive an annual fee of £50,000. 7 Fees paid to David Prosser included a £7,500 pa fee payable to the Chairman of the Remuneration Committee in recognition of the additional responsibilities of this role. With effect from 1 January 2005, David Prosser receives a total annual fee of £65,000. 8 Became non-executive Chairman on 1 January 2004 for which a fixed fee of £275,000 pa was paid. With effect from 1 January 2005, David Webster’s fee as non-executive Chairman is £350,000 pa. 9 The total emoluments earned by former directors of Six Continents PLC and IHG PLC during the period 1.10.02 to 31.12.03 are shown. Comparative figures for 2003 represent emoluments earned Thomas Oliver retired from Six Continents PLC on 31 March 2003 during the 15 month period ended 31 December 2003. and has not served as a director of IHG PLC. However, he has an ‘Performance payments’ include bonus awards in cash in ongoing consultancy agreement in respect of which he received respect of participation in the Short Term Deferred Incentive fees of £136,677 during the year. In addition, he had an ongoing Plan (STDIP) but exclude bonus awards in deferred shares and healthcare benefit of £9,919 during the year. These arrangements any matching shares, details of which are set out in the STDIP end in March 2005. Sir Ian Prosser retired on 31 December 2003. table on page 35. However, he had an ongoing healthcare benefit of £1,191 during ‘Benefits’ incorporate all tax assessable benefits arising from the individual’s employment. For Messrs Hartman, North and Solomons, this relates in the main to the provision of a fully expensed company car and private healthcare cover. In addition, Mr Hartman received housing, child education and other expatriate benefits. For Stevan Porter, benefits relate in the main to private healthcare cover and financial counselling. the year. 34 InterContinental Hotels Group 2004 Remuneration report 5 LONG TERM REWARD PERFORMANCE RESTRICTED SHARE PLAN (PRSP) In 2004 there were three cycles in operation. The awards made in respect of the Performance Restricted Share Plan cycles ending on 31 December 2004, 31 December 2005 and 31 December 2006 and the maximum pre-tax number of ordinary shares due if performance targets are achieved in full are: PRSP shares held at 1.1.04 111,9301 167,9002 PRSP shares awarded during the year 1.1.04 to 31.12.04 Award date 18.6.03 18.6.03 165,1303 24.6.04 188,7601 283,1402 18.6.03 18.6.03 248,5603 24.6.04 113,8101 170,7102 18.6.03 18.6.03 142,2903 24.6.04 Market price per share at award 445p 445p 549.5p 445p 445p 549.5p 445p 445p 549.5p 65,4101, 6 65,4102, 6 18.6.03 18.6.03 445p 445p 110,1101 165,1602 18.6.03 18.6.03 144,9903 24.6.04 445p 445p 549.5p Directors Richard Hartman Total Richard North Total Stevan Porter Total Sir Ian Prosser Total Richard Solomons Total Total PRSP shares vested during the year 1.1.04 to 31.12.04 Market price per share at vesting Value at vesting £ PRSP shares held at 31.12.045 Vesting date Value based on share price of Planned 647.50p at 31.12.04 vesting £ date – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 111,930 11.3.05 724,747 – 167,900 3.3.06 1,087,153 – 165,130 444,960 9.3.07 1,069,217 2,881,117 – 188,760 11.3.05 1,222,221 – 259,5454 – 144,9934 593,298 938,830 3,841,605 3.3.06 1,680,554 9.3.07 – 113,810 11.3.05 736,920 – 170,710 3.3.06 1,105,347 – 142,290 426,810 9.3.07 921,328 2,763,595 – – 65,410 11.3.05 423,530 65,410 130,820 3.3.06 423,530 847,060 – 110,110 11.3.05 712,962 – 165,160 3.3.06 1,069,411 – 144,990 420,260 9.3.07 938,810 2,721,183 13,054,560 1 This ‘transitional’ award is based on performance to 31 December 2004 where the performance measure relates to the Company’s total shareholder return against a group of 11 other comparator companies. The number of shares released is graded, according to where the Company finishes in the comparator group, with 100% of the award being released for first or second position and 20% of the award being released for sixth place. The Company finished in fourth place and accordingly 60% of the award will vest on 11 March 2005. 2 This award is based on performance to 31 December 2005 where the performance measure relates to both the Company’s total shareholder return against a group of 11 other comparator companies and growth in return on capital employed. 3 This award is based on performance to 31 December 2006 where the performance measure relates to both the Company’s total shareholder return against a group of 10 other comparator companies and growth in return on capital employed. 4 Richard North’s awards were pro-rated to reflect his contractual service during the applicable performance periods. 5 In the case of Richard North, who resigned as a director of the Company on 30 September 2004, the figures shown are as at cessation of employment. 6 Sir Ian Prosser’s awards were pro-rated to reflect his actual service during the applicable performance periods. InterContinental Hotels Group 2004 35 SHORT TERM DEFERRED INCENTIVE PLAN (STDIP) Messrs Hartman, Porter and Solomons participated in the STDIP during the year ended 31 December 2004, and are expected to receive an award on 16 March 2005. The awards, inclusive of matching shares, are expected to be in the range of 120% to 150% of base salary. Directors’ pre-tax interests during the year were: STDIP shares awarded during the year 1.1.04 to 31.12.04 STDIP shares vested during the year 1.1.04 to 31.12.04 Market price per share at award Award date Market price per share at vesting2 Value at vesting £ STDIP shares held at 31.12.04 Vesting date Value based on share price of Planned 647.50p at 31.12.04 vesting £ date 15.4.03 372p 3,789 2.6.04 529.5p 20,063 18.12.01 434.3p 55,428 20.12.04 654.5p 362,776 – – – – – – STDIP shares held at 1.1.041 3,789 55,428 Directors Richard North Stevan Porter 1 IHG PLC shares provided at 372p per share in equal value exchange for Six Continents PLC shares outstanding at 14.4.03 under the Six Continents Special Deferred Incentive Plan. 2 Award originally made in Six Continents PLC shares. The share prices shown are the equivalent IHG PLC share prices, based on a five day average immediately preceding the award date. SHARE OPTIONS Directors Richard Hartman a b Total Richard North a b Total Stevan Porter a b Total Richard Solomons a b Total Ordinary shares under option Granted during the year Lapsed during the year Exercised during the year Options held at 31.12.041 Options held at 1.1.04 615,072 218,950 615,072 218,950 1,125,168 394,840 1,125,168 394,840 433,059 225,260 433,059 601,040 225,260 230,320 601,040 230,320 364,388 469,634 834,022 712,017 807,991 1,520,008 178,176 480,143 658,319 357,545 473,815 831,360 – – – – – – – – Option price (p) 494.17 494.17 494.17 494.17 Weighted average option price (p) 414.88 398.98 464.19 435.70 412.69 398.05 465.40 433.85 426.22 409.36 464.35 449.47 400.55 375.24 465.16 426.49 1 In the case of Richard North, who resigned as a director of the Company on 30 September 2004, the figures shown are as at cessation of employment. In accordance with plan rules, Richard North’s unvested options will lapse three and a half years from the date of cessation of employment. a Where options are exercisable and the market price per share at 31 December 2004 was above the option price; and b Where options are not yet exercisable. A performance condition has to be met before options can be exercised, in accordance with the policy set out on page 30. Rolled over options, all of which are shown in ‘a’ above, became exercisable on the Separation of Six Continents PLC in April 2003 and will lapse on various dates up to October 2012. Rolled over options ceased to be subject to performance conditions on Separation. Executive share options granted in 2003 are exercisable between May 2006 and May 2013, subject to the achievement of the performance condition. Sharesave options granted in 2003 are exercisable between March 2007 and March 2009. Share options under the IHG Executive Share Option Plan were granted on 1 April 2004 at an option price of 494.17p. These options are exercisable between April 2007 and April 2014, subject to the achievement of the performance condition. Option prices range from 308.48p to 593.29p per IHG PLC share. The closing market value share price on 31 December 2004 was 647.50p and the range during the year was 479.17p to 690.81p per share. The gain on exercise by directors in aggregate was zero in the year ended 31 December 2004 (£69,491 in the period ended 31 December 2003). 36 InterContinental Hotels Group 2004 Remuneration report 6 DIRECTORS’ PENSIONS All plan benefits are subject to Inland Revenue limits. Where such The following information relates to the pension arrangements limitation is due to the earnings ‘cap’, ICETUS is used to increase provided for Richard Hartman, Richard North and Richard Solomons pension and death benefits to the level that would otherwise have under the executive section of the InterContinental Hotels UK applied. Pension Plan (‘the IC Plan’) and the unfunded InterContinental Executive Top-Up Scheme (‘ICETUS’). Stevan Porter has retirement benefits provided via the 401(k) Retirement Plan for employees of Six Continents Hotels Inc. The executive section of the IC Plan is a funded, Inland Revenue (‘401(k)’) and the Six Continents Hotels Inc. Deferred approved, final salary, occupational pension scheme. The main Compensation Plan (‘DCP’). features applicable to the executive directors are: a normal pension age of 60; pension accrual of 1/30th of final pensionable salary for each year of pensionable service; life assurance cover of four times pensionable salary; pensions payable in the event of ill health; and spouses’ and dependants’ pensions on death. The 401(k) is a tax qualified plan providing benefits on a defined contribution basis, with the member and the relevant company both contributing. The DCP is a non-tax qualified plan, providing benefits on a defined contribution basis, with the member and the relevant company both contributing. DIRECTORS’ PENSION BENEFITS Directors Richard Hartman Richard North Richard Solomons Age at 31 Dec 2004 58 54 43 Directors’ contributions in the year (note 1) £ Transfer value of accrued benefits Increases in transfer value over the year, less Directors’ 31 Dec 2004 contributions £ £ 1 Jan 2004 £ 15,200 652,200 1,189,800 522,400 15,200 2,423,800 3,581,400 1,142,400 15,100 569,400 834,100 249,600 Increase in accrued pension (note 2) £ 24,800 60,300 21,300 Increase in accrued pension (note 3) £ pa 23,700 55,200 19,200 Accrued pension at 31 Dec 2004 (notes 4&5) £ pa 63,200 240,300 96,800 note 1: Contributions paid in the year by the directors under the terms of the plans. Richard Hartman’s contributions exclude £3,700 paid in 2004, but relating to 2003. note 2: The absolute increase in accrued pension during the year. note 3: The increase in accrued pension during the year excluding any increase for inflation, on the basis that increases to accrued pensions are applied at 1 October. note 4: Accrued pension is that which would be paid annually on retirement at 60, based on service to 31 December 2004. note 5: Richard North ceased pensionable service with the Group on 31 December 2004 and his deferred pension at that date is £240,300 pa, payable from his 60th birthday (inclusive of an augmentation agreed as part of his severance arrangements). The figures shown in the above table relate to the final salary plans only. For defined contribution plans, the contributions made by and in respect of Stevan Porter during the year are: Stevan Porter 19,000 7,100 Stevan Porter The following additional information relates to directors’ pensions under the UK plans: Director’s contribution to 401(k) £ DCP £ Company contribution to 401(k) £ DCP £ 56,800 5,700 a) Dependants’ pensions On the death of a director before his normal retirement age, a widow’s pension equal to one-third of his b) Early retirement rights After leaving the service of the relevant company, the member has the right to draw his accrued pension pension entitlement is payable; a child’s pension of one-sixth of at any time after his 50th birthday, subject to a discount for early his pension is payable for each of a maximum of two eligible payment. children. On the death of a director after payment of his pension commences, a widow’s pension of two-thirds of the director’s full pension entitlement is payable; in addition, a child’s pension of one-sixth of his full pension entitlement is payable for each of a maximum of two eligible children. c) Pension increases All pensions (in excess of Guaranteed Minimum Pensions) are subject to contractual annual increases in line with the annual rise in RPI, subject to a maximum of 5% per annum. In addition, it is current policy to pay additional increases based on two-thirds of any rise in RPI above 5% per annum. d) Other discretionary benefits Other than the discretionary pension increases mentioned in c) above, there are no discretionary practices which are taken into account in calculating transfer values on leaving service. InterContinental Hotels Group 2004 37 7 DIRECTORS’ SHAREHOLDINGS Executive directors Richard Hartman Stevan Porter Richard Solomons David Webster Non-executive directors David Kappler Ralph Kugler Robert C Larson3 David Prosser Sir Howard Stringer 1 Or date of appointment, if later. 31 December 2004 InterContinental Hotels Group PLC Ordinary shares of 112p 1 January 20041 InterContinental Hotels Group PLC Ordinary shares of £12 45,247 88,077 16,031 13,395 2,602 892 10,714 4,464 7,566 30,345 56,754 17,956 824 2,915 1,000 9,805 5,000 8,474 2 These share interests were in InterContinental Hotels Group PLC £1 ordinary shares prior to the share consolidation effective from 13 December 2004. For every 28 existing InterContinental Hotels Group PLC shares held on 10 December 2004, shareholders received 25 new ordinary shares of 112p each. 3 Held in the form of American Depositary Receipts. The above shareholdings are all beneficial interests and include shares held by directors’ spouses and other connected persons, and shares held on behalf of certain directors by the Trustees of the Company’s ESOP. None of the directors has a beneficial interest in the shares of any subsidiary. At 31 December 2004, Richard Hartman, Stevan Porter and Richard Solomons, as potential beneficiaries under the Company’s ESOP, were each technically deemed to be interested in 3,057,649 unallocated IHG PLC shares held by the Trustees of the ESOP. In the period from 31 December 2004 to 9 March 2005 a further 122,270 shares were released from the ESOP, reducing the number of shares in which these directors hold a residual interest to 2,935,379 in total. The Company’s Register of Directors’ Interests, which is open to inspection at the Registered Office, contains full details of directors’ shareholdings and share options. By order of the Board Richard Winter Company Secretary 9 March 2005 38 InterContinental Hotels Group 2004 Financial statements GROUP PROFIT AND LOSS ACCOUNT for the 12 months ended 31 December 2004 Turnover analysed as: Continuing operations Discontinued operations Cost of sales Gross operating profit Administrative expenses Other operating income Operating profit analysed as: Continuing operations Discontinued operations Non-operating exceptional items analysed as: Continuing operations Cost of fundamental reorganisation Separation costs Profit on disposal of fixed assets Provision for loss on disposal of operations Provision against fixed asset investments Discontinued operations Separation costs Loss on disposal of fixed assets Profit on ordinary activities before interest Interest receivable Interest payable and similar charges Premium on early settlement of debt Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Minority equity interests Earnings available for shareholders Dividends on equity shares Retained (loss)/profit for the period Earnings per ordinary share: Basic Diluted Adjusted 2004 12 months Exceptional items £m – – – (28) (28) (11) 20 (19) (19) – (69) – – 15 (74) (10) – – (88) 22 (16) (17) (99) 167 68 – 68 – 68 – – – Before exceptional items £m 2,204 note 2 2,204 – (1,652) 552 (221) – 331 331 – – – – – – – – – 331 48 (70) – 309 (50) 259 (28) 231 (592) (361) – – 32.5p 2 7 2 8 7 9 10 31 11 Before exceptional items restated* £m 3,483 2,690 793 Total £m 2,204 2,204 – (1,680) (2,717) 524 (232) 20 312 312 – (69) – – 15 (74) (10) – – 243 70 (86) (17) 210 117 327 (28) 299 (592) (293) 42.1p 41.6p – 766 (283) – 483 346 137 – – – – – – – – 483 104 (151) – 436 (115) 321 (34) 287 (156) 131 – – 39.1p 2003 15 months Exceptional items restated* £m – – – (51) (51) – – (51) (51) – (213) (67) (51) 4 – Total £m 3,483 2,690 793 (2,768) 715 (283) – 432 295 137 (213) (67) (51) 4 – (56) (56) (41) (2) (264) – – (136) (400) 132 (268) – (268) – (268) – – – (41) (2) 219 104 (151) (136) 36 17 53 (34) 19 (156) (137) 2.6p 2.6p – * Restated to show exceptional tax credits on a basis consistent with 2004, comprising prior year adjustments which are exceptional by reason of their size or incidence. No profit and loss account is presented for InterContinental Hotels Group PLC as permitted by Section 230 of the Companies Act 1985. Notes on pages 42 to 66 form an integral part of these financial statements. STATEMENT OF TOTAL RECOGNISED GROUP GAINS AND LOSSES for the 12 months ended 31 December 2004 Earnings available for shareholders Reversal of previous revaluation gains due to impairment Exchange differences* Goodwill eliminated (see note 32) Other assets and liabilities Other recognised losses Total recognised gains and losses for the period NOTE OF HISTORICAL COST GROUP PROFITS AND LOSSES for the 12 months ended 31 December 2004 Reported profit on ordinary activities before taxation Realisation of revaluation gains of previous periods Historical cost profit on ordinary activities before taxation Historical cost loss retained after taxation, minority equity interests and dividends RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS for the 12 months ended 31 December 2004 Earnings available for shareholders Dividends Other recognised losses Issue of ordinary shares Net assets of MAB eliminated on Separation MAB goodwill eliminated on Separation Minority interest on transfer of pension prepayment Purchase of own shares Purchase of own shares by employee share trusts Credit in respect of employee share schemes Release of own shares by employee share trusts Movement in goodwill – exchange differences* Net movement in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds InterContinental Hotels Group 2004 39 2004 12 months £m 2003 15 months £m 299 (20) (110) (21) (151) 148 19 (22) (139) 79 (82) (63) 2004 12 months £m 2003 15 months £m 210 3 213 (290) 36 16 52 (121) 2004 12 months £m 2003 15 months £m 299 (592) (293) (151) 16 – – – (257) (33) 15 16 110 (577) 2,554 1,977 19 (156) (137) (82) 18 (2,777) 50 (7) – – – 15 139 (2,781) 5,335 2,554 * Foreign currency denominated net assets, including goodwill purchased prior to 30 September 1998 and eliminated against Group reserves, and related foreign currency borrowings and currency swaps, are translated at each balance sheet date giving rise to exchange differences which are taken to Group reserves as recognised gains and losses during the period. Notes on pages 42 to 66 form an integral part of these financial statements. 40 InterContinental Hotels Group 2004 Financial statements GROUP CASH FLOW STATEMENT for the 12 months ended 31 December 2004 Operating activities Interest paid Costs associated with new facilities Premium on early settlement of debt Dividends paid to minority shareholders Interest received Returns on investments and servicing of finance UK corporation tax (paid)/received Overseas corporate tax paid Taxation Paid: Intangible fixed assets Tangible fixed assets Fixed asset investments Received: Tangible fixed assets Fixed asset investments Capital expenditure and financial investment Separation costs Acquisitions and disposals Equity dividends Net cash flow Management of liquid resources Financing Movement in cash and overdrafts Notes on pages 42 to 66 form an integral part of these financial statements. note 12 14 16 16 2004 12 months £m (91) (5) (17) (26) 72 (4) (31) – (245) (12) 101 5 – £m 515 (67) (35) (151) – (600) (338) 320 – (18) 2003 15 months £m £m 795 (141) (20) (136) (22) 111 25 (21) (10) (475) (37) 265 9 (66) (208) 4 (248) (66) (299) (22) (129) 206 55 InterContinental Hotels Group 2004 41 Group Company 31 Dec 2004 £m 142 3,776 99 4,017 42 556 419 137 116 43 757 (1,013) (256) 3,761 (1,252) (382) (248) (134) (150) 31 Dec 2003 £m 158 3,951 172 4,281 44 523 447 76 377 55 999 (1,085) (86) 4,195 (1,085) (393) (314) (79) (163) 31 Dec 2004 £m – – 759 759 – 335 335 – – – 335 (91) 244 1,003 – – – – – 31 Dec 2003 £m – – 1,161 1,161 – 367 367 – – 3 370 (75) 295 1,456 (420) – – – – 1,977 2,554 1,003 1,036 697 26 233 46 1,164 (22) (167) 1,977 739 14 258 – 1,164 (11) 390 697 26 – 46 – (22) 256 739 14 – – – (11) 294 2,554 1,003 1,036 note 18 19 20 21 22 23 24 25 26 27 17 30 31 31 31 31 31 31 BALANCE SHEETS 31 December 2004 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors analysed as: Amounts falling due within one year Amounts falling due after one year Investments Cash at bank and in hand Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Creditors: amounts falling due after one year Provisions for liabilities and charges analysed as: Deferred taxation Other provisions Minority equity interests Net assets Capital and reserves Equity share capital Share premium account Revaluation reserve Capital redemption reserve Merger reserve Other reserve Profit and loss account Equity shareholders’ funds Signed on behalf of the Board Richard Solomons 9 March 2005 Notes on pages 42 to 66 form an integral part of these financial statements. 42 InterContinental Hotels Group 2004 Accounting policies BASIS OF PREPARATION The Group profit and loss account has been prepared by reference to Format 1 as set out in Schedule 4 of the Companies Act 1985. FIXED ASSETS AND DEPRECIATION Goodwill Any excess of purchase consideration for an acquired business over the fair value attributed to its separately identifiable This is considered more appropriate to the Group post Separation assets and liabilities represents goodwill. Goodwill is capitalised than the format used in previous years. Prior year comparatives as an intangible asset. Goodwill arising on acquisitions prior to have been restated on a consistent basis. 30 September 1998 was eliminated against reserves. To the BASIS OF ACCOUNTING extent that goodwill denominated in foreign currencies continues to have value, it is translated into sterling at each balance sheet The financial statements are prepared under the historical cost date and any movements are accounted for as set out under convention as modified by the revaluation of certain tangible fixed ‘foreign currencies’ above. On disposal of a business, any assets. They have been drawn up to comply with applicable goodwill relating to the business and previously eliminated against accounting standards. reserves, is taken into account in determining the profit or loss BASIS OF CONSOLIDATION The Group financial statements comprise the financial statements of the parent company and its subsidiary undertakings. The results of those businesses acquired or disposed of during the period are consolidated for the period during which they were under the Group’s dominant influence. FOREIGN CURRENCIES on disposal. Other intangible assets On acquisition of a business, no value is attributed to other intangible assets which cannot be separately identified and reliably measured. No value is attributed to internally generated intangible assets. Tangible assets Freehold and leasehold land and buildings are stated at cost, or valuation, less depreciation. All other fixed assets are stated at cost less depreciation. Repairs and Transactions in foreign currencies are recorded at the exchange maintenance costs are expensed as incurred. rates ruling on the dates of the transactions, adjusted for the effects of any hedging arrangements. Assets and liabilities denominated in foreign currencies are translated into sterling at the relevant rates of exchange ruling at the balance sheet date. When implementing FRS 15 ‘Tangible Fixed Assets’ in the year to 30 September 2000, the Group did not adopt a policy of revaluing properties. The transitional rules of FRS 15 were applied so that the carrying values of properties include an element resulting from The results of overseas operations are translated into sterling at previous valuations. weighted average rates of exchange for the period. Exchange differences arising from the retranslation of opening net assets (including any goodwill previously eliminated against reserves) denominated in foreign currencies and foreign currency borrowings and currency swap agreements used to hedge those assets are taken directly to reserves. All other exchange differences are taken to the profit and loss account. TREASURY INSTRUMENTS Revaluation Surpluses or deficits arising from previous professional valuations of properties, realised on the disposal of an asset, are transferred from the revaluation reserve to the profit and loss account reserve. Impairment Any impairment arising on an income-generating unit, other than an impairment which represents a consumption of economic benefits, is eliminated against any specific revaluation reserve relating to the impaired assets in that income-generating Net interest arising on interest rate agreements is taken to the unit with any excess being charged to the profit and loss account. profit and loss account. Premiums payable on interest rate agreements are charged to the Depreciation and amortisation Goodwill and other intangible assets are amortised over their estimated useful lives, generally profit and loss account over the term of the relevant agreements. 20 years. Currency swap agreements are retranslated at exchange rates ruling at the balance sheet date with the net amount being included in either current asset investments or borrowings. Interest payable or receivable arising from currency swap agreements is taken to the profit and loss account on a gross basis over the term of the relevant agreements. Gains or losses arising on forward exchange contracts are taken to the profit and loss account in line with the transactions they are hedging. InterContinental Hotels Group 2004 43 Freehold land is not depreciated. All other tangible fixed assets Accumulated differences between the amount charged to the are depreciated to a residual value over their estimated useful profit and loss account and the payments made to the pension lives, namely: Freehold buildings 50 years Leasehold buildings lesser of unexpired term of lease and 50 years Fixtures, fittings and equipment 3-25 years Plant and machinery 4-20 years plans are treated as either prepayments or other provisions for liabilities and charges in the balance sheet. The additional disclosures required by the transitional arrangements of FRS 17 ‘Retirement Benefits’ are given in note 5 to the financial statements. SELF INSURANCE The Group is self insured for various levels of general liability, All depreciation and amortisation is charged on a straight line workers’ compensation and employee medical and dental basis. Investments Fixed asset investments are stated at cost less any provision for diminution in value. DEFERRED TAXATION Deferred tax assets and liabilities are recognised, subject to certain exceptions, in respect of all material timing differences between the recognition of gains and losses in the financial statements and for tax purposes. insurance coverage. Insurance liabilities include projected settlements for known and incurred, but not reported claims. Projected settlements are estimated based on historical trends and actuarial data. STOCKS Stocks are stated at the lower of cost and net realisable value. TRADE DEBTORS Trade debtors are recognised and carried at original amount less Those timing differences recognised include accelerated capital an allowance for any doubtful accounts. An allowance for doubtful allowances, unrelieved tax losses and short-term timing accounts is made when collection of the full amount is no longer differences. Timing differences not recognised include those probable. relating to the revaluation of fixed assets in the absence of a commitment to sell the assets, the gain on sale of assets rolled REVENUE RECOGNITION into replacement assets and the distribution of profits from Revenue is derived from the following sources: owned and leased overseas subsidiaries in the absence of any commitment by the properties; management fees; franchise fees; sale of soft drinks subsidiary to make the distribution. and other revenues which are ancillary to the Group’s operations. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Generally, revenue represents sales (excluding VAT and similar taxes) of goods and services, net of discounts, provided in the normal course of business and is recognised when services have Deferred tax is calculated on a non-discounted basis at the tax been rendered. The following is a description of the composition rates that are expected to apply in the periods in which timing of revenues of the Group. differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. LEASES Operating lease rentals are charged to the profit and loss account on a straight line basis over the term of the lease. PENSIONS Owned and leased – derived from hotel operations, including the rental of rooms and food and beverage sales from a worldwide network of owned and leased hotels operated under the Group’s brand names. Revenue is recognised when rooms are occupied and food and beverage is sold. Management fees – earned from hotels managed by the Group, usually under long-term contracts with the hotel owner. The Group continues to account for pensions in accordance with Management fees include a base fee, which is generally a SSAP 24 ‘Accounting for pension costs’. The regular cost of percentage of hotel revenue, and an incentive fee, which is providing pensions to current employees is charged to the profit generally based on the hotel’s profitability. Revenue is recognised and loss account over the average expected service life of those in accordance with the contract. employees. Variations in regular pension cost are amortised over the average expected service life of current employees on a straight line basis. Franchise fees – received in connection with the franchise of the Group’s brand names, usually under long-term contracts with the hotel owner. The Group charges franchise royalty fees as a percentage of room revenue. Revenue is recognised when earned. 44 InterContinental Hotels Group 2004 Accounting policies Soft Drinks – sales (excluding VAT and similar taxes) of goods and services, net of discounts, provided in the normal course of business. Revenue is recognised when sales are made. LOYALTY PROGRAMME The hotel loyalty programme, Priority Club Rewards, enables members to earn points, funded through hotel assessments, during each stay at an InterContinental Hotels Group hotel and redeem points at a later date for free accommodation or other benefits. The future redemption liability is included in creditors less than, and greater than, one year and is estimated using actuarial methods which estimate eventual redemption rates and points values. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. GLOSSARY Additional information concerning terms used in these financial statements can be found in the glossary on page 76. Notes to the financial statements InterContinental Hotels Group 2004 45 1 EXCHANGE RATES The results of overseas operations have been translated into sterling at weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1 = $1.82 (2003 £1 = $1.62). In the case of the euro, the translation rate is £1 = €1.47 (2003 £1 = €1.47). Foreign currency denominated assets and liabilities have been translated into sterling at the rates of exchange on the last day of the period. In the case of the US dollar, the translation rate is £1 = $1.93 (2003 £1 = $1.78). In the case of the euro, the translation rate is £1 = €1.41 (2003 £1 = €1.41). 2 TURNOVER AND PROFIT 12 months ended 31 December 2004* Turnover InterContinental Hotels Group PLC† Americas £m 495 EMEA £m 829 Asia Pacific £m 134 Central £m 40 Total Hotels £m 1,498 Operating profit before exceptional items Operating exceptional items Operating profit Non-operating exceptional items: Provision for loss on disposal of operations (Loss)/profit on disposal of fixed assets Provision against fixed asset investments 163 (14) 149 (9) (1) 8 Profit on ordinary activities before interest 147 119 (19) 100 (65) 14 (16) 33 21 (4) 17 – 2 (2) 17 (52) 18 (34) – – – (34) 251 (19) 232 (74) 15 (10) 163 Soft Drinks £m Dis- Total continued† £m £m 706 2,204 80 – 80 – – – 80 331 (19) 312 (74) 15 (10) 243 – – – – – – – – Total Group £m 2,204 331 (19) 312 (74) 15 (10) 243 15 months ended 31 December 2003* Turnover 661 1,010 148 51 1,870 820 2,690 793 3,483 Operating profit before exceptional items Operating exceptional item Operating profit Non-operating exceptional items: Cost of fundamental reorganisation Separation costs Profit/(loss) on disposal of fixed assets Provision against fixed asset investments Profit on ordinary activities before interest 195 (9) 186 (11) – 10 (9) 176 114 (41) 73 (17) – (6) – 50 22 (1) 21 (2) – – – 19 (80) – (80) (37) (51) – (47) (215) 251 (51) 200 (67) (51) 4 (56) 30 95 – 95 – – – – 95 346 (51) 295 (67) (51) 4 (56) 125 137 – 137 – (41) (2) – 94 483 (51) 432 (67) (92) 2 (56) 219 * Other than for Soft Drinks which reflects the 53 weeks ended 25 December (2003 64 weeks ended 20 December) and, in 2003, Mitchells & Butlers plc which reflects the 28 weeks ended 12 April. † InterContinental Hotels Group PLC relates to continuing operations. Discontinued operations relate to Mitchells & Butlers plc. 46 InterContinental Hotels Group 2004 Notes to the financial statements 2 TURNOVER AND PROFIT (CONTINUED) 12 months ended 31 December 2004* United Kingdom Rest of Europe, the Middle East and Africa United States of America Rest of Americas Asia Pacific 15 months ended 31 December 2003* United Kingdom Rest of Europe, the Middle East and Africa United States of America Rest of Americas Asia Pacific Turnover By origin £m 1,126 419 423 102 134 By destination £m 1,103 442 423 102 134 2,204 2,204 2,131 2,124 506 571 127 148 513 571 127 148 3,483 3,483 Profit on ordinary activities before interest £m 60 26 110 30 17 243 117 (7) 63 28 18 219 * Other than for Soft Drinks which reflects the 53 weeks ended 25 December (2003 64 weeks ended 20 December) and, in 2003, Mitchells & Butlers plc which reflects the 28 weeks ended 12 April. 3 OPERATING PROFIT Operating profit is stated after charging: Staff costs Depreciation of tangible fixed assets Impairment of tangible fixed assets Amortisation of goodwill Hire of plant and machinery Property rentals Income from fixed asset investments * Relates to Mitchells & Butlers plc. Auditors’ remuneration paid to Ernst & Young LLP Audit fees Audit related fees Tax fees 2004 12 months 2003 15 months Total £m 659 188 28 10 14 53 (1) Continuing Discontinued operations* operations £m £m 815 236 51 13 18 65 (3) 198 54 – – 17 24 – Total £m 1,013 290 51 13 35 89 (3) 2004 12 months £m 2003 15 months £m 3.8 1.6 0.5 5.9 2.8 7.2 1.2 11.2 Audit related fees include £nil (2003 £6.3m) in relation to the Separation and bid defence. These costs have been charged to exceptional items (see note 7). Non-audit fees payable for UK services were £1.1m (2003 £6.6m). The Audit Committee has a process to ensure that any non-audit services do not compromise the independence and objectivity of the external auditors, and that relevant UK and US professional and regulatory requirements are met. A number of criteria are applied when deciding whether pre-approval for such services should be given. These include the nature of the service, the level of fees, and the practicality of appointing an alternative provider, having regard to the skills and experience required to supply the service effectively. Cumulative fees for audit and non-audit services are presented to the Audit Committee on a quarterly basis for review. The Audit Committee is responsible for monitoring adherence to the pre-approval policy. 4 STAFF Costs: Wages and salaries Social security costs Pensions (see note 5) Average number of employees, including part-time employees Hotels Soft Drinks InterContinental Hotels Group PLC* Discontinued operations* * InterContinental Hotels Group PLC relates to continuing operations. Discontinued operations relate to Mitchells & Butlers plc. 5 PENSIONS Regular cost Variations from regular cost Notional interest on prepayment Pension cost in respect of the principal plans Other plans InterContinental Hotels Group 2004 47 2004 12 months £m 2003 15 months £m 570 66 23 659 884 96 33 1,013 2004 12 months 2003 15 months 26,835 2,824 29,659 – 29,659 27,111 2,698 29,809 15,014 44,823 2004 12 months £m 2003 15 months £m 16 (2) (3) 11 12 23 33 (7) (4) 22 11 33 Retirement and death benefits are provided for eligible Group employees in the United Kingdom principally by the InterContinental Hotels UK Pension Plan which covers approximately 1,700 employees and the Britvic Pension Plan which covers approximately 2,400 employees. The plans are predominantly defined benefit schemes for current members. For new entrants, the plans provide defined contribution benefits. The assets of the plans are held in self-administered trust funds separate from the Group’s assets. The Group also maintains a US-based InterContinental Hotels Pension Plan. This plan is now closed to new members and pensionable service no longer accrues for current employee members. In addition, the Group operates a number of minor pension schemes outside the United Kingdom, the most significant of which is a defined contribution scheme in the United States; there is no material difference between the pension costs of, and contributions to, these schemes. On 1 April 2003, two new pension schemes were created for InterContinental Hotels Group PLC in the UK when Mitchells & Butlers Retail Limited became the sponsoring employer for the Six Continents Pension Plan and the Six Continents Executive Pension Plan. Approximately 30% of the assets and liabilities of these plans was transferred to the new InterContinental Hotels UK Pension Plan and the Britvic Pension Plan, which were established with effect from 1 April 2003. The Group continues to account for its defined benefit obligations in accordance with SSAP 24. The pension costs related to the two UK principal plans are assessed in accordance with the advice of independent qualified actuaries using the projected unit method. They reflect the 31 March 2004 actuarial valuations of the InterContinental Hotels UK Pension Plan and the Britvic Pension Plan. The significant assumptions in these valuations were that wages and salaries increase on average by 4.3% per annum, the long-term return on assets is 6.5% per annum, and pensions increase by 2.8% per annum. The average expected remaining service life of current employees is 12 years. At 31 March 2004, the market value of the combined assets of the InterContinental Hotels UK Pension Plan was £148m and the Britvic Pension Plan was £240m and the value of the assets was sufficient to cover 80% and 75%, respectively, of the benefits that had accrued to members after allowing for expected increases in earnings. In the period to 31 December 2004, the Group made regular contributions to the two UK principal plans of £12m and additional contributions of £60m. The agreed employer contribution rates to the defined benefit arrangements for the year to 31 December 2005 are 15.6% for the staff section of the InterContinental Hotels UK Pension Plan, 31.4% for the executive section, 16.9% for the staff section of the Britvic Pension Plan and 32.3% for the executive section. 48 InterContinental Hotels Group 2004 Notes to the financial statements 5 PENSIONS (CONTINUED) Certain pension benefits and post-retirement insurance obligations are provided on an unfunded basis. Where assets are not held with the specific purpose of matching the liabilities of unfunded schemes, a provision is included within other provisions for liabilities and charges. Liabilities are generally assessed annually in accordance with the advice of independent actuaries. FRS 17 disclosures The valuations used for FRS 17 disclosures are based on the results of the actuarial valuations at 31 March 2004 updated by independent qualified actuaries to 31 December 2004. Scheme assets are stated at market value at 31 December 2004 and the liabilities of the schemes have been assessed as at the same date using the projected unit method. As the principal plans are now closed as defined benefit schemes, the current service cost as calculated under the projected unit method will increase as members approach retirement. The principal assumptions used by the actuaries to determine the liabilities on an FRS 17 basis were: Wages and salaries increases Pensions increases Discount rate Inflation rate 31 Dec 2004 31 Dec 2003 30 Sept 2002 UK % 4.3 2.8 5.3 2.8 US % – – 5.8 – UK % 4.3 2.8 5.4 2.8 US % – – 6.3 – UK % 3.8 2.3 5.5 2.3 The combined assets of the principal schemes and expected rate of return were: US % – – 6.8 – Value £m 507 397 92 996 31 Dec 2004 31 Dec 2003 30 Sept 2002 Long-term rate of return expected % 8.0 4.9 8.0 Long-term rate of return expected % 8.0 5.4 – Value £m 272 173 27 472 Long-term rate of return expected % 8.0 4.7 8.0 Value £m 238 117 – 355 31 Dec 2004 31 Dec 2003 30 Sept 2002 Long-term rate of return expected % 9.6 5.5 Long-term rate of return expected % 9.2 6.0 31 Dec 2004 US £m 56 (100) (44) 17 (27) Value £m 34 22 56 UK £m 472 (600) (128) 40 (88) Long-term rate of return expected % 11.2 6.2 31 Dec 2003 Total £m 403 (579) (176) 58 (118) Value £m 29 19 48 Total £m 528 (700) (172) 57 (115) Value £m 27 22 49 30 Sept 2002 Total £m 1,045 (1,415) (370) 116 (254) UK Schemes Equities Bonds Other Total market value of assets US Schemes Equities Bonds Total market value of assets Total market value of assets Present value of scheme liabilities Deficit in the scheme Related deferred tax asset Net pension liability If FRS 17 had been recognised in the financial statements, the effects would have been as follows: Operating profit charge Current service cost Past service cost Total operating profit charge 2004 12 months 2003 15 months US £m – – – Total £m 18 1 19 Total £m 32 2 34 UK £m 18 1 19 5 PENSIONS (CONTINUED) Finance income Expected return on pension scheme assets Interest on pension scheme liabilities Net expense Items recognised in the Statement of Total Recognised Group Gains and Losses (STRGL) Actuarial loss: Actual return less expected return on pension scheme assets Experience gains and losses arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in the STRGL Other: Deficit transferred in respect of previous acquisitions Exchange adjustments Movement in deficit during the period At start of period Current service cost Past service cost Contributions Finance income Actuarial loss Deficit transferred in respect of previous acquisitions* Separation of MAB Exchange adjustments At end of period * Relates to the acquisition of Posthouse hotels in 2001. History of experience gains and losses Difference between the expected and actual return on scheme assets: Amount (£m) Percentage of scheme assets Experience gains and losses on scheme liabilities: Amount (£m) Percentage of the present value of scheme liabilities Total amount recognised in the STRGL: Amount (£m) Percentage of the present value of scheme liabilities Group net assets and reserves reconciliation As reported Less: SSAP 24 pension prepayment (net of tax of £23m (2003 £14m)) SSAP 24 pension provision (net of tax of £18m (2003 £16m)) FRS 17 net pension liability Restated for FRS 17 InterContinental Hotels Group 2004 49 2004 12 months 2003 15 months UK £m 27 (27) – UK £m 11 13 (70) (46) 6 – UK £m (122) (18) (1) 72 – (46) (13) – – US £m 4 (6) (2) 2004 12 months US £m 1 – (6) (5) – (4) 2004 12 months US £m (54) – – 13 (2) (5) – – 4 Total £m 31 (33) (2) Total £m 12 13 (76) (51) 6 (4) Total £m (176) (18) (1) 85 (2) (51) (13) – 4 Total £m 54 (61) (7) 2003 15 months Total £m 37 (18) (121) (102) – (8) 2003 15 months Total £m (370) (32) (2) 41 (7) (102) – 288 8 (128) (44) (172) (176) 2004 12 months 2003 15 months US Total Total 1 2% – – 12 2% 13 2% 37 9% (18) (3%) UK 11 2% 13 2% (46) (8%) (5) (5%) (51) (7%) (102) (18%) 31 Dec 2004 31 Dec 2003 Net assets £m 1,977 (87) 31 (115) 1,806 Profit and loss account reserve £m (167) (87) 31 (115) (338) Net assets £m 2,554 (33) 30 (118) 2,433 Profit and loss account reserve £m 390 (33) 30 (118) 269 50 InterContinental Hotels Group 2004 Notes to the financial statements 6 DIRECTORS’ EMOLUMENTS Basic salaries, fees, performance payments and benefits* Long-term reward Gains on exercise of share options 2004 12 months £000 2003 15 months £000 3,426 553 – 6,068 1,338 69 More detailed information on the emoluments, pensions, option holdings and shareholdings for each director is shown in the Remuneration Report on pages 29 to 37. * Includes long-term reward. 7 EXCEPTIONAL ITEMS Operating exceptional items Continuing operations: Cost of sales – impairment of fixed assets Administrative expenses Other operating income Non-operating exceptional items Continuing operations: Cost of fundamental reorganisation Separation costs Profit on disposal of fixed assets Provision for loss on disposal of operations Provision against fixed asset investments Discontinued operations:† Separation costs Loss on disposal of fixed assets Total non-operating exceptional items Total exceptional items before interest and taxation Interest receivable Interest payable Premium on early settlement of debt Tax credit on above items Exceptional tax credit Total exceptional items after interest and taxation 2004 12 months note £m 2003 15 months restated* £m a b c d e f g e h i j k (28) (11) 20 (19) – – 15 (74) (10) (69) – – – (69) (88) 22 (16) (17) 6 161 68 (51) – – (51) (67) (51) 4 – (56) (170) (41) (2) (43) (213) (264) – – (136) 64 68 (268) a Tangible fixed assets were written down by £48m (2003 £73m) following an impairment review of the hotel estate. £28m (2003 £51m) was charged above as an operating exceptional item and £20m (2003 £22m) reversed previous revaluation gains. b Administrative expenses include a charge of £11m related to the delivery of the further restructuring of the Hotels business in conjunction with the asset disposal programme. c Adjustment to market valuation of the Group’s investment in FelCor Lodging Trust Inc. d Relates to a fundamental reorganisation of the Hotels business. The cost includes redundancy entitlements, property exit costs and other implementation costs. e Relates to costs incurred for the bid defence and Separation of Six Continents PLC. f Provision for the loss on disposal of 13 hotels in the Americas and 73 hotels in the United Kingdom. g Relates to a provision for diminution in value of certain fixed asset investments and reflects the directors’ view of the fair value of the holdings. h Relates to interest received on exceptional tax refunds. i Relates to costs of closing out swaps and costs related to refinancing the Group’s debt. j Relates to the premiums paid on the repurchase of the Group’s public debt. k Represents the release of provisions relating to tax matters which have been settled or in respect of which the relevant statutory limitation period has expired, principally relating to acquisitions (including provisions relating to pre-acquisition periods) and disposals, intra-group financing and, in 2004, the recognition of a deferred tax asset of £83m in respect of capital losses. * Restated to show exceptional tax credits on a basis consistent with 2004, comprising prior year adjustments which are exceptional by reason of their size or incidence. † Discontinued operations relate to Mitchells & Butlers plc. 8 INTEREST PAYABLE AND SIMILAR CHARGES Bank loans and overdrafts Other 9 TAX ON PROFIT ON ORDINARY ACTIVITIES Tax charge UK corporation tax at 30% (2003 30%): Current year Prior years Foreign tax: Current year Prior years Total current tax Deferred tax: Origination and reversal of timing differences Adjustments to estimated recoverable deferred tax assets Prior years Total deferred tax Tax on profit on ordinary activities Further analysed as tax relating to: Profit before exceptional items Operating exceptional items: Administrative expenses Non-operating exceptional items (see note 7): Continuing operations: Cost of fundamental reorganisation Profit on disposal of fixed assets Separation costs Provision against fixed asset investments Discontinued operations: Separation costs Total non-operating exceptional items Interest Premium on early settlement of debt Total exceptional items Exceptional tax credit (see note 7) InterContinental Hotels Group 2004 51 2004 12 months £m 2003 15 months £m 16 70 86 38 113 151 2004 12 months Exceptional items £m Before exceptional items £m 2003 15 months restated* Total £m Total £m 32 (22) 10 50 (29) 21 31 31 – (12) 19 50 50 – – – – – – – – – – – – 50 (9) (26) (35) 1 (52) (51) (86) 2 – (83) (81) (167) – (3) (5) 5 – – – – – 2 (5) (6) (161) (167) 23 (48) (25) 51 (81) (30) (55) 33 – (95) (62) (117) 50 (3) (5) 5 – – – – – 2 (5) (6) (161) (117) 4 (80) (76) 69 (20) 49 (27) 30 (11) (9) 10 (17) 115 – (8) – (6) (5) (19) (4) (23) – (41) (64) (68) (17) * Restated to show exceptional tax credits on a basis consistent with 2004, comprising prior year adjustments which are exceptional by reason of their size or incidence. 52 InterContinental Hotels Group 2004 Notes to the financial statements 9 TAX ON PROFIT ON ORDINARY ACTIVITIES (CONTINUED) Tax reconciliation UK corporation tax standard rate Permanent differences Capital allowances in excess of depreciation Other timing differences Net effect of different rates of tax in overseas businesses Adjustment to tax charge in respect of prior years Other Exceptional items Effective current tax rate 2004 12 months Before exceptional items % 30.0 (0.2) (4.7) (5.0) 6.3 (16.4) 0.1 – 10.1 2003 15 months restated* Total % 30.0 20.7 (12.6) (104.2) 46.1 (88.9) 2.0 32.2 (74.7) Total % 30.0 (0.3) (6.9) (7.4) 9.2 (24.1) 0.2 (26.2) (25.5) * Restated to show exceptional tax credits on a basis consistent with 2004, comprising prior year adjustments which are exceptional by reason of their size or incidence. Factors which may affect future tax charges The key factors which may affect future tax charges are disposals of assets, the availability of accelerated tax depreciation, utilisation of unrecognised losses, changes in tax legislation, settlements with tax authorities and the proportion of profits subjected to higher overseas tax rates. 10 DIVIDENDS Dividends on ordinary shares: Interim Six Continents PLC Interim InterContinental Hotels Group PLC Special interim dividend InterContinental Hotels Group PLC Proposed final InterContinental Hotels Group PLC The proposed final dividend is payable on the shares in issue at 1 April 2005. 2004 12 months pence per share 2003 15 months pence per share – 4.30 72.00 10.00 86.30 7.65 4.05 – 9.45 21.15 2004 12 months 2003 15 months £m – 29 501 62 592 £m 56 30 – 70 156 InterContinental Hotels Group 2004 53 11 EARNINGS PER ORDINARY SHARE Basic earnings per ordinary share is calculated by dividing the earnings available for shareholders of £299m (2003 £19m) by 710m (2003 733m), being the weighted average number of ordinary shares, excluding investment in own shares, in issue during the period. Diluted earnings per ordinary share is calculated by adjusting basic earnings per ordinary share to reflect the notional exercise of the weighted average number of dilutive ordinary share options outstanding during the period. The resulting weighted average number of ordinary shares is 718m (2003 733m). On 10 December 2004, shareholders approved a share capital consolidation on the basis of 25 new ordinary shares for every 28 existing ordinary shares, together with a special dividend of 72 pence per existing share. The overall effect of the transaction was that of a share repurchase at fair value, therefore no adjustment has been made to comparative data. Adjusted earnings per ordinary share is calculated as follows: Basic earnings Exceptional items, less tax thereon Exceptional tax credit Adjusted earnings 2004 12 months pence per ordinary share 2003 15 months restated* pence per ordinary share 42.1 13.1 (22.7) 32.5 2.6 45.8 (9.3) 39.1 note 7, 9 7 Adjusted earnings per ordinary share is disclosed in order to show performance undistorted by exceptional items. * Restated to show exceptional tax credits on a basis consistent with 2004, comprising prior year adjustments which are exceptional by reason of their size or incidence. 12 CASH FLOW FROM OPERATING ACTIVITIES Operating profit before exceptional items Depreciation and amortisation Earnings before interest, taxation, depreciation and amortisation and exceptional items Other non-cash items Decrease/(increase) in stocks Increase in debtors Increase in creditors Special pension contributions Provisions expended Operating activities before expenditure relating to exceptional items Cost of fundamental reorganisation Operating activities Net capital expenditure Operating cash flow 2004 12 months £m 2003 15 months £m note 331 198 529 12 1 (11) 75 (71) (3) 532 (17) 515 (151) 364 483 303 786 (2) (1) (10) 69 – (10) 832 (37) 795 (248) 547 26 26 14 15 54 InterContinental Hotels Group 2004 Notes to the financial statements 13 NET DEBT At 31 December 2003 Net cash flow Management of liquid resources and financing Exchange and other adjustments At 31 December 2004 At 30 September 2002 Net cash flow Management of liquid resources and financing Separation of MAB Exchange and other adjustments At 31 December 2003 Cash and overdrafts Cash at bank and in hand £m Overdrafts £m 55 (332) 320 – 43 84 (86) 77 (7) (13) 55 (5) (6) – – (11) (66) 64 – – (3) (5) Liquid resources Current asset investments £m Financing Other borrowings due within one year £m Other borrowings due after one year £m 377 – (320) (17) 40 218 – 129 (7) 37 377 (8) – (22) (2) (32) (782) – 758 4 12 (8) (988) – (236) 68 (1,156) (631) – (369) – 12 (988) Total £m 50 (338)* 320* – 32 18 (22)* 77* (7) (16) 50 Total £m (569) (338) (258) 49 (1,116) (1,177) (22) 595 (10) 45 (569) Currency swaps are included within current asset investments in 2003 and within other borrowings in 2004. * Represents a movement in cash and overdrafts of £18m outflow (2003 £55m inflow) (see Group cash flow statement). 14 NET CAPITAL EXPENDITURE Hotels capital expenditure Americas EMEA Asia Pacific Central Hotels disposal proceeds Hotels net capital expenditure Soft Drinks InterContinental Hotels Group PLC* Discontinued operations* * InterContinental Hotels Group PLC relates to continuing operations. Discontinued operations relate to Mitchells & Butlers plc. 2004 12 months £m 2003 15 months £m 60 95 20 12 187 (106) 81 70 151 – 151 73 237 43 24 377 (255) 122 65 187 61 248 15 OPERATING CASH FLOW Hotels Soft Drinks InterContinental Hotels Group PLC* Discontinued operations* * InterContinental Hotels Group PLC relates to continuing operations. Discontinued operations relate to Mitchells & Butlers plc. 16 MANAGEMENT OF LIQUID RESOURCES AND FINANCING New borrowings* Other borrowings repaid* Debt assumed by MAB Ordinary shares issued Purchase of own shares Purchase of own shares by employee share trusts Proceeds on release of shares by employee share trusts Financing Movement in liquid resources† InterContinental Hotels Group 2004 55 2004 12 months £m 2003 15 months £m 291 73 364 – 364 336 59 395 152 547 2004 12 months £m 2003 15 months £m 9,666 18,672 (9,408) (19,061) 258 – 16 (257) (33) 16 – 320 320 (389) 577 18 – – – 206 (129) 77 * Includes amounts rolled over under bank loan facilities. † Liquid resources primarily comprise short-term deposits of less than one year, short-term investments and, in 2003, currency swaps. 17 ASSETS Hotels Americas EMEA Asia Pacific Soft Drinks Non-operating assets: Current asset investments Cash at bank and in hand Corporate taxation Non-operating liabilities: Borrowings Proposed dividend of parent company Proposed dividend for minority shareholders Corporate taxation Deferred taxation Minority equity interests United Kingdom Rest of Europe, the Middle East and Africa United States of America Rest of Americas Asia Pacific Net non-operating liabilities 31 Dec 2004 31 Dec 2003 Total £m 1,073 2,755 444 4,272 502 4,774 4,774 1,972 1,285 958 115 444 4,774 4,774 Net operating £m 765 2,334 414 3,513 306 3,819 40 43 14 (1,199) (62) (19) (261) (248) (150) 1,977 1,512 1,128 667 98 414 3,819 (1,842) 1,977 Total £m 1,146 3,183 481 4,810 470 5,280 5,280 2,329 1,324 1,020 126 481 5,280 5,280 Net operating £m 859 2,422 457 3,738 300 4,038 377 55 37 (1,001) (70) (16) (389) (314) (163) 2,554 1,586 1,136 751 108 457 4,038 (1,484) 2,554 56 InterContinental Hotels Group 2004 Notes to the financial statements 18 INTANGIBLE FIXED ASSETS Cost: At 31 December 2003 Exchange and other adjustments At 31 December 2004 Amortisation: At 31 December 2003 Provided Exchange adjustments At 31 December 2004 Net book value: At 31 December 2004 At 31 December 2003 19 TANGIBLE FIXED ASSETS Cost or valuation: At 31 December 2003 Exchange and other adjustments Additions Disposals Impairment At 31 December 2004 Depreciation: At 31 December 2003 Exchange and other adjustments Provided On disposals Impairment At 31 December 2004 Net book value: At 31 December 2004 At 31 December 2003 Goodwill £m 192 (8) 184 34 10 (2) 42 142 158 Total Group £m 4,826 (95) 249 (182) (20) 4,778 875 (16) 188 (73) 28 1,002 3,776 3,951 Hotels £m 4,375 (95) 177 (142) (20) 4,295 660 (16) 144 (35) 28 781 3,514 3,715 Soft Drinks £m 451 – 72 (40) – 483 215 – 44 (38) – 221 262 236 Tangible fixed assets have been written down in total by £48m following an impairment review of the hotel estate. The impairment has been measured by reference to the value of income-generating units, using either the higher of value in use or estimated recoverable amount. The discount rates used for value in use calculations ranged from 8.0% to 10.5%. Properties Properties, comprising land, buildings and certain fixtures, fittings and equipment, are included above at cost or valuation, less depreciation as required. The transitional rules of FRS 15 have been followed, permitting the carrying values of properties as at 1 October 1999 to be retained. The most recent valuation of properties was undertaken in 1999 and covered all properties then owned by the Group other than hotels acquired or constructed in that year and leasehold properties having an unexpired term of 50 years or less. This valuation was undertaken by external Chartered Surveyors and internationally recognised valuers (Jones Lang LaSalle Hotels) in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. The basis of valuation was predominantly existing use value and had regard to trading potential. InterContinental Hotels Group 2004 57 19 TANGIBLE FIXED ASSETS (CONTINUED) Historical cost The comparable amounts under the historical cost convention for properties would be: Cost Depreciation Net book value Cost or valuation: At 31 December 2003 Exchange and other adjustments Additions Disposals Impairment At 31 December 2004 Depreciation: At 31 December 2003 Exchange and other adjustments Provided On disposals Impairment At 31 December 2004 Net book value: At 31 December 2004 At 31 December 2003 Land and buildings Freehold Leasehold: unexpired term of more than 50 years unexpired term of 50 years or less Cost or valuation of properties comprises: 1999 valuation 1992 valuation Cost 31 Dec 2003 £m 2,771 (177) 2,594 Total Group £m 4,826 (95) 249 (182) (20) 4,778 875 (16) 188 (73) 28 1,002 3,776 3,951 31 Dec 2003 £m 2,002 800 34 Group 31 Dec 2004 £m 2,667 (205) 2,462 Land and buildings £m Fixtures, fittings and equipment £m Plant and machinery £m 165 – 27 (10) – 182 97 – 18 (10) – 105 77 68 Net book value £m 1,906 604 189 3,004 1,657 (59) 50 (83) (20) 2,892 168 (6) 14 (11) 28 193 (36) 172 (89) – 1,704 610 (10) 156 (52) – 704 2,699 2,836 1,000 1,047 31 Dec 2004 Cost or valuation Depreciation £m £m (130) (32) (31) (193) 2,036 636 220 2,892 1,517 22 1,353 2,892 2,699 2,836 58 InterContinental Hotels Group 2004 Notes to the financial statements 20 FIXED ASSET INVESTMENTS Cost: At 31 December 2003 Exchange and other adjustments Reclassification to current asset investments* Additions Disposals and repayments At 31 December 2004 Provision for diminution in value: At 31 December 2003 Exchange adjustments Reclassification to current asset investments* Provisions made Provisions written back At 31 December 2004 Net book value: At 31 December 2004 At 31 December 2003 * Relates to the Group’s investment in FelCor Lodging Trust Inc. Investments Group Listed investments Unlisted investments All listed investments are listed on a recognised investment exchange. Group Company Loans to Group Investments undertakings undertakings £m Shares in Group £m £m Total £m 1,161 (3) – – (399) 759 – – – – – – 741 – – – – 741 – – – – – – 420 (3) – – (399) 18 – – – – – – 341 (13) (195) 11 (7) 137 169 (5) (133) 13 (6) 38 99 172 741 741 18 420 759 1,161 31 Dec 2004 31 Dec 2003 Cost less amount written off £m 1 98 99 Market value £m 4 Cost less amount written off £m 64 108 172 Market value £m 66 Group 31 Dec 2004 £m 31 Dec 2003 £m 21 STOCKS Raw materials Finished stocks Consumable stores 22 DEBTORS Trade debtors Amounts owed by Group undertakings Other debtors Corporate taxation Pension prepayment Other prepayments 9 23 10 42 Group Company 31 Dec 2004 31 Dec 2003 Total £m 285 – 100 14 110 47 556 After one year £m – – 25 – 110 2 137 Total £m 277 – 104 37 47 58 523 After one year £m – – 17 7 47 5 76 31 Dec 2004 £m – 330 – 5 – – 335 9 21 14 44 31 Dec 2003 £m – 367 – – – – 367 InterContinental Hotels Group 2004 59 Group 31 Dec 2004 £m 76 40 116 Group Company 31 Dec 2004 £m 31 Dec 2003 £m 43 159 – 261 50 232 62 19 13 133 – 389 46 235 70 16 187 1,013 183 1,085 31 Dec 2004 £m 28 – 1 – – – 62 – – 91 Group Company 31 Dec 2004 £m 1,156 96 1,252 31 Dec 2003 £m 988 97 1,085 31 Dec 2004 £m – – – Group 31 Dec 2004 £m 252 122 (113) 23 (36) 248 31 Dec 2003 £m – 377 377 31 Dec 2003 £m – – – – – 5 70 – – 75 31 Dec 2003 £m 420 – 420 Group £m 314 1 (3) (64) 248 31 Dec 2003 £m 252 123 (37) 14 (38) 314 23 CURRENT ASSET INVESTMENTS Equity investments Other 24 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Borrowings (see note 28) Trade creditors Amounts due to Group undertakings Corporate taxation Other taxation and social security Accrued charges Proposed dividend of parent company Proposed dividend for minority shareholders Other creditors 25 CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR Borrowings (see note 28) Other creditors and deferred income 26 DEFERRED TAXATION At 31 December 2003 Exchange and other adjustments Disposals Profit and loss account At 31 December 2004 Analysed as tax on timing differences related to: Fixed assets Deferred gains on loan notes Losses Pension prepayment Other 60 InterContinental Hotels Group 2004 Notes to the financial statements 26 DEFERRED TAXATION (CONTINUED) The deferred tax asset of £113m (2003 £37m) recognised in respect of losses includes £89m (2003 £6m) of capital losses available to be utilised against the realisation of capital gains which are recognised as a deferred tax liability and £24m (2003 £31m) in respect of revenue tax losses. Tax losses with a value of £305m (2003 £317m), including capital losses with a value of £98m (2003 £112m), have not been recognised as their use is uncertain or not currently anticipated. No provision has been made for deferred tax on the sale of properties at their revalued amounts. The total amount unprovided is estimated at £177m (2003 £215m). No provision has been made for deferred tax on the sale of properties where gains have been, or are expected to be, deferred against expenditure on replacement assets for an indefinite period until the sale of the replacement assets. The total amount unprovided is estimated at £58m (2003 £52m), of which £14m is expected to be rolled over into capital expenditure in periods up to 31 December 2004. It is not anticipated that any such tax will be payable in the foreseeable future. 27 OTHER PROVISIONS FOR LIABILITIES 26 AND CHARGES At 31 December 2003 Exchange and other adjustments Profit and loss account Expenditure At 31 December 2004 Hotels Disposalsa reorganisationb £m £m Onerous contractsc £m Pensionsd £m Other £m – – 74 – 74 27 (2) – (17) 8 5 – (1) (1) 3 46 (3) 8 (2) 49 1 – (1) – – Total Group £m 79 (5) 80 (20) 134 a Relates to the disposal of 13 hotels in the Americas and 73 hotels in the United Kingdom. b Relates to the Hotels reorganisation charged as a non-operating exceptional item in 2003 and is expected to be largely utilised in the year to 31 December 2005. c Primarily relates to onerous fixed lease contracts acquired with the InterContinental hotels business and having expiry dates to 2008. d Relates to unfunded post-retirement benefit plans (see note 5). 28 BORROWINGS Bank loans and overdrafts Secured: Bank loans* Unsecured: Bank loans Overdrafts Total bank loans and overdrafts Other borrowings Secured: Other loan stock† Unsecured: 2007 Guaranteed Notes 5.75% (£250m) 2010 Guaranteed Notes 4.75% (€600m) Other loan stock Total other borrowings Total borrowings Group Company 31 Dec 2004 Within one year £m After one year £m Total £m 31 Dec 2003 Total £m 31 Dec 2004 Within one year £m 31 Dec 2003 Total £m 2 12 11 25 – – 18 – 18 43 49 51 1,104 – 1,153 1,116 11 1,178 – – – 3 3 – – 18 3 21 60 494 5 559 1 18 420 3 442 1,156 1,199 1,001 – – 10 10 – – 18 – 18 28 – – – – – – 420 – 420 420 * Secured by way of mortgage over individual hotel properties. The terms, rates of interest and currencies of these bank loans vary. † Secured on the individual assets purchased by using such borrowings. The terms, rates of interest and currencies of these borrowings vary. InterContinental Hotels Group 2004 61 Group Company Bank loans and overdrafts £m 31 Dec 2004 Other borrowings £m 25 2 1,150 1 1,153 1,178 19 18 – – 3 3 21 – 31 Dec 2003 31 Dec 2004 31 Dec 2003 Total £m 43 2 1,150 4 1,156 1,199 Total £m 13 42 514 432 988 1,001 19 22 Total £m 28 – – – – 28 – 31 Dec 2004 £m 1,155 542 1,697 40 500 2 542 Total £m – – – 420 420 420 – 31 Dec 2003 £m 554 408 962 – 36 372 408 28 BORROWINGS (CONTINUED) Analysis by year of repayment Due within one year (see note 24) Due: between one and two years between two and five years after five years Due after more than one year (see note 25) Amounts repayable by instalments, some of which fall due after five years Facilities committed by banks Utilised Unutilised Unutilised facilities expire: within one year after one year but before two years after two years 29 FINANCIAL INSTRUMENTS Details of the Group’s policies on the use of financial instruments are given in the operating and financial review on pages 11 to 12 and in the accounting policies on page 42. The following disclosures provide additional information regarding the effect of these instruments on the financial assets and liabilities of the Group, other than short-term debtors and creditors. Interest rate risk In order to manage interest rate risk, the Group enters into interest rate swap, interest rate option and forward rate agreements. The interest rate profile of the Group’s material financial assets and liabilities, after taking account of the interest rate swap agreements and currency swap agreements, was: 31 December 2004 Current asset investments and cash at bank and in hand: Sterling US dollar Other Borrowings: Sterling US dollar Euro Hong Kong dollar Other * Primarily based on the relevant inter-bank rate. Interest at fixed rate Currency swap agreements £m Net debt £m Principal Total £m At variable rate* £m At fixed rate £m Weighted average rate % 26 29 28 (247) (283) (560) (69) (40) (1,116) 339 – – – (52) (239) – (48) – 365 29 28 (247) (335) (799) (69) (88) (1,116) 365 29 28 (244) (231) (596) (49) (64) (762) – – – (3) (104) (203) (20) (24) (354) – – – – 4.6 3.6 1.5 5.4 3.9 Weighted average period for which rate is fixed (years) – – – 5.0 1.7 1.0 0.8 0.7 1.2 62 InterContinental Hotels Group 2004 Notes to the financial statements 29 FINANCIAL INSTRUMENTS (CONTINUED) Interest at fixed rate 31 December 2003 Currency swap agreements £m Net debt £m Principal Total £m At variable rate* £m At fixed rate £m Weighted average rate % Current asset investments and cash at bank and in hand: Sterling US dollar Other Borrowings: Sterling US dollar Euro Hong Kong dollar Other 377 9 46 (24) (337) (514) (84) (42) (569) 934 1,311 1,311 – – – (615) (258) – (61) – 9 46 (24) (952) (772) (84) (103) (569) 9 46 (3) (301) (403) (57) (82) 520 – – – (21) (651) (369) (27) (21) (1,089) – – – 5.0 4.7 4.8 5.2 4.7 4.8 Weighted average period for which rate is fixed (years) – – – 4.1 1.5 4.7 0.8 0.7 2.6 * Primarily based on the relevant inter-bank rate. At 31 December 2004, the Group had investments totalling £175m (2003 £172m) on which no interest is receivable and which do not have a maturity date. These interests are denominated primarily in US dollars. The Group had other creditors and deferred income, denominated primarily in US dollars, due after one year of £96m at 31 December 2004 (2003 £97m) on which no interest is payable. Currency risk In order to manage currency risk, the Group enters into agreements for the forward purchase or sale of foreign currencies as well as currency options. Foreign currency inflows and outflows are also netted where practical. As virtually all foreign exchange gains and losses are charged to the Statement of total recognised Group gains and losses under the hedging provisions of SSAP 20, no disclosure of the remaining currency risks has been provided on the grounds of materiality. At 31 December 2004, the Group had contracted to exchange within one year the equivalent of £204m (2003 £49m) of various currencies. Liquidity risk A liquidity analysis of the Group’s borrowings is provided in note 28, along with details of the Group’s material unutilised committed borrowing facilities. The liquidity analysis of the Group’s other financial liabilities is set out below: Other financial liabilities Due: between one and two years between two and five years after five years * Restated to include certain provisions for liabilities and charges on a basis consistent with 2004. 31 Dec 2004 £m 26 33 89 148 31 Dec 2003 restated* £m 36 40 72 148 InterContinental Hotels Group 2004 63 29 FINANCIAL INSTRUMENTS (CONTINUED) Fair values The net book values and related fair values of the Group’s financial assets and liabilities are: Fixed asset investments Current asset equity investments Net debt: Cash and overdrafts Current asset investments Currency swap agreements Other borrowings Net debt Other financial liabilities Interest rate swap agreements Forward exchange contracts 31 Dec 2004 Net book value £m 99 76 32 40 (9) (1,179) (1,116) (148) – – Fair value £m 102 76 32 40 (9) (1,179) (1,116) (148) (3) 9 31 Dec 2003 restated* Net book value £m Fair value £m 174 – 50 361 20 (1,000) (569) (148) (29) (1) (573) 172 – 50 361 16 (996) (569) (148) – – (1,089) (1,080) (545) * Restated to include certain provisions for liabilities and charges on a basis consistent with 2004. The fair values of listed fixed asset investments and borrowings are based on market prices at the year end. Other assets and liabilities have been fair valued by discounting expected future cash flows to present value. Hedges The Group’s unrecognised gains and losses for the period on derivative financial instruments are: Unrecognised at 30 September 2002 Recognised in the period Arising in the period but not recognised Unrecognised at 31 December 2003 Recognised in the year Arising in the year but not recognised Unrecognised at 31 December 2004 Expected to be recognised in the year ending 31 December 2005 Expected to be recognised thereafter 30 SHARE CAPITAL Authorised (ordinary shares and redeemable preference share) At 31 December 2003 Share capital consolidation At 31 December 2004 Allotted, called up and fully paid (ordinary shares) At 31 December 2003 (shares of £1 each) Share capital consolidation Issued under option schemes Repurchased and cancelled under repurchase programmes At 31 December 2004 (shares of 112 pence each) Gains £m Losses £m Total £m 24 (2) (18) 4 (1) 6 9 9 – (45) 31 (16) (30) 21 6 (3) (1) (2) Number of shares millions note (21) 29 (34) (26) 20 12 6 8 (2) £m a b c b d 10,000 (1,071) 8,929 10,000 – 10,000 739 (75) 4 (46) 622 739 – 4 (46) 697 a At 31 December 2003, the authorised share capital was £10,000,050,000, comprising 10,000,000,000 ordinary shares of £1 each and one redeemable preference share of £50,000. b On 10 December 2004, shareholders approved a share capital consolidation on the basis of 25 new ordinary shares for every 28 existing ordinary shares. This provided for all the authorised ordinary shares of £1 each (whether issued or unissued) to be consolidated into new ordinary shares of 112 pence each. The share capital consolidation became effective on 13 December 2004. The consolidation had no impact on the authorised redeemable preference share. c At 31 December 2004, the authorised share capital was £10,000,049,999, comprising 8,928,571,428 ordinary shares of 112 pence each and one redeemable preference share of £50,000. d During 2004, the Company undertook to return funds of up to £500m to shareholders by way of two consecutive £250m share repurchase programmes, the second of which commenced in December 2004. During the year, 46,385,981 ordinary shares were repurchased and cancelled under the authorities granted by shareholders at general meetings held during 2003 and 2004. 64 InterContinental Hotels Group 2004 Notes to the financial statements 30 SHARE CAPITAL (CONTINUED) The aggregate consideration in respect of ordinary shares issued in respect of option schemes during the year was £16m (2003 £18m). Options to subscribe for ordinary shares At 31 December 2003 Granted Exercised Foregone At 31 December 2004 Option exercise price per ordinary share (pence) Final exercise date millions 28.6 6.9 (7.4) (0.1) 28.0 308.48 – 593.29 1 April 2014 The authority given to the Company at the Extraordinary General Meeting on 10 December 2004 to purchase its own shares was still valid at 31 December 2004. A resolution to renew the authority will be put to shareholders at the Annual General Meeting on 1 June 2005. Share premium Revaluation reserve account £m £m Capital redemption reserve £m Merger reserve £m Other reserve £m Profit and loss account £m 14 12 – – – – – – – – – – – 31 RESERVES – EQUITY INTERESTS Group At 31 December 2003 Premium on allotment of ordinary shares Repurchase of shares Transfer to capital redemption reserve Purchase of own shares by employee share trusts Release of own shares by employee share trusts Credit in respect of employee share schemes Retained loss for the period Goodwill (see note 32) Revaluation surplus realised on disposals Reversal of previous revaluation gains due to impairment Exchange adjustments on: assets borrowings and currency swaps At 31 December 2004 goodwill eliminated (see note 32) – 26 Company At 31 December 2003 Premium on allotment of ordinary shares Repurchase of shares Transfer to capital redemption reserve Purchase of own shares by employee share trusts Release of own shares by employee share trusts Retained earnings for the period At 31 December 2004 The Company has distributable reserves of £234m. 258 – – – – – – – – (3) (20) (2) – – 233 – – – 46 – – – – – – – – – 1,164 (11) – – – – – – – – – – – – – – – (33) 22 – – – – – – – – 46 – 1,164 – (22) 390 – (211) (46) – (6) 15 (293) 110 3 – (73) 54 (110) (167) Share Capital premium redemption reserve account £m £m Other reserve £m Profit and loss account £m 14 12 – – – – – 26 – – – 46 – – – 46 (11) – – – (33) 22 – (22) 294 – (211) (46) – (6) 225 256 Total £m 1,815 12 (211) – (33) 16 15 (293) 110 – (20) (75) 54 (110) 1,280 Total £m 297 12 (211) – (33) 16 225 306 The other reserve comprises £21.8m in respect of 3.1m (2003 2.2m) InterContinental Hotels Group PLC ordinary shares held by employee share trusts, with a market value at 31 December 2004 of £20m (2003 £12m). InterContinental Hotels Group 2004 65 Cost of goodwill eliminated £m 2,353 – 2,353 Group Exchange adjustments £m (17) (110) (127) Total £m 2,336 (110) 2,226 32 GOODWILL ELIMINATED* Eliminated to 31 December 2003 Exchange adjustments Eliminated to 31 December 2004 * Represents goodwill purchased prior to 30 September 1998 and eliminated against Group reserves. 33 PARENT COMPANY Profit on ordinary activities after taxation dealt with in the financial statements of the Company amounts to £817m (2003 £399m). 34 FINANCIAL COMMITMENTS The Group has annual commitments under operating leases at 31 December 2004 which expire as follows: Within one year Between one and five years After five years 35 CONTRACTS FOR EXPENDITURE ON FIXED ASSETS Contracts placed for expenditure on fixed assets not provided for in the financial statements 36 CONTINGENCIES Contingent liabilities not provided for in the financial statements relate to: Guarantees: Liabilities of subsidiaries Other Properties Other 31 Dec 2004 £m 31 Dec 2003 £m 31 Dec 2004 £m 31 Dec 2003 £m 1 11 35 47 1 10 32 43 2 5 1 8 2 5 – 7 Group 31 Dec 2004 £m 53 31 Dec 2003 £m 63 Group Company 31 Dec 2004 £m 31 Dec 2003 £m – 9 9 – 11 11 31 Dec 2004 £m 1,099 – 1,099 31 Dec 2003 £m 450 – 450 In limited cases, the Group may provide performance guarantees to third-party owners to secure management contracts. The maximum exposure under such guarantees is £115m. It is the view of the directors that, other than to the extent that liabilities have been provided for in these financial statements, such guarantees are not expected to result in financial loss to the Group. The Group has given warranties in respect of the disposal of certain of its former subsidiaries. It is the view of the directors that, other than to the extent that liabilities have been provided for in these financial statements, such warranties are not expected to result in financial loss to the Group. 66 InterContinental Hotels Group 2004 Notes to the financial statements 37 PRINCIPAL OPERATING SUBSIDIARY UNDERTAKINGS 38 POST BALANCE SHEET EVENTS InterContinental Hotels Group PLC is the beneficial owner of all On 28 February 2005, IHG announced the acquisition by Strategic (unless specified) of the equity share capital, either itself or Hotel Capital, Inc. of 85% interests in two hotels in the United through subsidiary undertakings, of the following companies: States. IHG will receive approximately $287m in cash before Corporate activities Six Continents PLC (note a) Hotels InterContinental Hotels Limited transaction costs, based upon a total value for both hotels of $303.5m, $12m in excess of net book value. This transaction is expected to complete in the first half of 2005. IHG will continue to manage these hotels under a 20 year management contract with three options to extend for a further ten years each. InterContinental Hotels Group Operating Corporation On 10 March 2005, IHG announced the sale of 73 hotels in the (incorporated and operates principally in the United States) United Kingdom. Proceeds totalled £1.0bn before transaction InterContinental Hotels Group Services Company costs, £22m below net book value. This transaction is expected to complete in the second quarter of 2005. IHG will continue to InterContinental Hotels Group (UK) Limited manage 63 of these hotels under a 20 year management contract with two consecutive options to extend the contract for a further five years each. The remaining ten hotels will be under a temporary management agreement with IHG. Holiday Inn Limited Soft Drinks Britannia Soft Drinks Limited (47.5% Six Continents Investments Limited, 23.75% Whitbread PLC, 23.75% Allied Domecq PLC, 5% PepsiCo Holdings Limited) (note b) Britvic Soft Drinks Limited (100% Britannia Soft Drinks Limited) Robinsons Soft Drinks Limited (100% Britannia Soft Drinks Limited) note a Shares held directly by InterContinental Hotels Group PLC. note b note c The Group exercises dominant influence over Britannia Soft Drinks Limited which is, accordingly, treated as a subsidiary undertaking. Unless stated otherwise, companies are incorporated in Great Britain, registered in England and Wales and operate principally within the United Kingdom. note d The companies listed above include all those which principally affect the amount of profit and assets of the Group. US GAAP information InterContinental Hotels Group 2004 67 DIFFERENCES BETWEEN UNITED KINGDOM AND For the purposes of US GAAP the Group adopted statement of UNITED STATES GENERALLY ACCEPTED ACCOUNTING Financial Accounting Standards (FAS) 142 ‘Goodwill and Other PRINCIPLES Intangible Assets’ on 1 October 2002 and from that date goodwill The Group financial statements are prepared in accordance with and indefinite life intangible assets, including that which arose in accounting principles generally accepted in the United Kingdom the period from 1 July 2001, would not be amortised but would (UK GAAP) which differ from those generally accepted in the be reviewed annually for impairment. United States (US GAAP). The significant differences, as they apply to the Group, are summarised below. Under US GAAP, separately identified definite life intangible assets arising on acquisitions would be capitalised and amortised This US GAAP information provides a reconciliation between over their useful lives. Under UK GAAP, these assets are included earnings available for shareholders under UK GAAP and net within goodwill. income under US GAAP and between shareholders’ funds under UK GAAP and shareholders’ equity under US GAAP, respectively. CLASSIFICATION OF BORROWINGS Under US GAAP the amounts shown as repayable after one year for unsecured bank loans and overdrafts drawn under or supported by bank facilities with maturities of up to five years and amounting to £1,104m (2003 £489m) would be classified as current liabilities. PENSION COSTS The Group provides for the cost of retirement benefits based upon consistent percentages of employees’ pensionable pay as recommended by independent qualified actuaries. Under US GAAP, the projected benefit obligation (pension liability) in respect of the Group’s principal pension plans would be matched against the fair value of the plans’ assets and would be adjusted to reflect any unrecognised obligations or assets in determining the pension cost or credit for the year. Under UK GAAP, where purchase consideration is contingent on a future event, the cost of acquisition includes a reasonable estimate of the amount expected to be payable in the future. Under US GAAP, contingent consideration is not recognised until the related contingencies are resolved. IMPAIRMENT OF GOODWILL Under UK GAAP, goodwill is reviewed for potential impairment where there is an indicator that impairment may have occurred. The impairment is measured by comparing the carrying value of goodwill for each income-generating unit (IGU) with the higher of net realisable value and value in use. Under US GAAP, goodwill impairment reviews are also conducted when an indicator of impairment exists, in addition to an annual goodwill impairment test required by FAS 142. The impairment is measured by comparing the carrying value of each reporting unit with its fair value. Where the carrying value, including any separately identified intangible assets, is greater than the fair value, the impairment loss is based on the excess of the carrying value of At 31 December 2004, the accumulated benefit obligations goodwill over the implied fair value of the goodwill. Where exceeded the fair value of the plans’ assets. In these reporting units identified under US GAAP differ from IGUs circumstances, US GAAP would require the recognition of the identified under UK GAAP, a reconciling item may arise. difference as a balance sheet liability and the elimination of any amounts previously recognised as a prepaid pension cost. An TANGIBLE FIXED ASSETS equal amount, but not exceeding the amount of unrecognised Prior to 1 October 1999, the Group’s properties were valued from past service cost, would be recognised as an intangible asset time to time by professionally qualified external valuers. Book with the balance reported in other comprehensive income. values were adjusted to accord with the valuations, except where INTANGIBLE ASSETS Under UK GAAP, prior to 1 October 1998, goodwill arising on acquisitions was eliminated against reserves. Since 1 October 1998, acquired goodwill has been capitalised and amortised over a period not exceeding 20 years. On disposal of a business, the profit or loss on disposal is determined after incorporating the attributable amount of any purchased goodwill, including any previously written off to reserves. Under US GAAP, goodwill arising on acquisitions prior to 1 July 2001 would be capitalised and amortised over its estimated useful life, not exceeding 40 years. a directors’ valuation was deemed more appropriate. Under US GAAP, revaluations would not have been permitted. Depreciation is based on the book value of assets, including revaluation where appropriate. Prior to 1 October 1999, freehold pubs and hotels were not depreciated under UK GAAP, as any charge would have been immaterial given that such properties were maintained, as a matter of policy, by a programme of repair and maintenance such that their residual values were at least equal to their book values. Following the introduction of FRS 15, which was implemented by the Group with effect from 1 October 1999, all properties are depreciated under UK GAAP. There is now no difference between UK GAAP and US GAAP with regard to depreciation policies. 68 InterContinental Hotels Group 2004 US GAAP information Under UK GAAP, the impairment of tangible fixed assets SEVERANCE AND RESTRUCTURING COSTS is measured by reference to discounted cash flows. Under Under UK GAAP, severance costs are provided for in the financial US GAAP, if the carrying value of assets is supported by statements if it is determined that a constructive or legal obligation undiscounted cash flows, there is no impairment. has arisen from a restructuring programme where it is probable The Group recognises a profit on disposal of fixed assets provided substantially all the risks and rewards of ownership have transferred. For the purposes of US GAAP, the Group would account 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 recognised over the life of the long-term management contract retained on the property. STAFF COSTS The Group charges against earnings the cost of shares acquired to settle awards under certain incentive schemes. The charge is based on an apportionment of the cost of shares over the period of the scheme. Prior to Separation, for the purposes of US GAAP, the Group accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion 25 ‘Accounting for Stock Issued to Employees’ and related interpretations. Under APB 25 these awards would be accounted for as variable plans and the charge would be based on the intrinsic value of the shares using the share price at the balance sheet date. Effective from the date of Separation, the Group adopted the preferable fair value recognition provisions of FAS 123 ‘Accounting for Stock-Based Compensation’. The Group selected the modified prospective method of adoption described in FAS 148 ‘Accounting for Stock-Based Compensation – Transition and Disclosure’. Compensation costs recognised since Separation are the same as those which would have been recognised had the fair value method of FAS 123 been applied from its original effective date. In accordance with the modified prospective method of adoption, results for years prior to 2002 have not been restated. that it will result in the outflow of economic benefits and the costs involved can be estimated with reasonable accuracy. Under US GAAP, severance costs are recognised over the remaining service period to termination. Accordingly, timing differences between UK GAAP and US GAAP arise on the recognition of such costs. DEFERRED TAXATION The Group provides for deferred taxation in respect of timing differences, subject to certain exceptions, between the recognition of gains and losses in the financial statements and for tax purposes. Timing differences recognised, include accelerated capital allowances, unrelieved tax losses and short-term timing differences. Under US GAAP, deferred taxation would be computed on all 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 taxation assets under UK GAAP and US GAAP are recognised only to the extent that it is more likely than not that they will be realised. FIXED ASSET INVESTMENTS Fixed asset investments are stated at cost less any provision for diminution in value. Under US GAAP, these investments are recorded at market value and unrealised gains and losses are reported in other comprehensive income except for other than temporary which are recognised in the profit and loss account. DERIVATIVE INSTRUMENTS AND HEDGING The Group enters into derivative instruments to limit its exposure to interest rate and foreign exchange risk. Under UK GAAP, these instruments are measured at cost and accounted for as hedges, whereby gains and losses are deferred until the underlying transaction occurs. Under US GAAP, all derivative instruments The Group provides certain compensation arrangements in the (including those embedded in other contracts) are recognised on United States through a rabbi trust. Under UK GAAP, the net the balance sheet at their fair values. Changes in fair value would deficit is recorded as a provision in the accounts and the net be recognised in net income unless specific hedge criteria are change in the underlying value of the assets and liabilities is met. If a derivative qualifies for hedge accounting as defined recorded as a charge (or credit) to the profit and loss account. under US GAAP, changes in fair value are recognised periodically Under US GAAP, the marketable securities held by the rabbi in net income or in shareholders’ equity as a component of other trust would be accounted for in accordance with FAS 115 comprehensive income depending on whether the derivative ‘Accounting for certain investments in Debt and Equity Securities’. qualifies as a fair value or cash flow hedge. Substantially all The trust is shown gross in the balance sheet. The marketable derivatives held by the Group during the year did not qualify securities held by the trust are recorded at market value and for hedge accounting under US GAAP. unrealised gains and losses are reported in other comprehensive income except for other than temporary which are recognised in the profit and loss account. InterContinental Hotels Group 2004 69 GUARANTEES The Group gives guarantees in connection with obtaining long- term management contracts. Under UK GAAP, a contingent liability under such guarantees is not recognised unless it is probable that it will result in a future loss to the Group. For the purposes of US GAAP, under FASB Interpretation (FIN) 45 ‘Guarantors Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others in the Year’, at the inception of guarantees issued after 31 December 2002, the Group would record the fair value of the guarantee as an asset and a liability, which are amortised over the life of the contract. PROPOSED DIVIDENDS Final ordinary dividends are provided for in the year in respect of which they are proposed by the Board for approval by the shareholders. Under US GAAP, dividends would not be provided for until the year in which they are declared. EXCEPTIONAL ITEMS Certain exceptional items are shown on the face of the profit and loss account statement after operating profit. Under US GAAP, these items would be classified as operating profit or expenses. Exceptional items for the 15 and 12 months ended 31 December 2003 include restructuring charges associated with the fundamental reorganisation within the Hotels business which is an expressly permitted exceptional item in accordance with FRS3. ASSETS HELD FOR SALE Under UK GAAP there is no held for sale definition. Under US GAAP, assets are classified as held for sale when the criteria under FAS 144 ‘Accounting for the impairment or disposal of long-lived assets’ are met. Assets classified as held for sale are recorded at the lower of carrying value or estimated fair value, less estimated costs to sell. Depreciation is no longer charged. DISCONTINUED OPERATIONS Under UK GAAP, operations are classified as discontinued when the sale or termination of operations is completed by the balance sheet date, or before approval of the financial statements. In addition, the operations concerned must have a material effect on the nature and focus of operations resulting in either a withdrawal from a particular class of business or geographic market or a material reduction in turnover in a continuing market. Under US GAAP, operations are classified as discontinued when they are classified as held for sale and when the Group no longer believes it will have a significant continuing involvement. 70 InterContinental Hotels Group 2004 US GAAP information NET INCOME/(LOSS) IN ACCORDANCE WITH US GAAP The significant adjustments required to convert earnings available for shareholders in accordance with UK GAAP to net income/(loss) in accordance with US GAAP are: 12 months to 31 Dec 2004 £m 3 months to 31 Dec 2002 £m 12 months to 31 Dec 2003 £m 15 months to 31 Dec 2003 £m 12 months to 31 Dec 2004a $m 3 months to 31 Dec 2002a $m 12 months to 31 Dec 2003a $m 15 months to 31 Dec 2003a $m 299 64 (45) 19 546 105 (74) 31 Earnings available for shareholders in accordance with UK GAAP Adjustments: Pension costs Amortisation of intangible fixed assets Impairment of intangible fixed assets on adoption of FAS 142 Depreciation of tangible fixed assets Disposal of tangible fixed assets Impairment of tangible fixed assets Provisions Gain on held for sale equity investment Staff costs Deferred revenue Change in fair value of derivativesb Deferred taxation: on above adjustments methodology Minority share of above adjustments Net income/(loss) in accordance with US GAAP Income/(loss) before cumulative effect on prior years of change in accounting principle: Continuing operations Discontinued operations Cumulative effect on prior years of adoption of FAS 142 Basicc net income/(loss) per American Depositary Share Income/(loss) before cumulative effect on prior years of change in accounting principle: Continuing operations Discontinued operations Cumulative effect on prior years of adoption of FAS 142 Dilutedd net income/(loss) per American Depositary Share Income/(loss) before cumulative effect on prior years of change in accounting principle: Continuing operations Discontinued operations Cumulative effect on prior years of adoption of FAS 142 (15) 7 – (4) 79 10 (5) (28) (2) 5 52 (7) (63) 29 4 33 332 330 2 – 332 (9) (4) (712) – 3 – (1) – – – 7 2 (2) (716) – (716) (652) 28 32 (712) (652) £ £ (14) (5) – (4) 5 45 3 – (6) 3 26 4 14 71 3 74 29 (6) 35 – 29 £ (23) (9) (712) (4) 8 45 2 – (6) 3 33 6 12 (645) 3 (642) (623) 22 67 (712) (623) (27) 12 – (8) 144 18 (9) (51) (4) 10 95 (14) (114) 52 7 59 605 602 3 – 605 (15) (7) (1,154) – 5 – (2) – – – 12 3 (3) (23) (8) – (7) 8 73 5 – (38) (15) (1,154) (7) 13 73 3 – (10) (10) 5 43 7 23 5 55 10 20 (1,161) 116 (1,045) 5 121 47 5 (1,040) (1,009) – (1,161) (1,056) 46 52 (1,154) (1,056) (9) 56 – 47 $ 37 108 (1,154) (1,009) $ 0.05 0.15 (1.58) (1.38) £ $ $ 0.47 – – 0.47 0.04 0.04 (0.97) (0.89) (0.01) 0.05 – 0.04 0.03 0.09 (0.97) (0.85) 0.85 – – 0.85 0.07 0.07 (1.58) (1.44) (0.01) 0.07 – 0.06 £ £ £ £ $ $ $ $ 0.44 – – 0.44 0.04 0.04 (0.97) (0.89) (0.01) 0.05 – 0.04 0.03 0.09 (0.97) (0.85) 0.81 – – 0.81 0.07 0.07 (1.58) (1.44) (0.01) 0.07 – 0.06 0.05 0.15 (1.58) (1.38) a Translated at the weighted average rate of exchange for the period of £1 = $1.82 (2003 £1 = $1.62). b Comprises net gains in the fair value of derivatives that do not qualify for hedge accounting of £50m (2003 £28m) and net gains reclassified to other comprehensive income of £2m (2003 £5m). c Calculated by dividing net income/(loss) in accordance with US GAAP of £332m profit (2003 £623m loss) by 710m (2003 733m) shares, being the weighted average number of ordinary shares in issue during the period. Each American Depositary Share represents one ordinary share. d Calculated by adjusting basic net income/(loss) in accordance with US GAAP of £321m profit to reflect both the future compensation on share-based payments and the notional exercise of the weighted average number of dilutive ordinary share options outstanding during the period. The resulting weighted average number of ordinary shares is 720m (2003 733m). InterContinental Hotels Group 2004 71 SHAREHOLDERS’ EQUITY IN ACCORDANCE WITH US GAAP The significant adjustments required to convert shareholders’ funds in accordance with UK GAAP to shareholders’ equity in accordance with US GAAP are: Shareholders’ funds in accordance with UK GAAP Adjustments: Intangible fixed assets: Cost: goodwill other Accumulated amortisation Intangible asset – minimum pension liability Tangible fixed assets: Cost Assets held for sale Accumulated depreciation Fixed asset investments: Investments and advances Assets held for sale Current assets: Pension prepayment Other debtors Derivatives Creditors: amounts falling due within one year: Other creditors Proposed dividend of parent company Proposed dividend for minority shareholders Derivatives Creditors: amounts falling due after one year: Other creditors Derivatives Provisions for liabilities and charges: Provisions Accrued pension cost Deferred taxation: on above adjustments methodology Minority share of above adjustments 31 Dec 2004 £m 1,977 781 689 (245) 1,225 3 31 Dec 2003 £m 2,554 837 843 (257) 1,423 6 31 Dec 2004a $m 3,813 1,508 1,329 (474) 2,363 6 1,228 1,429 2,369 (82) (300) 60 (322) 3 300 (52) 22 9 5 62 19 (1) (99) (2) 98 (64) (187) (155) 864 (45) 819 (68) – 33 (35) 2 – (47) 22 4 (2) 70 16 (6) (114) (24) 25 (54) (238) (169) 879 (53) 826 (158) (579) 116 (621) 6 579 (101) 44 18 10 120 36 (2) (192) (4) 190 (124) (361) (299) 1,668 (86) 1,582 5,395 31 Dec 2003a $m 4,546 1,490 1,500 (457) 2,533 11 2,544 (121) – 59 (62) 4 – (84) 39 7 (4) 125 28 (11) (203) (43) 45 (96) (423) (301) 1,565 (95) 1,470 6,016 Shareholders’ equity in accordance with US GAAP 2,796 3,380 a Translated at the rate of exchange ruling at the balance sheet date of £1 = $1.93 (2003 £1 = $1.78). 72 InterContinental Hotels Group 2004 Directors’ responsibilities in relation to financial statements The following statement, which should be read in conjunction with the report of the independent auditors set out opposite, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the financial statements. The directors are required by the Companies Act 1985 to prepare financial statements for each financial year, which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for the financial year. Following discussions with the auditors, the directors consider that in preparing the financial statements on pages 38 to 66 inclusive, the Company has used appropriate accounting policies, applied in a consistent manner and supported by reasonable and prudent judgements and estimates, and that all applicable accounting standards have been followed. The directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 1985. The directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Report of the independent auditors InterContinental Hotels Group 2004 73 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS We read other information contained in the Annual Report and OF INTERCONTINENTAL HOTELS GROUP PLC consider whether it is consistent with the audited financial We have audited the Group’s financial statements for the year statements. This other information comprises the Financial ended 31 December 2004 which comprise the Group profit and Highlights, Operating and Financial Review, International Financial loss account, statement of total recognised Group gains and Reporting Information, Directors’ Report, Corporate Governance losses, note of historical cost Group profits and losses, statement, Audit Committee Report, unaudited part of the reconciliation of movement in shareholders’ funds, Group cash Remuneration Report, US GAAP Information and Four Year flow statement, balance sheets, accounting policies and the Review. We consider the implications for our report if we become related notes 1 to 38. These financial statements have been aware of any apparent misstatements or material inconsistencies prepared on the basis of the accounting policies set out therein. with the financial statements. Our responsibilities do not extend to We have also audited the information in the Remuneration Report any other information. that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. BASIS OF AUDIT OPINION We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS We planned and performed our audit so as to obtain all the AND AUDITORS information and explanations which we considered necessary The directors are responsible for preparing the Annual Report, in order to provide us with sufficient evidence to give reasonable including the financial statements which are required to be assurance that the financial statements and the part of the prepared in accordance with applicable United Kingdom law and Remuneration Report to be audited are free from material accounting standards as set out in the Statement of Directors’ misstatement, whether caused by fraud or other irregularity Responsibilities in relation to the financial statements. or error. In forming our opinion we also evaluated the overall Our responsibility is to audit the financial statements and the part of the Remuneration Report to be audited in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards and the Listing Rules of the Financial Services Authority. adequacy of the presentation of information in the financial statements and the part of the Remuneration Report to be audited. OPINION In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at We report to you, our opinion as to whether the financial 31 December 2004 and of the profit of the Group for the year statements give a true and fair view and whether the financial then ended; and the financial statements and the part of the statements and the part of the Remuneration Report to be audited Remuneration Report to be audited have been properly prepared have been properly prepared in accordance with the Companies in accordance with the Companies Act 1985. Ernst & Young LLP, Registered Auditor, London. 9 March 2005 Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed. We review whether the Corporate Governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Code specified for our review by the Listing Rules of the Financial Services Authority and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. 74 InterContinental Hotels Group 2004 Four year review InterContinental Hotels Group PLC Group Profit and Loss Account Hotels Soft Drinks Turnover Hotels Soft Drinks Continuing operations before exceptional items Operating exceptional items Operating profit Non-operating exceptional items: Continuing operations Discontinued operations‡ Profit before interest Interest Profit before tax Tax Profit after tax Minority interests Earnings Earnings per share: Pro forma Basic Adjusted§ InterContinental Hotels Group PLC Group Cash Flow Statement EBITDA# Working capital movements Cost of fundamental reorganisation Operating exceptional expenditure Operating activities Net capital expenditure (see below) Operating cash flow (see below) Net capital expenditure Hotels Soft Drinks Operating cash flow Hotels Soft Drinks Continuing operations Discontinued operations‡ * See page 12. Pro forma* Dec 2004 12 months £m Dec 2003 12 months £m Dec 2002 12 months £m Sept 2002† 12 months £m Sept 2001† 12 months £m 1,498 706 2,204 1,487 674 2,161 1,538 611 2,149 1,532 602 2,134 1,902 571 2,473 251 80 331 (19) 312 (69) – 243 (33) 210 117 327 (28) 299 200 83 283 – 283 – – 283 (39) 244 (61) 183 (30) 153 239 68 307 – 307 – – 307 (49) 258 (71) 187 (26) 161 266 63 329 (77) 252 (2) 57 307 (17) 290 28 318 (25) 293 429 57 486 (43) 443 (2) 38 479 (1) 478 (141) 337 (24) 313 – 42.1p 32.5p 20.8p 21.9p – – – – – 40.1p 43.1p – 42.8p 43.8p Dec 2004 12 months £m Pro forma* Dec 2003 12 months £m Dec 2003 15 months £m Sept 2002† 12 months £m Sept 2001† 12 months £m 529 3 (17) – 515 (151) 364 (81) (70) (151) 291 73 364 – 364 481 30 – – 511 (100) 411 (45) (55) (100) 340 71 411 – 411 595 24 (37) – 582 (187) 395 (122) (65) (187) 336 59 395 – 395 510 (144) – (17) 349 (287) 62 (256) (31) (287) 644 19 – (23) 640 (580) 60 (552) (28) (580) (15) (82) 77 62 – 62 99 17 43 60 † Represents the continuing IHG business as disclosed in InterContinental Hotels Group PLC Listing Particulars February 2003. Hotels includes Other Activities which was separately disclosed in those Listing Particulars. # Earnings before interest, taxation, depreciation and amortisation and exceptional items. ‡ Relates to Bass Brewers. § Calculated after excluding the effect of exceptional items and any relevant tax. InterContinental Hotels Group 2004 75 31 Dec 2003 £m 4,281 44 523 377 55 – Pro forma* 31 Dec 2002 £m 4,510 43 456 193 135 – 30 Sept 2002† £m 4,495 30 Sept 2001† £m 4,575 42 545 216 68 831 46 484 364 49 825 (1,085) (1,025) (2,054) (1,759) (86) (198) (1,085) (1,423) (352) (763) (334) (149) 2,897 2,897 4,084 246 4,330 9 (1,179) (419) (133) 2,853 2,853 3,918 252 4,170 (336) (139) 2,414 2,414 4,060 268 4,328 (1,000) (1,191) (1,016) (914) 2,414 (242) 2,897 (301) 2,853 (393) (163) 2,554 2,554 3,738 300 4,038 (569) (915) 2,554 31 Dec 2004 £m 4,017 42 556 116 43 – (1,013) (256) (1,252) (382) (150) 1,977 1,977 3,513 306 3,819 (1,116) (726) 1,977 56.4% 8.7% 22.3% 7.0% 41.4% 7.1% 41.1% 7.6% 35.6% 11.7% InterContinental Hotels Group PLC Group Balance Sheet Fixed assets Stocks Debtors Investments Cash at bank and in hand Amounts due from MAB Short-term creditors Net current (liabilities)/assets Long-term creditors Provisions Minority interests Net assets Equity shareholders’ funds Comprising: Hotels Soft Drinks Net operating assets Net debt Other# Equity shareholders’ funds Statistics Gearing‡ Return on net operating assets§ * See page 12. † Represents the continuing IHG business as disclosed in InterContinental Hotels Group PLC Listing Particulars February 2003. Hotels includes Other Activities which was separately disclosed in those Listing Particulars. # Proposed dividend, corporate taxation, deferred taxation, minority interests and balances with MAB. ‡ Net debt expressed as a percentage of shareholders’ funds. § Operating profit before exceptional items expressed as a percentage of net operating assets. 76 InterContinental Hotels Group 2004 Glossary ADJUSTED excluding the effect of exceptional items and MANAGEMENT CONTRACT any relevant tax. a contract to operate a hotel on behalf of the hotel owner. AVERAGE DAILY RATE (ADR) room revenue divided by the number of room nights sold. Also known as average room rate. BASIC EARNINGS PER SHARE earnings available for ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year. MARKET CAPITALISATION the value attributed to a listed company by multiplying its share price by the number of shares in issue. MIDSCALE HOTEL a hotel in the three/four star category, e.g. Holiday Inn, Holiday Inn Express. BOND a long-dated note, being an obligation to repay. NET CAPITAL EXPENDITURE COMMERCIAL PAPER a negotiable short-term unsecured promissory note, issued by a corporate or other borrower normally for a maximum of one year. COMPARABLE REVPAR a comparison for a grouping of hotels that have traded in all months in both financial years being compared. Principally excludes new hotels, hotels closed for major refurbishment and hotels sold in either of the two years. CONTINGENT LIABILITY a liability that is contingent upon the occurrence of one or more uncertain future events. CONTINUING OPERATIONS operations not classified as discontinued and including acquisitions made during the year. CURRENCY SWAP an exchange of a deposit and a borrowing, each denominated in a different currency, for an agreed period of time. DISCONTINUED OPERATIONS operations that have been sold or terminated and where the sale or termination has had a material effect on the nature and focus of the Group’s operations. EBITDA earnings before interest, taxation, depreciation and amortisation and exceptional items. EXCEPTIONAL ITEMS material items deriving from ordinary activities but which are disclosed separately because of their size or incidence. EXTENDED-STAY HOTEL a hotel designed for guests staying for periods of time longer than a few nights and tending to have a higher proportion of suites than normal hotels, e.g. Staybridge Suites. FRANCHISEE operator who uses a brand under licence from the brand owner (e.g. InterContinental Hotels). FRANCHISOR brand owner (e.g. InterContinental Hotels) who licenses brands for use by other operators. GEARING net debt expressed as a percentage of shareholders’ funds. GOODWILL the difference between the consideration given for a business and the total of the values of the separable assets and liabilities comprising that business. HEDGING the reduction of risk, normally in relation to HOLIDEX FEES foreign currency or interest rate movements, by making offsetting commitments. charges to hotels under management and franchise agreements for the use of Holidex, IHG’s proprietory reservation system. INCOME-GENERATING UNIT a portfolio of similar assets that are subject to the same economic and commercial influences. INTEREST RATE SWAP an agreement to exchange fixed for floating interest rate streams (or vice versa) on a notional principal. cash expended on fixed assets, less cash received from selling fixed assets, excluding significant acquisitions and disposals. NET CASH FLOW cash flow from all operations, including exceptional and one-off payments and receipts. NET DEBT borrowings less current asset investments and cash at bank and in hand. NET OPERATING ASSETS total assets less liabilities, excluding all assets and liabilities of a financing nature. OCCUPANCY RATE rooms occupied by hotel guests, expressed as a percentage of rooms that are available. OPERATING CASH FLOW cash flow from operations but before payments for tax and to providers of finance (through interest and dividends), and before major and one-off payments and receipts. OPERATING MARGIN operating profit expressed as a percentage of turnover. PIPELINE signed/executed agreements, including franchises and management contracts, for hotels which will enter the InterContinental Hotels system at a future date. REVENUE PER room revenue divided by the number of room AVAILABLE ROOM nights that are available (can be mathematically (REVPAR) derived from occupancy rate multiplied by average room rate). ROOM REVENUE revenue generated from the sale of room nights. ROYALTY RATE the percentage of room revenue that a franchisee pays to the brand owner for use of the brand name. SUBSIDIARY UNDERTAKING a company in which the Group holds an equity stake and over which it exercises dominant influence. SYSTEM SIZE number of hotels (or rooms) owned, managed or franchised by InterContinental Hotels. UPSCALE HOTEL a four/five star full-service hotel characterised by superior service, e.g. InterContinental, Crowne Plaza. UK GAAP accounting principles generally accepted in the United Kingdom. US GAAP accounting principles generally accepted in the United States. WEIGHTED AVERAGE the average of the monthly exchange rates, EXCHANGE RATE weighted by reference to monthly operating profit. WORKING CAPITAL the sum of stocks, debtors, creditors and accruals of a trading nature, excluding financing items such as corporate taxation and proposed dividends. Shareholder profile InterContinental Hotels Group 2004 77 as at 31 December 2004 Category of holdings Private individuals Nominee companies Limited and public limited companies Other corporate bodies Pension funds, insurance companies and banks Number of shareholders 78,190 5,249 559 306 26 Percentage of total shareholders 92.72 6.23 0.66 0.36 0.03 Ordinary shares (million) 42,715,539 544,411,159 6,245,208 12,468,041 16,228,100 Total 84,330 100 622,068,047 Range of holdings 1 – 199 200 – 499 500 – 999 1,000 – 4,999 5,000 – 9,999 10,000 – 49,999 50,000 – 99,999 100,000 – 499,999 500,000 – 999,999 1,000,000 – highest Total Number of shareholders 40,767 18,236 12,069 11,160 845 605 171 301 69 107 Percentage of total shareholders 48.34 21.63 14.31 13.23 1.00 0.72 0.20 0.36 0.08 0.13 Ordinary shares (million) 2,991,366 5,974,740 8,572,548 21,471,612 5,778,173 13,459,629 12,188,953 68,691,310 48,332,634 434,607,082 84,330 100 622,068,047 Percentage of issued share capital 6.87 87.52 1.00 2.00 2.61 100 Percentage of issued share capital 0.48 0.96 1.38 3.45 0.93 2.16 1.96 11.04 7.77 69.87 100 FORWARD-LOOKING STATEMENTS Both the Annual Review and Summary Financial Statement 2004 and the Annual Report and Financial Statements 2004 contain certain forward-looking statements as defined under US legislation (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. Such statements include, but are not limited to, statements made in the Chairman’s Review and the Chief Executive’s Statement. 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. 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: events that impact domestic or international travel; levels of consumer and business spending in major economies where InterContinental Hotels Group does business; changes in consumer tastes and preferences; levels of marketing and promotional expenditure by InterContinental Hotels Group and its competitors; changes in the cost and availability of raw materials, key personnel and changes in supplier dynamics; significant fluctuations in exchange rates, interest rates and tax rates; the availability and effects of future business combinations, acquisitions or dispositions; the impact of legal and regulatory actions or developments; the impact of the European Economic and Monetary Union; the ability of InterContinental Hotels Group to maintain appropriate levels of insurance; exposures relating to franchise or management contract operations; the maintenance of InterContinental Hotels Group’s IT structure, including its centralised reservation system; the development of new and emerging technologies; competition in the markets in which InterContinental Hotels Group operates; political and economic developments and currency exchange fluctuations; economic recession; management of InterContinental Hotels Group’s indebtedness and capital resource requirements; material litigation against InterContinental Hotels Group; substantial trading activity in InterContinental Hotels Group shares; the reputation of InterContinental Hotels Group’s brands; the level of costs associated with leased properties; and the weather. Other factors that could affect the business and financial results are described in Item 3 Risk Factors as General Risks, Additional Risks relating to InterContinental Hotels and Additional Risks relating to the Soft Drinks business in the Annual Report of InterContinental Hotels Group PLC on Form 20-F for the financial period ended 31 December 2003, or in any Annual Report of InterContinental Hotels Group PLC on Form 20-F for any subsequent year, filed with the US Securities and Exchange Commission. Design and production Corporate Edge www.corporateedge.com Photography James Bell Print Royle Corporate Print At least 30% of the fibre used in making this paper comes from well-managed forests independently certified according to the rules of the Forest Stewardship Council, and 30% is from post-consumer recycled waste paper A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 0 4 www.ihgplc.com INTERCONTINENTAL BRITVIC SOFT DRINKS LIMITED HOTELS GROUP PLC 67 Alma Road Windsor Berkshire SL4 3HD T +44 (0) 1753 410 100 F +44 (0) 1753 410 101 Britvic House Broomfield Road Chelmsford Essex CM1 1TU T +44 (0) 1245 261 871 F +44 (0) 1245 267 147 Annual report and financial statements 2004 

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