opportunity, strategy, investment, targets, performance, progress, growth, profits, returns, dividends, results… great hotels guests love™ IHG Annual Report and Financial Statements 2007 Contents 1 Overview 1 Welcome to IHG 2 Highlights 3 Message from the Chairman and Chief Executive 4 The IHG brands 5 Business review 25 The Board, senior management and their responsibilities 45 Group financial statements 89 Parent company financial statements 95 Useful information 6 9 11 12 14 20 22 26 27 28 30 35 36 46 47 48 49 50 51 52 57 90 91 92 93 Business overview People Corporate responsibility Group performance Regional performance Other financial information Risk management The Board of Directors Other members of the Executive Committee Directors’ report Corporate governance Audit Committee report Remuneration report Statement of Directors’ responsibilities Independent auditor’s report to the members Group income statement Group statement of recognised income and expense Group cash flow statement Group balance sheet Corporate information and accounting policies Notes to the Group financial statements Statement of Directors’ responsibilities Independent auditor’s report to the members Parent company balance sheet Notes to the parent company financial statements 96 97 98 99 100 101 Glossary Shareholder profiles Investor information Financial calendar Contacts Forward-looking statements Welcome to IHG In 2007 our operating profits grew, reflecting a record increase in our room and hotel count and a healthy increase in our revenues per room night. We are one of the world’s largest hotel companies and are focused on quality growth through managing and franchising our seven distinctive brands. Our core purpose is to create Great Hotels Guests Love. We do this by placing guest satisfaction at the heart of everything we do and, as a result, developing our financial strength for the benefit of all our stakeholders. This Report presents a full review of our business endeavours, embracing the key areas of employee engagement and corporate responsibility as well as our financial and operational performance and approach towards risk management. We also present a wide range of statutory and governance data and our full financial statements for the year. Overview 1 O V E R V I E W I B U S N E S S R E V I E W M A N A G E M E N T A N D T H E B O A R D , S E N O R I I T H E R R E S P O N S B I L I T I E S I S T A T E M E N T S G R O U P F I N A N C A L I P A R E N T C O M P A N Y I F I N A N C A L S T A T E M E N T S U S E F U L I N F O R M A T I O N “2007 was a year of excellent progress for IHG in which the Company recorded strong growth in an expanding industry. We opened and signed a record number of hotels, and grew revenue per available room (RevPAR) faster than the market in all our major geographies. Our brands are increasingly being chosen over those of our competitors, by guests and by the hotel owners with whom we partner.” Andrew Cosslett Chief Executive Highlights RECORD NET ROOMS GROWTH UP 5% BY 28,848 ROOMS TOTAL HOTELS OPEN UNDER IHG BRANDS UP 208 TO 3,949 HOTELS RECORD SIGNINGS UP 22% TO 125,533 ROOMS DEVELOPMENT PIPELINE UP 43% TO 225,872 ROOMS REVENUE PER AVAILABLE ROOM‡ UP 7% TOTAL GROSS REVENUE† FROM ALL HOTELS IN IHG SYSTEM UP 17% TO $18bn+ CONTINUING REVENUE UP 12% TO £883m CONTINUING OPERATING PROFIT* UP 19% TO £237m ADJUSTED CONTINUING EARNINGS PER SHARE UP 23% TO 46.9p SPECIAL DIVIDEND £709m PAID FINAL DIVIDEND UP 12% TO 14.9p ‡ Total system room revenue divided by the number of room nights available. † Total room revenue from franchised hotels and total hotel revenue from managed, owned and leased hotels (not revenue attributable to IHG, as it is derived mainly from hotels owned by third parties). + US dollars. * Operating profit before exceptional items. 2 IHG Annual Report and Financial Statements 2007 David Webster Chairman Message from the Chairman and Chief Executive O V E R V I E W O V E R V I E W Strong trading Our financial performance was strong. Continuing operating profit before exceptional items was up 19 per cent, from £200 million to £237 million, and up 30 per cent at constant exchange rates. Adjusted continuing earnings per share rose 23 per cent from 38.0p to 46.9p. Global RevPAR rose by 7 per cent, mainly driven by guests’ willingness to pay more for an enhanced customer experience. Accelerating growth The number of hotels which operate under IHG’s brands grew at a record pace. We opened 366 hotels in 2007, one a day on average. We continued to focus on improving the quality of our hotel estate and removed over 150 hotels during the year. Taking into account these removals, the number of hotel rooms in our system increased by over 5 per cent, representing more than a 50 per cent increase in rooms growth over 2006. Our future growth lies in the forward order book of contracts that we have signed for new hotels – our pipeline. This pipeline also grew at a record pace in 2007, and now stands at 1,674 hotels, comprising 225,872 rooms, a 43 per cent increase on 2006. We signed 873 hotels in the year, comprising 125,533 rooms, a 22 per cent increase on 2006. This is by far the highest level of signings in the hotel industry. We have now added a total of 47,419 rooms to our system against our three-year target of adding 50,000 to 60,000 net rooms by the end of 2008. We remain confident we will exceed the top end of this target. Improving brand performance Over the last two years we have conducted extensive hotel research studies across the globe and we are now applying the insights from this work to refresh and renew our hotel brands. The performance of the InterContinental brand continues to gather pace; we signed 33 new InterContinental hotels around the world in 2007 and ended the year with a record pipeline of 62 hotels. In October 2007 we announced the global relaunch of our Holiday Inn brand family. The relaunch is designed to raise the standards of quality, style and comfort in the hotels, and will deliver a consistent, best-in-class service to our guests. Owners and franchisees will invest up to £500 million in Holiday Inn hotels around the world over the next three years, and IHG will separately make a £30 million contribution. This activity should generate a strong return on investment through expected increases in RevPAR following completion of the relaunch. Board and Executive Committee As previously announced, Richard Hartman retired from the Board in September 2007. We thank him for his service and wish him well for the future. In December 2007 Ying Yeh was appointed as a Non-Executive Director. Her in-depth knowledge of the Asia Pacific region will be of great value to IHG. Two of our Non-Executive Directors, Sir David Prosser and Robert C Larson, are planning to retire from the Board at the end of May and December 2008, respectively. Both have given outstanding service to IHG. We also made changes to our Executive Committee. Kirk Kinsell, previously Chief Development Officer for the Americas region, took up the position of President of our Europe, Middle East and Africa region. Peter Gowers, formerly Chief Marketing Officer, became President of our Asia Pacific region, and we welcomed back Tom Seddon (who had previously worked for IHG) as Chief Marketing Officer. Shareholder returns During the year we returned £790 million to shareholders by way of a £709 million special dividend and £81 million of share buybacks. This takes our total funds returned to shareholders since March 2004 to £3.5 billion. Dividend increase The Board is recommending a 12 per cent increase to the final dividend for 2007, taking it to 14.9p per share. This will give a full year dividend of 20.6p, 12 per cent higher than in 2006. Subject to shareholder approval, the final dividend will be paid on 6 June 2008. Outlook The outstanding contribution from our people has driven excellent results in 2007. We have the biggest development pipeline in the industry and this will deliver another high level of hotel openings in 2008. Although the current economic environment is less predictable than in 2007, our broadly-based portfolio of brands and our resilient fee-based business model position us well for future growth. David Webster Chairman Andrew Cosslett Chief Executive Highlights and Message from the Chairman and Chief Executive 3 The IHG brands Our seven hotel brands and our Priority Club Rewards programme are among the best known in the world. High-class facilities and services for the discerning business and leisure traveller. Memorable experiences in special locations. Simple elegance and full-service facilities for business and leisure guests in more than 50 countries around the world. Relaunched in 2007 to improve our ability to meet guest needs for contemporary, high-quality facilities. Convenience, comfort and value make Holiday Inn Express a popular choice with guests and hotel owners. The relaunch included a new identity for the Holiday Inn brand family. 149 HOTELS 8 OWNED AND LEASED 104 MANAGED 37 FRANCHISED 50,762 ROOMS 62 HOTELS IN 299 HOTELS 1 OWNED AND LEASED 89 MANAGED 209 FRANCHISED 83,170 ROOMS 118 HOTELS IN 1,381 HOTELS 6 OWNED AND LEASED 193 MANAGED 1,182 FRANCHISED 256,699 ROOMS 365 HOTELS IN 1,808 HOTELS 1 OWNED AND LEASED 23 MANAGED 1,784 FRANCHISED 156,531 ROOMS 712 HOTELS IN DEVELOPMENT PIPELINE DEVELOPMENT PIPELINE DEVELOPMENT PIPELINE DEVELOPMENT PIPELINE The industry’s first branded boutique hotel, aimed at style-conscious guests who want peaceful and affordable luxury. A high-end brand offering guests a home from home for extended hotel stays. The brand will develop outside the US in 2008. Studios and one-bedroom suites offer convenience and comfort for guest stays of a week or longer. Our award-winning rewards programme is the world's largest hotel loyalty scheme, offering unrivalled incentives to choose our hotels. 11 HOTELS 2 MANAGED 9 FRANCHISED 1,501 ROOMS 52 HOTELS IN 122 HOTELS 2 OWNED AND LEASED 41 MANAGED 79 FRANCHISED 13,466 ROOMS 157 HOTELS IN 158 HOTELS 78 MANAGED 80 FRANCHISED 16,825 ROOMS 207 HOTELS IN DEVELOPMENT PIPELINE DEVELOPMENT PIPELINE DEVELOPMENT PIPELINE 37 MILLION MEMBERS WORLDWIDE PRIORITY CLUB REWARDS WEBSITES IN NINE LANGUAGES 4 IHG Annual Report and Financial Statements 2007 Business review In this section we present an overview of our business, including the markets in which we work, our strategy, activities, resources and operating environment. We also describe the development and financial performance of the business during 2007, main trends and factors impacting the business, together with environmental and employee matters. Business overview 6 6 Market and competitive environment 7 8 8 Strategy Operating model Business relationships 9 People 11 12 12 12 13 13 14 16 18 19 20 20 20 20 20 20 20 20 20 21 21 22 Corporate responsibility Group performance Group results Total gross revenues Global hotel and room count Global pipeline The Americas Europe, Middle East and Africa Asia Pacific Central Other financial information Exceptional operating items Net financial expenses Taxation Earnings per share Dividends Share price and market capitalisation Cash flow Capital structure and liquidity management Asset disposal programme Return of funds programme Risk management I B U S N E S S R E V I E W I B U S N E S S R E V I E W The IHG brands and Business review 5 Business review This Business Review provides a commentary on the performance of InterContinental Hotels Group PLC (the Group or IHG) for the financial year ended 31 December 2007. Business overview Market and competitive environment Global room capacity The global hotel market has an estimated room capacity of 18 million rooms. Room capacity has grown at approximately 3% per annum over the last five years. Competitors in the market include other large hotel companies and independently owned hotels. The market remains fragmented, with an estimated seven million branded hotel rooms (approximately 40% of the total market). IHG has an estimated 8% share of the branded market (approximately 3% of the total market). The top six major companies, including IHG, together control approximately 38% of the branded rooms, only 15% of total hotel rooms. Geographically, the market is more concentrated with the top 20 countries accounting for 80% of global hotel rooms. Within this, the United States (US) is dominant (more than 25% of global hotel rooms) with China, Japan and Italy being the next largest markets. The Group’s brands have a leadership position (top three by room numbers) in each of the six largest geographic markets, a greater representation than any other major hotel company. Drivers of growth US market data indicates a steady increase in hotel industry revenues, broadly in line with Gross Domestic Product, with growth of approximately 1% to 1.5% per annum in real terms since 1967, driven by a number of underlying trends: • change in demographics – as the population ages and becomes wealthier, increased leisure time and income encourages more travel and hotel visits; • increase in travel volumes as low cost airlines grow rapidly; • globalisation of trade and tourism; • increase in affluence and freedom to travel within the Chinese middle class; and • increase in the preference for branded hotels amongst consumers. Branded v unbranded 2006 branded hotel rooms by region as a percentage of the total market US Europe, Middle East and Africa (EMEA) Asia Pacific Source: IHG Analysis, Northstar Travel Management. 67% 35% 28% Within the global market, a relatively low proportion of hotel rooms are branded; however, there has been an increasing trend towards branded rooms. Branded companies are therefore gaining market share at the expense of unbranded companies. IHG is well positioned to benefit from this trend. Hotel owners are increasingly recognising the benefits of working with a group such as IHG which can offer a portfolio of brands to suit the different real estate opportunities an owner may have, together with effective revenue delivery through global reservation channels. Furthermore, hotel ownership is increasingly being separated from hotel operations, encouraging hotel owners to use third parties such as IHG to manage or franchise their hotels. Other factors Potential negative trends impacting hotel industry growth include increased terrorism, environmental considerations and economic factors such as high oil prices, risk of recession and global credit restrictions. Supply growth in the industry is cyclical, averaging between zero and 5% per annum historically. The Group’s fee-based profit is partly protected from changes of supply due to its model of third-party ownership of hotels under IHG management and franchise contracts. 6 IHG Annual Report and Financial Statements 2007 Strategy IHG’s ambition IHG seeks to deliver enduring top quartile shareholder returns, when measured against a broad global hotel peer group. IHG’s strategy The Group’s underlying strategy is that by putting the guest first, IHG will grow a portfolio of differentiated hospitality brands in core strategic countries and global key cities to maximise our scale advantage. With a clear target for room growth and a number of brands with market premiums offering excellent returns for owners, the Group is well placed to execute the following strategic priorities: Strategic priorities Key performance indicators (KPIs) v 2006* Current status and 2007 developments 2008 priorities • Global revenue per available • Relaunch of Holiday Inn room (RevPAR) growth 6.9%; and brand family; Brand performance To operate a portfolio of brands attractive to both owners and guests that have clear market positions and differentiation in the eyes of the guest. Excellent hotel returns To generate higher owner returns through revenue delivery and improved operating efficiency. Market scale and knowledge To accelerate profitable growth in the largest markets where the Group currently has scale. Aligned organisation To create a more efficient organisation with strong core capabilities. • RevPAR growth premiums to respective key market segments** (% pt increase) + 4.4 InterContinental US + 1.0 Holiday Inn US + 0.7 Holiday Inn Express US + 3.5 InterContinental EMEA + 0.3 Holiday Inn and Holiday Inn Express UK. • Total gross revenue (TGR) growth 17.1%; • Continuing operating profit margin growth 1.4% pts; • Priority Club Rewards (PCR) membership growth 17.6%; and • Return on capital employed (ROCE) increased by 4% pts to 7% for IHG’s flagship InterContinental hotels (New York, London Park Lane, Paris Le Grand and Hong Kong). • Progress against 2008 growth targets, set in June 2005: – 47,419 net room growth; – 81 hotels in China; and – 13 net InterContinental hotel additions. • Roll-out of the Holiday Inn brand family relaunch; and • Define and roll-out Hotel Indigo internationally and continue to build scale in the US. I B U S N E S S R E V I E W I B U S N E S S R E V I E W • International launch of Staybridge Suites; and • InterContinental positioning continued to gain ground, with advertising driving a material change in consumer ‘intent to stay’, up 10% in the year. • Increased revenue delivery through IHG global reservation channels by 19.3% to $6.8bn of global system room revenue in 2007, including $2.6bn from the internet; • Industry leading PCR loyalty programme with 37 million members, contributing $5.2bn of global system room revenue, an increase of 16.3%; and • Strong web presence: holidayinn.com is the industry’s most visited site, with around 75 million site visits per annum; new InterContinental website launch. • Integrate reservation channels to provide a seamless and differentiated experience for guests; • Drive more value from the IHG loyalty programme initiatives; and • Implement technology upgrades across guest insight, owner insight and revenue delivery systems. • Significant progress against • Achieve 2008 growth targets: 2008 growth targets; • TGR growth in US 8.5%, UK 22.4%, China 31.0%, Japan 269.9%; and • 90% of pipeline focused on core strategic countries. – 50,000-60,000 net room growth; – 125 hotels in China; – 15-25 net InterContinental hotel additions; and • Execute agreed strategies for core strategic countries. • Align organisation behind core purpose of Great Hotels Guests Love; and • Increase investment in key countries to compete for talent. Business review 7 • 2007 employee engagement of 65%, as defined on page 10 of this Report. • Defined ‘core purpose’ for the organisation – Great Hotels Guests Love; • Continued to strengthen IHG’s senior management team with new regional and functional appointments; and • Created Winning Ways and Room to be yourself initiatives, as explained on page 9 of this Report, resulting in increased employee engagement. * KPIs v 2006 unless stated otherwise. ** Source: STR, Deloitte Business review continued Operating model Global room count by ownership type at 31 December 2007 Owned and leased Managed Franchised Continuing operating profit* by ownership type at 31 December 2007 Owned and leased Managed Franchised * Before regional and central overheads, exceptional items, interest and tax. IHG’s future growth will be achieved predominantly by managing and franchising rather than owning hotels. Approximately 580,000 rooms operating under Group brands are managed or franchised. The managed and franchised fee-based model is attractive because it enables the Group to achieve its goals with limited capital investment at an accelerated pace. For this reason, the Group has executed a disposal programme for most of its owned hotels, releasing capital and enabling the return of funds to shareholders as well as targeted investment in the business. A key characteristic of the managed and franchised business is that it generates more cash than is required for investment in the business, with a high return on capital employed. Currently 86% of continuing earnings before regional and central overheads, exceptional items, interest and tax is derived from managed and franchised operations. Business relationships IHG maintains effective relationships across all aspects of its operations. The Group’s operations are not dependent upon any single customer, supplier or hotel owner due to the extent of its brands, market segments and geographical coverage. For example, IHG’s largest third-party hotel owner controls less than 4% of the Group’s total room count. To promote effective owner relationships, the Group’s management meets with owners on a regular basis. In addition, IHG has an important relationship with the IAHI – The Owners’ Association. The IAHI is an independent worldwide association for owners of the Crowne Plaza, Holiday Inn, Holiday Inn Express, Hotel Indigo, Staybridge Suites and Candlewood Suites brands. IHG and the IAHI work together to support and facilitate the continued development of IHG’s brands and systems, with specific emphasis during 2007 on the relaunch of the Holiday Inn brand family. Additionally, IHG and the IAHI began working together to develop and facilitate key Corporate Responsibility (CR) initiatives within the IHG brands. Many jurisdictions and countries regulate the offering of franchise agreements and recent trends indicate an increase in the number of countries adopting franchise legislation. As a significant percentage of the Group’s revenue is derived from franchise fees, the Group’s continued compliance with franchise legislation is important to the successful deployment of the Group’s strategy. 8 IHG Annual Report and Financial Statements 2007 People IHG directly employed an average of 10,366 people worldwide during 2007. When the managed and franchised hotels are included, approximately 315,000 people are employed globally across IHG's brands. Unless otherwise stated, any data in this section relates to the people directly employed by IHG and those who work in managed hotels, in total approximately 93,000 people. Culture of Winning Ways Winning Ways, a set of behaviours that define how IHG interacts with guests, colleagues and hotel owners was developed in 2006 and integrated into the business in 2007. IHG’s people have embraced these behaviours with enthusiasm and creativity worldwide. They are as follows: Do the right thing We aim to do what we believe is right and have the courage and conviction to put it into practice. We are honest and straightforward and see our decisions through. Show we care We want to be a company that understands people’s needs better than anyone else in our industry. This means being sensitive to others, noticing the things that matter and taking responsibility for getting things right. Defining IHG’s commitment to our people While Winning Ways define what is expected from all employees at IHG, the Group also developed standards that characterise what employees can expect from IHG. Four promises encompass the IHG commitment, internally called Room to be yourself and describe the work environment that employees can rely on at IHG. Talent management focus To meet the demands of growth and to deliver IHG’s core purpose, Great Hotels Guests Love, IHG implements an ongoing talent management agenda. In 2007, this strategy was manifested in key programmes designed to attract, retain, and inspire employees across the owned and managed hotel portfolio, corporate offices, and reservation centres. These programmes focus on fulfilling expectations, developing skills and leadership, providing competitive rewards and benefits, measuring progress, celebrating diversity, leveraging technology and ensuring safety. IHG made progress in every category in 2007. Strengthening leadership IHG has a number of development programmes in place to support leaders in hotels and corporate offices to deliver Great Hotels Guests Love. These include the assessment of individual potential and capability, along with clarity on expectations and business-related education. In 2007, IHG launched the third stage of its senior leadership programme, concentrating on the role leaders play in driving performance and results through people. I B U S N E S S R E V I E W I B U S N E S S R E V I E W We aim to be acknowledged industry leaders, and have built a team of talented people who have the will to be the best. We strive for success and we value individuals who are always looking for better ways to do things. The succession planning process for key senior leadership roles was reviewed and refined, enabling IHG to manage proactively changes in leadership. As part of this review, several key appointments were made, demonstrating the strength and depth in IHG’s senior management team. Aim higher Celebrate difference We believe it is the knowledge of our people that brings our brands to life. We do not impose a rigid, uniform view of the world. Our global strength comes from celebrating local differences, while knowing that some things should be the same. Work better together We are at our best when we collaborate to form a powerful team. We listen to each other and combine our expertise to create a strong, focused, supportive and trusted team of people. The following senior appointments were made in 2007: • the appointment of Ms Ying Yeh as an additional independent Non-Executive Director of IHG, effective 1 December 2007; • the internal appointment of Peter Gowers as President of the Asia Pacific region, effective 1 November 2007; • the internal appointment of Kirk Kinsell as President of the EMEA region and member of the Executive Committee, effective 1 September 2007, succeeding outgoing President and Board Member, Richard Hartman, who retired on 25 September 2007; and • the external appointment of Tom Seddon as Chief Marketing Officer and member of the Executive Committee, effective 1 November 2007. Biographical details of the above are set out on pages 26 and 27 of this Report. Business review 9 Business review continued Communicating and measuring progress Great emphasis is placed on employee communication, particularly on matters relating to the Group’s business and its performance. Communication channels include global management conferences, team meetings, informal briefings, in-house publications and intranets. Regular employee feedback is obtained to ensure that IHG meets expectations and delivers on its commitments. The Group conducts a twice-yearly survey that measures employee opinion and attitudes. This survey covers employees in owned and managed hotels, corporate offices and reservation centres. The first survey in 2007 achieved a very high response rate of 83%, with over 77,500 employees participating. IHG’s key measure is the engagement index. This is constructed from a set of questions which measure advocacy, retention and effort. During 2007, IHG’s engagement index improved by 5 percentage points to 65%. The survey also reported that nine out of 10 people are proud to work for IHG and 84% of employees would recommend IHG as a good place to work, a figure that is 10 percentage points higher than external benchmark data (source: TNS). The survey highlights that initiatives undertaken during the year on Winning Ways and Room to be yourself are strongly correlated to employee engagement. Continuing skills development During the year, IHG continued to place importance on the growth and development of its people in the owned and managed hotels, and within its corporate and reservation offices, and ensured training programmes were available to all of its employees. The Group’s internal surveys indicate that the majority of employees agree that IHG delivers training to assist with both current roles and future skills development. Rewarding people by offering competitive compensation and benefits IHG’s compensation and benefits programmes are designed to be competitive and to recognise and reward achievement. The benefits offered to employees vary according to region. IHG contributes to both mandatory and company-sponsored retirement plans to ensure benefits are competitive within each local market. The majority of employees believe they are fairly paid for the work they do. Leveraging technology IHG is leveraging technology to improve communications and engagement with employees. In 2007, the Group introduced an upgraded corporate intranet site, ‘Merlin’, which provides continuous access to people information, policies and news. A best-in-class recruitment management system, e-Careers, reduces time to access and hire the most qualified candidates. Ensuring health and safety IHG applies high standards of health and safety equally to all employees and guests. The Group strives to provide and maintain a safe environment for all employees, customers and other visitors to its premises and to comply with relevant health and safety legislation. Further details can be found in the Corporate Reputation section of the Annual Review and Summary Financial Statement 2007 and in the online CR Report at www.ihg.com/responsibility Celebrating diversity IHG benefits from the diversity of its employees, owners, business partners and guests. The Group regards diversity as a fundamental factor in its success in operating as a global organisation and this principle is embedded in IHG’s Winning Ways. The Group is committed to providing equality of opportunity to all employees without discrimination and continues to be supportive of the employment of disabled persons. Where existing employees become disabled, it is the Group’s policy to provide continuing employment wherever practical in the same or an alternative position. Code of Ethics Among the Group’s core values is the concept that all employees should have the courage and conviction to do what is right. The Group’s global Code of Ethics and Business Conduct consolidates and clarifies expected standards of behaviour and communicates the ethical values of the Group. The code is applicable to all employees and is available on the Company's website at www.ihg.com/corporate 10 IHG Annual Report and Financial Statements 2007 Corporate responsibility IHG is committed to integrating CR into its business. The table below outlines IHG’s overall CR priorities, developments during the year and priorities for 2008. Further details on IHG’s CR activities can be found on the website, www.ihg.com/responsibility, including IHG’s online CR Report and in the Annual Review and Summary Financial Statement 2007. CR priorities Building the base for delivery Engaging hotels and brands Aligning global environmental initiatives 2007 developments 2008 priorities • Established a steering group of senior IHG executives; • Monitor performance of • Developed a CR strategy in light of stakeholder feedback on responsible tourism and the need to respect local communities; • Integrated the CR strategy with IHG’s corporate objectives; • Agreed CR priorities which include engaging IHG hotels and brands, aligning IHG’s global environmental initiatives and supporting local communities; and • Improved internal and external communication including an online CR Report. steering group members on agreed 2008 objectives; and • Periodically update the online CR Report, in line with widely accepted CR guidelines. I B U S N E S S R E V I E W I B U S N E S S R E V I E W • Commenced major consumer insight research project • Complete consumer insight with focus groups conducted in the US and the UK; • Created an online Innovation Hotel resource to engage corporate clients and guests; • Commenced integration of CR considerations into brand strategies, including the design of an environmentally-friendly prototype which requires less construction materials; and • Developed and distributed best practice CR guides to hotels and owners. research and consider appropriate application; • Further integrate CR strategy in the brand planning process; and • Ensure best practice guides are made available to all hotels and owners. • Piloted an online tool which will enable IHG to measure • Roll-out the online tool to at its water, waste and energy across the globe; • Completed a carbon and environmental footprint, the first by a major hotel group; • Distributed compact fluorescent light bulbs as replacements for incandescent bulbs. It is estimated that this initiative will result in over $2m of annual energy savings; and • Implemented a range of environmental initiatives at IHG’s corporate offices, including recycling and improved waste management. least 70% of owned and managed hotels by the end of 2008; • Review footprint data in context of the overall CR strategy and consider appropriate targets for energy reduction; and • Expand CR activities at IHG’s corporate head offices. Supporting local communities • IHG has a long tradition of community support which is • Increase visibility of community continuing to evolve. During 2007, all hotel general managers were surveyed for details of activities undertaken, both in terms of cash and in kind, to support their local communities. Based on the results of the survey, it is estimated that IHG hotels provided more than $14m during 2007. support data. Business review 11 Business review continued Group performance Group results Revenue Americas EMEA Asia Pacific Central Continuing operations Discontinued operations Operating profit Americas EMEA Asia Pacific Central Continuing operations Discontinued operations Operating profit before exceptional items Exceptional operating items Operating profit Net financial expenses Profit before tax* Analysed as: Continuing operations Discontinued operations Earnings per ordinary share 12 months ended 31 December 2007 £m 450 245 130 58 883 40 923 220 67 31 (81) 237 8 245 30 275 (45) 230 222 8 2006 £m 422 198 111 55 786 174 960 215 37 29 (81) 200 31 231 27 258 (11) 247 216 31 Revenue from continuing operations increased by 12.3% to £883m and continuing operating profit increased by 18.5% to £237m during the 12 months ended 31 December 2007. The growth was driven by strong underlying RevPAR gains across all regions, hotel expansion in key markets and profit uplift from owned and leased assets. Furthermore, strong revenue conversion led to a 1.4 percentage point increase in continuing operating profit margins to 26.8%. Including discontinued operations, total revenue decreased by 3.9% to £923m whilst operating profit before exceptional items increased by 6.1% to £245m, reflecting the year-on-year impact of asset disposals. Discontinued operations represent the results from operations that have been sold, or are held for sale, and where there is a coordinated plan to dispose of the operations under IHG’s asset disposal programme. In this Business Review, discontinued operations include owned and leased hotels in the US, the UK and Continental Europe that have been sold or placed on the market from 1 January 2006. As the weighted average US dollar exchange rate to sterling has weakened during 2007 (2007 $2.01:£1, 2006 $1.84:£1), growth rates for results expressed in US dollars are higher than those in sterling. Continuing operating profit before exceptional items was $474m, ahead of 2006 by 29.2%. Including discontinued operations, operating profit before exceptional items was $491m, 15.8% higher than 2006. Translated at constant currency, applying 2006 exchange rates, continuing revenue increased by 19.6% and continuing operating profit increased by 30.0%. % change 6.6 23.7 17.1 5.5 12.3 (77.0) (3.9) 2.3 81.1 6.9 – 18.5 (74.2) 6.1 11.1 6.6 (309.1) (6.9) 2.8 (74.2) (30.6) 12.8 23.4 72.2p Basic 48.4p Adjusted Adjusted – continuing operations 46.9p 104.1p 42.9p 38.0p * Profit before tax includes the results of discontinued operations. Total gross revenues InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Other brands Total 12 months ended 31 December 2007 $bn 3.7 2.8 6.7 3.5 1.1 17.8 2006 $bn 3.0 2.3 6.3 3.0 0.6 15.2 % change 23.3 21.7 6.3 16.7 83.3 17.1 12 IHG Annual Report and Financial Statements 2007 One measure of overall IHG hotel system performance is the growth in total gross revenue, defined as total room revenue from franchised hotels and total hotel revenue from managed, owned and leased hotels. Total gross revenue is not revenue attributable to IHG, as it is derived mainly from hotels owned by third parties. Total gross revenue increased by 17.1% from $15.2bn in 2006 to $17.8bn in 2007, with strong growth levels achieved across IHG’s key brands reflecting hotel performance and room growth. Translated at constant currency, total gross revenue increased by 14.5%. Global hotel and room count 2007 At 31 December Analysed by brand 149 InterContinental 299 Crowne Plaza 1,381 Holiday Inn Holiday Inn Express 1,808 122 Staybridge Suites 158 Candlewood Suites 11 Hotel Indigo 21 Other 3,949 Total Analysed by ownership type Owned and leased Managed Franchised Total 18 539 3,392 3,949 Hotels Change over 2006 1 24 (14) 122 25 28 5 17 208 (7) 27 188 208 Global pipeline At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Staybridge Suites Candlewood Suites Hotel Indigo Other 62 118 365 712 157 207 52 1 1,674 Total Analysed by ownership type Managed Franchised Total 247 1,427 1,674 Global pipeline signings Hotels Change over 2006 2007 26 58 66 138 37 79 28 1 433 108 325 433 2007 50,762 83,170 256,699 156,531 13,466 16,825 1,501 6,140 585,094 6,396 134,883 443,815 585,094 2007 20,013 36,362 56,945 70,142 17,150 18,605 6,565 90 225,872 71,814 154,058 225,872 At 31 December Total Hotels Change over 2006 156 2007 873 2007 125,533 During 2007, the IHG global system (the number of hotels and rooms which are owned, leased, managed or franchised by the Group) increased by 208 hotels (28,848 rooms, or 5.2%) to 3,949 hotels (585,094 rooms). The record growth level was driven, in particular, by continued expansion in the US, the UK, China and Japan, resulting in openings of 366 hotels (52,846 rooms). Holiday Inn Express represented 58.7% of the net hotel growth, demonstrating strong market demand in the midscale, limited service sector. The extended stay portfolio, comprising Staybridge Suites and Candlewood Suites hotels, expanded by 53 hotels (5,189 rooms), indicating owner confidence in this sector. The net decline in the Holiday Inn hotel and room count (14 hotels and 3,771 rooms) primarily reflects IHG’s continued strategy to reinvigorate the Holiday Inn brand through the removal of lower quality, non-brand conforming hotels in the US. This strategy is further supported by the worldwide brand relaunch of the Holiday Inn brand family, announced in October 2007, which entails the consistent delivery of best-in-class service and physical quality in all Holiday Inn and Holiday Inn Express hotels. I B U S N E S S R E V I E W I B U S N E S S R E V I E W At the end of 2007, the IHG pipeline (contracts signed for hotels and rooms yet to enter the IHG global system) totalled 1,674 hotels (225,872 rooms). In the year, record room signings across all regions of 125,533 rooms led to pipeline growth of 67,881 rooms (or 43.0%). This level of growth demonstrates strong demand for IHG brands across all regions and represents a key driver of future profitability. Rooms Change over 2006 1,163 7,538 (3,771) 12,949 2,513 2,676 608 5,172 28,848 (2,064) 9,669 21,243 28,848 Rooms Change over 2006 6,802 19,249 12,171 14,622 4,545 6,882 3,520 90 67,881 30,166 37,715 67,881 Rooms Change over 2006 22,759 Business review 13 Business review continued The Americas Americas results 12 months ended 31 December Revenue Owned and leased Managed Franchised Continuing operations Discontinued operations* Total Sterling equivalent $m £m 2007 $m 257 156 489 902 62 964 481 Owned and leased Managed Franchised Operating profit before exceptional items 40 41 425 506 (66) 440 16 456 Regional overheads Continuing operations Discontinued operations* Total $m Sterling equivalent £m 228 * Discontinued operations are all owned and leased. 2006 $m 192 143 443 778 74 852 463 22 50 382 454 (59) 395 12 407 221 % change 33.9 9.1 10.4 15.9 (16.2) 13.1 3.9 81.8 (18.0) 11.3 11.5 (11.9) 11.4 33.3 12.0 3.2 Americas comparable RevPAR movement on previous year 12 months ended 31 December 2007 Owned and leased InterContinental Managed InterContinental Crowne Plaza Holiday Inn Staybridge Suites Candlewood Suites Franchised Crowne Plaza Holiday Inn Holiday Inn Express 10.6% 10.8% 7.2% 7.7% 2.0% 3.4% 7.6% 4.7% 6.7% 14 IHG Annual Report and Financial Statements 2007 Revenue and operating profit from continuing operations increased by 15.9% to $902m and 11.4% to $440m respectively. Discontinued operations include the results of hotels sold during 2006 and 2007, together with two hotels currently on the market for disposal. Including discontinued operations, revenue increased by 13.1% whilst operating profit increased by 12.0%. The region achieved healthy RevPAR growth across all ownership types and RevPAR premiums to the US market segments for hotels operating under InterContinental, Crowne Plaza, Holiday Inn and Holiday Inn Express brands. During the fourth quarter, consistent with the US market, the region was impacted by a marginal softening in RevPAR growth due to a slight decline in occupancy levels. Continuing owned and leased revenue increased by 33.9% to $257m and operating profit increased by 81.8% to $40m. Positive underlying trading was driven by RevPAR growth of 9.7%, led by the InterContinental brand with growth of 10.6%. The results were favourably impacted by trading performance at the InterContinental Boston which became fully operational during the first half of the year (year-on-year profit increase of $11m) and trading at the InterContinental New York where robust market conditions lifted average occupancy levels to over 90%. Managed revenues increased by 9.1% to $156m during the year, driven by strong RevPAR growth, particularly in Latin America where rate-led RevPAR growth exceeded 20%. Robust brand performance resulted in RevPAR growth premiums, compared to respective US market segments, for InterContinental, Crowne Plaza and Holiday Inn. Growth in the extended stay segment was impacted by an increase in market supply. Managed revenues included $86m (2006 $80m) from properties that are structured, for legal reasons, as operating leases but with the same characteristics as management contracts. Managed operating profit decreased by 18.0% to $41m, including $6m (2006 $9m) from managed properties held as operating leases. The decline in profit principally reflects increased revenue investment to support growth in contract signings, the impact of fewer hotels under management contracts following the restructuring of the FelCor agreement in 2006, foreign exchange losses in Latin America and lower ancillary revenues together with higher costs at one of the hotels held as an operating lease. These items reduced operating profit margins in the managed estate by 8.7 percentage points to 26.3% and reduced continuing operating profit margins in the region by 2.0 percentage points to 48.8%. Franchised revenue and operating profit increased by 10.4% to $489m and 11.3% to $425m respectively, compared to 2006. The increase was driven by RevPAR growth of 5.8%, net room count growth of 4.0% and fees associated with growth in signings. Regional overheads were affected positively in 2006 by lower claims in the Group-funded employee healthcare programme. Excluding this, regional overheads were in line with the prior period. Americas hotel and room count 2007 At 31 December Analysed by brand 50 InterContinental 172 Crowne Plaza 952 Holiday Inn Holiday Inn Express 1,615 122 Staybridge Suites 158 Candlewood Suites 11 Hotel Indigo 3,080 Total Analysed by ownership type Owned and leased Managed Franchised Total 11 193 2,876 3,080 Hotels Change over 2006 1 17 (35) 109 25 28 5 150 (2) 4 148 150 Hotels Change over 2006 2007 Americas pipeline At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Staybridge Suites Candlewood Suites Hotel Indigo 8 37 265 614 147 207 52 1,330 Total Analysed by ownership type Managed Franchised Total 21 1,309 1,330 2 13 53 111 32 79 28 318 7 311 318 The Americas hotel and room count grew by 150 hotels (13,950 rooms) to 3,080 hotels (408,859 rooms). The growth included openings of 274 hotels (31,744 rooms) led by continued demand for Holiday Inn Express of 156 hotels (13,908 rooms). Franchised hotels contributed over 98% of net growth, reflecting the sustained demand for the franchised model. Net growth also included removals of 124 hotels (17,794 rooms), of which Holiday Inn hotels represented 54.0% (69.2% of rooms). I B U S N E S S R E V I E W I B U S N E S S R E V I E W The Americas pipeline continued to achieve high growth levels and totalled 1,330 hotels (141,157 rooms) at 31 December 2007. During the year, 75,279 room signings were completed, compared with 61,673 room signings in 2006. These signing levels outpaced the prior year as demand for Holiday Inn and Holiday Inn Express continued to accelerate. Furthermore, the extended stay brands, Staybridge Suites and Candlewood Suites, contributed 24.3% of the region’s room signings. Rooms Change over 2006 99 5,289 (8,068) 10,833 2,513 2,676 608 13,950 (650) 439 14,161 13,950 Rooms Change over 2006 787 3,197 6,463 10,729 3,894 6,882 3,520 35,472 1,251 34,221 35,472 2007 16,624 47,893 177,999 134,551 13,466 16,825 1,501 408,859 4,029 39,696 365,134 408,859 2007 3,722 9,036 33,029 54,279 15,921 18,605 6,565 141,157 4,961 136,196 141,157 Business review 15 Revenue and operating profit from continuing operations increased by 23.7% to £245m and 81.1% to £67m respectively. Including discontinued operations, revenue decreased by 23.3% whilst operating profit increased by 8.1%, reflecting the impact of hotels sold and converted to management and franchise contracts over the past two years. During the year, the region achieved RevPAR growth of 8.6% driven by substantial gains across all brands and ownership types. From a regional perspective, RevPAR levels benefited from the positive market conditions in the Middle East, France and the UK. The region’s continuing operating profit margins increased by 8.6 percentage points to 27.3% as a result of improved revenue conversion in the owned and leased portfolio and increased scalability in the franchised operations. In the owned and leased estate, continuing revenue increased by 31.5% to £121m as a result of trading at the InterContinental London Park Lane which became fully operational during the first half of 2007, together with strong rate-led RevPAR growth at the InterContinental Paris Le Grand. Effective revenue conversion led to an increase in continuing operating profit of £21m to £17m, including operating profit growth of £14m at the InterContinental London Park Lane. EMEA managed revenues increased by 18.3% to £84m and operating profit increased by 16.2% to £43m. The growth was driven by management contracts negotiated in 2006 as part of the hotel disposal programme in Europe and strong underlying trading in markets such as the Middle East, the UK, Spain and Russia. Franchised revenue and operating profit increased by 14.3% to £40m and 20.8% to £29m respectively. The growth was principally driven by RevPAR gains and room count expansion in the UK and Continental Europe. Business review continued Europe, Middle East and Africa EMEA results 12 months ended 31 December Revenue Owned and leased Managed Franchised Continuing operations Discontinued operations* Total £m Dollar equivalent $m 2007 £m 121 84 40 245 9 254 509 Owned and leased Managed Franchised Operating profit before exceptional items 17 43 29 89 (22) 67 – 67 Regional overheads Continuing operations Discontinued operations* Total £m 2006 £m 92 71 35 198 133 331 608 (4) 37 24 57 (20) 37 25 62 % change 31.5 18.3 14.3 23.7 (93.2) (23.3) (16.3) 525.0 16.2 20.8 56.1 (10.0) 81.1 – 8.1 Dollar equivalent $m 135 114 18.4 * Discontinued operations are all owned and leased. EMEA comparable RevPAR movement on previous year Owned and leased InterContinental All ownership types UK Continental Europe Middle East 12 months ended 31 December 2007 14.0% 6.2% 7.6% 19.6% 16 IHG Annual Report and Financial Statements 2007 Hotels Change over 2006 2007 Hotels Change over 2006 2007 EMEA hotel and room count At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Total Analysed by ownership type Owned and leased Managed Franchised Total 5 171 475 651 EMEA pipeline At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Staybridge Suites Other Total Analysed by ownership type Managed Franchised Total 70 117 187 62 72 335 182 651 24 25 51 76 10 1 187 (4) 4 18 10 28 (5) (3) 36 28 14 10 (3) 17 5 1 44 31 13 44 Rooms Change over 2006 (1,411) 886 2,214 1,271 2,960 (1,414) (1,602) 5,976 2,960 Rooms Change over 2006 3,411 2,631 1,728 2,321 651 90 10,832 7,514 3,318 10,832 2007 20,012 17,326 52,842 19,380 109,560 1,674 39,073 68,813 109,560 2007 5,960 6,298 9,546 9,766 1,229 90 32,889 15,203 17,686 32,889 During 2007, EMEA hotel and room count increased by 28 hotels (2,960 rooms) to 651 hotels (109,560 rooms). The net growth included the opening of 55 hotels (7,956 rooms) and the removal of 27 hotels (4,996 rooms). System growth was led by openings in the UK of 22 hotels (2,522 rooms). Holiday Inn was the largest contributor of room openings, adding over 50% of the region’s total. I B U S N E S S R E V I E W I B U S N E S S R E V I E W The pipeline in EMEA increased by 44 hotels (10,832 rooms) to 187 hotels (32,889 rooms). The growth included a record level of 19,153 room signings, driven by exceptional demand in the Middle East, particularly in the United Arab Emirates and Saudi Arabia. Across the region, sustained demand for the Holiday Inn brand led to 6,004 room signings during the year whilst the region also experienced a significant increase in room signings for the InterContinental and Crowne Plaza brands. The EMEA pipeline included 10 Staybridge Suites hotels (1,229 rooms), of which the first hotels are expected to open in the UK and the Middle East during 2008. Business review 17 Business review continued Asia Pacific Asia Pacific results 12 months ended 31 December Revenue Owned and leased Managed Franchised Total Sterling equivalent $m £m 2007 $m 145 99 16 260 130 Owned and leased Managed Franchised Operating profit before exceptional items 36 46 6 88 (25) 63 Regional overheads Total $m Sterling equivalent £m 31 2006 $m 131 65 8 204 111 31 39 5 75 (23) 52 29 % change 10.7 52.3 100.0 27.5 17.1 16.1 17.9 20.0 17.3 (8.7) 21.2 6.9 Asia Pacific comparable RevPAR movement on previous year 12 months ended 31 December 2007 Asia Pacific revenue increased by 27.5% to $260m whilst operating profit increased by 21.2% to $63m. The region achieved strong RevPAR growth across all brands and ownership types and continued its strategic expansion in China and Japan. Strong growth in total profit was achieved; however, revenue conversion was impacted by continued investment to support expansion, resulting in a 1.3 percentage point reduction in operating profit margins to 24.2%. In the owned and leased estate, revenue increased by 10.7% to $145m due to the combined impact of strong room and food and beverage trading at the InterContinental Hong Kong, despite the impact of renovation works throughout a significant part of the year. The hotel’s revenue growth combined with profit margin gains drove the estate’s operating profit growth of 16.1% to $36m. Managed revenues increased by 52.3% to $99m as a result of the full year contribution from the hotels which joined the system in 2006 as part of the IHG ANA joint venture in Japan, continued organic expansion in China and solid RevPAR growth across Southern Asia and Australia. Operating profit increased by 17.9% to $46m as revenue gains were offset by integration and ongoing costs associated with the ANA joint venture and continued infrastructure investment in China. Owned and leased InterContinental All ownership types Greater China 7.3% 7.0% Franchised revenues doubled from $8m to $16m, primarily driven by hotels in the IHG ANA joint venture. Similar to the managed operations, growth in profitability was impacted by ANA integration and ongoing costs. Regional overheads increased by $2m to $25m primarily as a result of investment in technology and corporate infrastructure in China and Japan and included the favourable impact of a legal settlement. 18 IHG Annual Report and Financial Statements 2007 Rooms Change over 2006 2,475 1,363 2,083 845 5,172 11,938 – 10,832 1,106 11,938 Rooms Change over 2006 2,604 13,421 3,980 1,572 21,577 21,401 176 21,577 2007 14,126 17,951 25,858 2,600 6,140 66,675 693 56,114 9,868 66,675 2007 10,331 21,028 14,370 6,097 51,826 51,650 176 51,826 Asia Pacific hotel and room count increased by 30 hotels (11,938 rooms) to 218 hotels (66,675 rooms). The net growth included 16 hotels (7,827 rooms) in Greater China reflecting continued expansion in one of IHG’s strategic markets, together with 15 hotels (3,542 rooms) in Japan that joined the system as part of the IHG ANA joint venture. I B U S N E S S R E V I E W I B U S N E S S R E V I E W The pipeline in Asia Pacific increased by 71 hotels (21,577 rooms) to 157 hotels (51,826 rooms). Demand in the Greater China market continued throughout the year and represented 82.3% of the region’s room signings. From a brand perspective, Crowne Plaza attracted significant interest, contributing over half of the total room signings. 4 3 3 3 17 30 – 26 4 30 10 35 16 10 71 70 1 71 Hotels Change over 2006 2007 Asia Pacific hotel and room count Hotels Change over 2006 2007 37 55 94 11 21 218 30 56 49 22 157 At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Other Total Analysed by ownership type Owned and leased Managed Franchised Total 2 175 41 218 Asia Pacific pipeline At 31 December Analysed by brand InterContinental Crowne Plaza Holiday Inn Holiday Inn Express Total Analysed by ownership type Managed Franchised Total 156 1 157 Central Central results Revenue Gross central costs Net central costs Dollar equivalent £m $m 12 months ended 31 December 2007 £m 58 (139) (81) 2006 £m 55 (136) (81) % change 5.5 (2.2) – (163) (149) (9.4) During 2007, net central costs were flat on 2006 but increased in line with inflation when translated at constant currency exchange rates. Business review 19 Business review continued Other financial information Exceptional operating items Exceptional operating items of £30m included an £18m gain on the sale of financial assets and an £11m gain on the sale of associate investments. Exceptional operating items are treated as exceptional items by reason of their size or nature and are excluded from the calculation of adjusted earnings per share in order to provide a more meaningful comparison of performance. Net financial expenses Net financial expenses increased from £11m in 2006 to £45m in 2007, as a result of higher debt levels following payment of the £709m special dividend in June 2007. Financing costs included £10m (2006 £10m) of interest costs associated with Priority Club Rewards where interest is charged on the accumulated balance of cash received in advance of the redemption points awarded. Financing costs in 2007 also included £9m (2006 £4m) in respect of the InterContinental Boston finance lease. Taxation The effective rate of tax on profit before tax, excluding the impact of exceptional items, was 22% (2006 24%). By also excluding the impact of prior year items, which are included wholly within continuing operations, the equivalent tax rate would be 36% (2006 36%). This rate is higher than the UK statutory rate of 30% due mainly to certain overseas profits (particularly in the US) being subject to statutory rates higher than the UK statutory rate and disallowable expenses. Taxation within exceptional items totalled a credit of £30m (2006 £94m credit) in respect of continuing operations. This represented, primarily, the release of exceptional provisions relating to tax matters which were settled during the year, or in respect of which the statutory limitation period had expired. In 2006, taxation exceptional items, in addition to such provision releases, included £12m for the recognition of a deferred tax asset in respect of tax losses. Net tax paid in 2007 totalled £69m (2006 £49m) including £32m (2006 £6m) in respect of disposals. Earnings per share Basic earnings per share in 2007 were 72.2p, compared with 104.1p in 2006. Adjusted earnings per share were 48.4p, against 42.9p in 2006. Adjusted continuing earnings per share were 46.9p, 23.4% up on last year. Dividends The Board has proposed a final dividend per share of 14.9p; with the interim dividend per share of 5.7p, the normal dividend per share for 2007 will total 20.6p. Share price and market capitalisation The IHG share price closed at 884.0p on 31 December 2007, down from 1262.0p on 31 December 2006. The market capitalisation of the Group at the year end was £2.6bn. 20 IHG Annual Report and Financial Statements 2007 Cash flow The net movement in cash and cash equivalents in the 12 months to 31 December 2007 was an outflow of £131m. This included net cash inflows from operating activities of £232m, net cash overflows from investing activities of £19m and net cash outflows from financing activities of £344m. Key components of investing and financing activities included: • proceeds from the disposal of hotels and equity investments totalled £106m; • capital expenditure totalled £93m and included the completion of the major refurbishment at the InterContinental London Park Lane and the renovation works at the InterContinental Hong Kong; • cash outflows associated with shareholder returns during the year included a special dividend of £709m and share buybacks of £81m; and • increased borrowings of £553m. IHG’s cash flow strategy has focused on reducing capital intensity and returning surplus funds to shareholders. Capital investment in new projects will be made where this creates value by accelerating the development of IHG’s brands. Such investment will be funded largely from the proceeds of hotel and minority shareholding disposals, with the objective of subsequently recycling that capital into other projects. Capital structure and liquidity management Net debt at 31 December 2007 was £825m and included £100m in respect of the finance lease commitment for the InterContinental Boston. Net debt at 31 December Borrowings (including derivatives): Sterling US dollar Euro Other Cash (including derivatives) Excluding fair value of derivatives (net) Net debt Average debt levels Facilities at 31 December Committed Uncommitted Total Interest risk profile of net debt for major currencies (including derivatives) at 31 December At fixed rates At variable rates 2007 £m 275 439 121 48 (58) 825 – 825 536 2007 £m 1,154 25 1,179 2007 % 45 55 2006 £m 102 282 101 48 (403) 130 4 134 92 2006 £m 1,157 39 1,196 2006 % 57 43 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 audit. The treasury function does not operate as a profit centre. The Syndicated Bank Facility contains two financial covenants, interest cover and net debt/earnings before interest, tax, depreciation and amortisation. The Group is in compliance with both covenants, neither of which is expected to represent a material restriction on funding or investment policy in the foreseeable future. Medium and long-term borrowing requirements at 31 December 2007 were met through a £1.1bn Syndicated Bank Facility which matures in November 2009. Short-term borrowing requirements were principally met from drawings under committed and uncommitted bilateral loan facilities. At the year end, the Group had £377m of committed facilities available for drawing. Asset disposal programme Disposed since April 2003 Remaining owned and leased hotels During 2007, IHG achieved further progress with its asset disposal programme, including: • the sale of the Crowne Plaza Santiago for $21m before transaction costs, approximately $9m above net book value. Under the agreement, IHG retained a 10 year franchise contract; • the sale of its 74.11% share of the InterContinental Montreal for £17m before transaction costs, approximately £5m above book value. Under the agreement, IHG retained a 30 year management contract on the hotel; and • the sale of the Holiday Inn Disney, Paris for £14m before transaction costs, approximately £2m above book value. Under the agreement, IHG retained a five year franchise contract. Further information on the Group’s treasury management can be found in note 21 on page 74 in the notes to the Group Financial Statements 2007. I B U S N E S S R E V I E W I B U S N E S S R E V I E W Number of hotels 181 18 Proceeds £3.0bn Net book value £2.9bn £0.9bn These transactions support IHG’s continued strategy of growing its managed and franchised business whilst reducing asset ownership. Since April 2003, 181 hotels with a net book value of £2.9bn have been sold, generating aggregate proceeds of £3.0bn, of which 162 of these hotels remained in the IHG system through the successful negotiation of either management or franchise agreements. During 2007, IHG also divested a number of equity interests of which proceeds totalled £57m, including a 33.3% interest in the Crowne Plaza London The City for £19m and a 15% interest in the InterContinental Chicago for £11m. Return of funds programme £501m special dividend First £250m share buyback £996m capital return Second £250m share buyback £497m special dividend Third £250m share buyback £709m special dividend £150m share buyback Total Timing Paid in December 2004 Completed in 2004 Paid in July 2005 Completed in 2006 Paid in June 2006 Completed in 2007 Paid in June 2007 Under way Total return £501m £250m £996m £250m £497m £250m £709m £150m £3,603m Returned to date £501m £250m £996m £250m £497m £250m £709m £50m £3,503m Still to be returned Nil Nil Nil Nil Nil Nil Nil £100m £100m In the year, IHG paid a £709m special dividend, completed a third £250m share buyback and commenced a £150m share buyback. At the year end, £100m of this buyback was outstanding. Since March 2004, IHG has returned £3.5bn to shareholders. Business review 21 Business review continued Risk management The Group is subject to a variety of risks which could have a negative impact on its performance and financial condition. The Board is responsible for the Group’s system of internal control and risk management, and for reviewing its effectiveness. In order to discharge that responsibility, the Board has established an ongoing process to identify significant business risks facing the Group. The Board also receives assurance from the internal audit and risk management functions that these risks are being appropriately managed, having regard to the balance of risk, cost and opportunity. This section describes some of the risks that could materially affect the Group’s business. The factors below should be considered in connection with any financial and forward-looking information in this Business Review and the cautionary statements contained on page 101. The risks below are not the only ones that the Group faces. Some risks are not yet known to IHG and some that IHG does not currently believe to be material could later turn out to be material. All of these risks could materially affect the Group’s business, revenue, operating profit, earnings, net assets and liquidity and/or capital resources. The Group is reliant on the reputation of its brands and the protection of its intellectual property rights Any event that materially damages the reputation of one or more of the Group’s brands and/or failure to sustain the appeal of the Group’s brands to its customers could have an adverse impact on the value of that brand and subsequent revenues from that brand or business. In addition, the value of the Group’s brands is influenced by a number of other factors, some of which may be outside the Group’s control, including commoditisation (whereby price/quality becomes relatively more important than brand identifications due, in part, to the increased prevalence of third- party intermediaries), consumer preference and perception, failure by the Group or its franchisees to ensure compliance with the significant regulations applicable to hotel operations (including fire and life safety requirements), or other factors affecting consumers’ willingness to purchase goods and services, including any factor which adversely affects the reputation of those brands. In particular, where the Group is unable to enforce adherence to its operating and quality standards, or the significant regulations applicable to hotel operations, pursuant to its management and franchise contracts, there may be further adverse impact upon brand reputation or customer perception and therefore the value of the hotel brands. Given the importance of brand recognition to the Group’s business, the Group has invested considerable effort in protecting its intellectual property, including registration of trademarks and domain names. However, the laws of certain foreign countries in which the Group operates do not protect the Group’s proprietary 22 IHG Annual Report and Financial Statements 2007 rights to the same extent as the laws in the US and the European Union. This is particularly relevant in China where, despite recent improvements in intellectual property rights, the relative lack of protection increases the risk that the Group will be unable to prevent infringements of its intellectual property in this key growth market. Any widespread infringement or misappropriation could materially harm the value of the Group’s brands and its ability to develop the business. The Group is exposed to a variety of risks related to identifying, securing and retaining management and franchise agreements The Group’s growth strategy depends on its success in identifying, securing and retaining management and franchise agreements. Competition with other hotel companies may generally reduce the number of suitable management, franchise and investment opportunities offered to the Group and increase the bargaining power of property owners seeking to engage a manager or become a franchisee. The terms of new management or franchise agreements may not be as favourable as current arrangements and the Group may not be able to renew existing arrangements on the same terms. There can also be no assurance that the Group will be able to identify, retain or add franchisees to the Group system or to secure management contracts. For example, the availability of suitable sites, planning and other local regulations or the availability and affordability of finance may all restrict the supply of suitable hotel development opportunities under franchise or management agreements. There are also risks that significant franchisees or groups of franchisees may have interests that conflict, or are not aligned, with those of the Group including, for example, the unwillingness of franchisees to support brand improvement initiatives. In connection with entering into management or franchise agreements, the Group may be required to make investments in, or guarantee the obligations of, third-parties or guarantee minimum income to third-parties. Changes in legislation or regulatory changes may be implemented that have the effect of favouring franchisees relative to brand owners. The Group is exposed to the risks of political and economic developments The Group is exposed to the risks of global and regional adverse political, economic and financial market developments, including recession, inflation and currency fluctuations that could lower revenues and reduce income. A recession in one country or more widely tends to reduce leisure and business travel to and from affected countries and would adversely affect room rates and/or occupancy levels and other income-generating activities resulting in deterioration of results of operations and potentially reducing the value of properties in affected economies. The owners or potential owners of hotels managed or franchised by one group face similar risks which could adversely affect IHG’s ability to secure management or franchise agreements. More specifically, the Group is highly exposed to the US market and, accordingly, is particularly susceptible to adverse changes in the US economy. Further political or economic factors or regulatory action could effectively prevent the Group from receiving profits from, or selling its investments in, certain countries, or otherwise adversely affect operations. For example, changes to tax rates or legislation in the jurisdictions in which the Group operates could decrease the proportion of profits the Group is entitled to retain, or the Group’s interpretation of various tax laws and regulations may prove to be incorrect, resulting in higher than expected tax charges. In addition, fluctuations in currency exchange rates between sterling, the currency in which the Group reports its financial statements, and the US dollar and other currencies in which the Group’s international operations or investments do business, could adversely affect the Group’s reported earnings and the value of its business. Fluctuations of this type have been experienced over recent years with the significant strengthening of sterling against the US dollar. As the majority of the Group’s profits are generated in the US, such fluctuations may have a significant impact on the Group’s reported results. The Group is dependent upon recruiting and retaining key personnel and developing their skills In order to develop, support and market its products, the Group must hire and retain highly skilled employees with particular expertise. The implementation of the Group’s strategic business plans could be undermined by failure to recruit or retain key personnel, the unexpected loss of key senior employees, failures in the Group’s succession planning and incentive plans, or a failure to invest in the development of key skills. Some of the markets in which the Group operates are experiencing rapid economic growth and the Group must compete against a number of companies inside and outside the hospitality industry for suitably qualified or experienced employees. Failure to attract and retain these employees may threaten the success of the Group’s operations in these markets. Additionally, unless skills are supported by a sufficient infrastructure to enable knowledge and skills to be passed on, the Group risks losing accumulated knowledge if key employees leave the Group. The Group is exposed to the risk of events that adversely impact domestic or international travel The room rates and occupancy levels of the Group could be adversely impacted by events that reduce domestic or international travel, such as actual or threatened acts of terrorism or war, epidemics, travel-related accidents, travel-related industrial action, increased transportation and fuel costs and natural disasters resulting in reduced worldwide travel or other local factors impacting individual hotels. A decrease in the demand for hotel rooms as a result of such events may have an adverse impact on the Group’s operations and financial results. In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of the Group. I B U S N E S S R E V I E W I B U S N E S S R E V I E W The Group is reliant upon its proprietary reservation system and is exposed to the risk of failures in the system and increased competition in reservation infrastructure The value of the brands of the Group is partly derived from the ability to drive reservations through its proprietary HolidexPlus reservation system, an electronic booking and delivery channel directly linked to travel agents, hotels and internet networks. Inadequate disaster recovery arrangements, or inadequate continued investment in this technology, leading to loss of key communications linkages, particularly in relation to HolidexPlus, internet reservation channels and other key parts of the IT infrastructure for a prolonged period, or permanently, may result in significant business interruption and subsequent impact on revenues. The Group is also exposed to the risk of competition from third- party intermediaries who provide reservation infrastructure. In particular, any significant increase in the use of these reservation channels in preference to proprietary channels may impact the Group’s ability to control the supply, presentation and price of its room inventory. The Group is exposed to certain risks in relation to technology and systems To varying degrees, the Group is reliant upon certain technologies and systems (including IT systems) for the running of its business, particularly those which are highly integrated with business processes. Disruption to those technologies or systems could adversely affect the efficiency of the business, notwithstanding business continuity or disaster recovery processes. The Group may have to make substantial additional investments in new technologies or systems to remain competitive. Failing to keep pace with developments in technologies or systems may put the Group at a competitive disadvantage. The technologies or systems that the Group chooses may not be commercially successful or the technology or system strategy employed may not be sufficiently aligned to the needs of the business or responsive to changes in business strategy. As a result, the Group could lose customers, fail to attract new customers or incur substantial costs or face other losses. Additionally, failure to develop an appropriate e-commerce strategy and select the right partners could erode the Group’s market share. The Group is exposed to the risks of the hotel industry supply and demand cycle The future operating results of the Group could be adversely affected by industry over-capacity (by number of rooms) and weak demand due, in part, to the cyclical nature of the hotel industry, or other differences between planning assumptions and actual operating conditions. Reductions in room rates and occupancy levels would adversely impact the results of Group operations. Business review 23 Business review continued The Group may experience a lack of selected development opportunities While the strategy of the Group is to extend the hotel network through activities that do not involve significant capital, in some cases the Group may consider it appropriate to acquire new land or locations for the development of new hotels. If the availability of suitable sites becomes limited, this could adversely affect its results of operations. The Group is exposed to risks related to corporate responsibility The reputation of the Group and the value of its brands are influenced by a wide variety of factors, including the perception of key stakeholders and the communities in which the Group operates. The social and environmental impacts of business are under increasing scrutiny, and the Group is exposed to the risk of damage to its reputation if it fails to demonstrate sufficiently responsible practices in a number of areas such as sustainability, responsible tourism, environmental management, human rights and support for the local community. The Group is exposed to the risk of litigation The Group could be at risk of litigation from its guests, customers, joint venture partners, suppliers, employees, regulatory authorities, franchisees and/or the owners of hotels managed by it for breach of its contractual or other duties. Claims filed in the US may include requests for punitive damages as well as compensatory damages. Exposure to litigation or fines imposed by regulatory authorities may affect the reputation of the Group even though the monetary consequences are not significant. The Group may face difficulties insuring its business Historically, the Group has maintained insurance at levels determined by it to be appropriate in light of the cost of cover and the risk profiles of the business in which it operates. However, forces beyond the Group’s control including market forces, may limit the scope of coverage the Group can obtain as well as the Group’s ability to obtain coverage at reasonable rates. Other forces beyond the Group’s control, such as terrorist attacks or natural disasters may be uninsurable or simply too expensive to insure against. Inadequate or insufficient insurance could expose the Group to large claims or could result in the loss of capital invested in properties, as well as the anticipated future revenue from properties, and could leave the Group responsible for guarantees, debt or other financial obligations related to such properties. The Group is exposed to a variety of risks associated with its ability to borrow and satisfy debt covenants The Group is reliant on having access to borrowing facilities to meet its expected capital requirements and to maintain an efficient balance sheet. The majority of the Group’s borrowing facilities are only available if the financial covenants in the facilities are complied with. If the Group is not in compliance with the covenants, the lenders may demand the repayment of the funds advanced. If the Group’s financial performance does not meet market expectations it may not be able to refinance its 24 IHG Annual Report and Financial Statements 2007 existing facilities on terms it considers favourable. The availability of funds for future financing is, in part, dependent on conditions and liquidity in the capital markets. The Group is required to comply with data privacy regulations Existing and emerging data privacy regulations limit the extent to which the Group can use customer information for marketing or promotional purposes. Compliance with these regulations in each jurisdiction in which the Group operates may require changes in marketing strategies and associated processes which could increase operating costs or reduce the success with which products and services can be marketed to existing or future customers. In addition, non-compliance with privacy regulations may result in fines, damage to reputation or restrictions on the use or transfer of information. The Group is exposed to funding risks in relation to the defined benefits under its pension plans The Group is required by law to maintain a minimum funding level in relation to its ongoing obligation to provide current and future pensions for members of its pension plans who are entitled to defined benefits. In addition, if any plan of the Group is wound up, the Group could become statutorily liable to make an immediate payment to the trustees to bring the funding of these defined benefits to a level which is higher than this minimum. The contributions payable by the Group must be set with a view to making prudent provision for the benefits accruing under the plans of the Group. Some of the issues which could adversely affect the funding of these defined benefits (and materially affect the Group’s funding obligations) include: • poor investment performance of pension fund investments which are substantially weighted towards global equity markets; • long life expectancy (which will make pensions payable for longer and therefore more expensive to provide); • adverse annuity rates (which tend in particular to depend on prevailing interest rates and life expectancy) as these will make it more expensive to secure pensions with an insurance company; and • other events occurring which make past service benefits more expensive than predicted in the actuarial assumptions by reference to which the Group’s past contributions were assessed. The trustees of the UK defined benefit plan can demand increases to the contribution rates relating to the funding of this pension plan, which would oblige the relevant members of the Group to contribute extra amounts to such pension funds. The trustees must consult the plan’s actuary and principal employer before exercising this power. In practice, contribution rates are agreed between the Group and the trustees on actuarial advice, and are set for three year terms. The last such review was as at 31 March 2006. The Board, senior management and their responsibilities In this section we present our Board and senior management team, our governance processes and procedures, and our compliance with the codes and regulations to which we are committed. We also present details of Directors’ remuneration in 2007. 26 27 28 30 35 36 36 36 37 38 39 39 39 40 40 41 42 43 43 44 The Board of Directors Other members of the Executive Committee Directors’ report Corporate governance Audit Committee report Remuneration report Remuneration Committee Policy on executive remuneration Components of remuneration Policy on external appointments Performance graph Contracts of service Policy regarding pensions Policy on non-executive remuneration Directors’ emoluments Short Term Deferred Incentive Plan Long Term Incentive Plan Share options Directors’ shareholdings Directors’ pensions Business review and The Board, senior management and their responsibilities 25 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I The Board of Directors David Webster Non-Executive Chairman* Appointed Deputy Chairman and Senior Independent Director of InterContinental Hotels Group on the separation of Six Continents PLC in April 2003. Appointed Non-Executive Chairman on 1 January 2004. Also Non-Executive Chairman of Makinson Cowell Limited, a capital markets advisory firm, and a member of the Appeals Committee of the Panel on Takeovers and Mergers. Formerly Chairman of Safeway plc and a Non-Executive Director of Reed Elsevier PLC. Chairman of the Nomination Committee. Age 63. Andrew Cosslett Chief Executive† Appointed Chief Executive in February 2005, joining the Group from Cadbury Schweppes plc where he was most recently President, Europe, Middle East & Africa. During his career at Cadbury Schweppes he held a variety of senior regional management and marketing roles in the UK and Asia Pacific. Also has over 11 years’ experience in brand marketing with Unilever. Non-Executive Chairman of Duchy Originals Limited. Age 52. Richard Solomons Finance Director† Qualified as a chartered accountant in 1985, followed by seven years in investment banking, based in London and New York. Joined the Group in 1992 and held a variety of senior finance and operational roles. Appointed Finance Director of the Hotels business in October 2002 in anticipation of the separation of Six Continents PLC in April 2003. Responsible for corporate and regional finance, Group financial control, strategy, investor relations, tax and treasury. Age 46. Stevan Porter President, The Americas† Previously 13 years with Hilton Corporation in a variety of senior management positions. Joined the Group in 2001 as Chief Operating Officer, The Americas. Subsequently, as President, The Americas, he was appointed an Executive Director in April 2003. Responsible for the business development and performance of all the hotel brands and properties in the Americas region. Additionally, has responsibility for the development and deployment of best practice in franchising, globally. US citizen. Age 53. David Kappler Senior Independent Non-Executive Director# Appointed a Director and Senior Independent Director in June 2004. Non-Executive Chairman of Premier Foods plc and a Non-Executive Director of Shire plc. A qualified accountant and formerly Chief Financial Officer of Cadbury Schweppes plc until April 2004. Also served as a Non-Executive Director of Camelot Group plc and of HMV Group plc. Chairman of the Audit Committee. Age 60. 26 IHG Annual Report and Financial Statements 2007 Ralph Kugler Non-Executive Director• Appointed a Director in April 2003, he is President, Unilever Home and Personal Care, and joined the boards of Unilever plc and Unilever NV in May 2005. Held a variety of senior positions globally for Unilever and has experience of regional management in Asia, Latin America and Europe, with over 25 years’ experience of general management and brand marketing. Will become Chairman of the Remuneration Committee following the retirement of Sir David Prosser on 31 May 2008. Age 51. Jennifer Laing Non-Executive Director• Appointed a Director in August 2005, she was Associate Dean, External Relations at London Business School, until 2007. A fellow of the Marketing Society and of the Institute of Practitioners in Advertising, she has over 30 years’ experience in advertising including 16 years with Saatchi & Saatchi, to whom she sold her own agency. Also serves as a Non-Executive Director of Hudson Highland Group Inc., a US human resources company. Age 60. Robert C Larson Non-Executive Director‡ Appointed a Director in April 2003, he is a Managing Director of Lazard Alternative Investments LLC and Chairman of Lazard Real Estate Partners, LLC. Also Chairman of Larson Realty Group and Non-Executive Chairman of UDR, Inc. Served as a Non-Executive Director of Six Continents PLC (formerly Bass PLC) from 1996 until April 2003. Will retire from the Board on 31 December 2008. US citizen. Age 73. Jonathan Linen Non-Executive Director‡ Appointed a Director in December 2005, he was formerly Vice Chairman of the American Express Company, having held a range of senior positions throughout his career of over 35 years with American Express. Also serves as a Non-Executive Director of Yum! Brands, Inc. and on a number of US Councils and advisory boards. US citizen. Age 64. Sir David Prosser Non-Executive Director# Qualified actuary with over 40 years’ experience in financial services. Appointed a Director in April 2003, he was formerly Group Chief Executive of Legal & General Group Plc. Also a Non-Executive Director of Investec plc and of Investec Limited, a Director of the Royal Automobile Club Limited and of Epsom Downs Racecourse Limited. Chairman of the Remuneration Committee. Will retire from the Board on 31 May 2008. Age 63. Ying Yeh Non-Executive Director‡ Appointed a Director in December 2007, she is Chairman and President, North Asia Region, President, Business Development, Asia Pacific Region and Vice President, Eastman Kodak Company. Also a Non-Executive Director of AB Volvo. Prior to joining Kodak in 1997 she was, for 15 years, a diplomat with the US Foreign Service in Hong Kong and Beijing. US citizen. Age 59. Other members of the Executive Committee Richard Winter Executive Vice President, Corporate Services, General Counsel and Company Secretary†§ Tom Seddon Executive Vice President and Chief Marketing Officer †§ Has over 15 years’ experience in sales and marketing in the hospitality industry, including with IHG’s predecessor parent companies from 1994 to 2004. Rejoined the Group in November 2007, from restaurant business SUBWAY® where he was responsible for worldwide sales and marketing activities. Has in the past held senior positions in management consulting and at Motorola. Has responsibility for worldwide brand management, reservations, e-commerce, global sales, relationship and distribution marketing and loyalty programmes. British and US citizen. Age 39. The Board of Directors and other members of the Executive Committee together comprise the IHG Senior Leadership Team. While the Directors have certain specific legal and regulatory duties and responsibilities, they work with and rely on the detailed knowledge and experience of all the Executive Committee members to secure the effective running of the business in support of IHG’s core purpose to create Great Hotels Guests Love. * † # • ‡ A Non-Executive Director and a member of the Nomination Committee A member of the Executive Committee An independent Non-Executive Director and a member of the Audit, Remuneration and Nomination Committees An independent Non-Executive Director and a member of the Audit and Nomination Committees An independent Non-Executive Director and a member of the Remuneration and Nomination Committees § Not a main Board Director Solicitor, qualified in 1973 with over 20 years’ commercial law experience in private practice. Joined the Group in 1994 as Director of Group Legal and was appointed Company Secretary in 2000. Now responsible for corporate governance, corporate responsibility, risk management, insurance, internal audit, data privacy, company secretariat and Group legal matters. Age 58. Tom Conophy Executive Vice President and Chief Information Officer†§ Has over 27 years’ experience in the IT industry, including management and development of new technology solutions within the travel and hospitality business. Joined the Group in February 2006 from Starwood Hotels & Resorts International where he held the position of Executive Vice President & Chief Technology Officer. Responsible for global technology, including IT systems and information management throughout the Group. US citizen. Age 47. Peter Gowers President, Asia Pacific†§ Joined the Group in 1999. Following appointments as Executive Vice President, Global Brand Services in 2003, and as Chief Marketing Officer in 2005, he was appointed President, Asia Pacific in November 2007. Now has responsibility for the business development and performance of all the hotel brands and properties in the Asia Pacific region. Has previous international experience in management consultancy, based in London and Singapore. Age 35. Kirk Kinsell President, EMEA†§ Has over 25 years’ experience in the hospitality industry, including senior franchise positions with Holiday Inn Corporation and ITT Sheraton, prior to joining the Group in 2002 as Senior Vice President, Chief Development Officer for the Americas region. Promoted to the role of President, EMEA and joined the Executive Committee in September 2007. Responsible for the business development and performance of all the hotel brands and properties in the EMEA region. US citizen. Age 53. Tracy Robbins Executive Vice President, Global Human Resources†§ Has over 22 years’ experience in line and HR roles in service industries. Joined the Group in December 2005 from Compass Group PLC, a world leading food service company, where she was Group Human Resources Leadership & Development Director. Previously Group HR Director for Forte Hotels Group. Responsible for global talent management and leadership development, reward strategy and implementation. Age 44. The Board of Directors and Other members of the Executive Committee 27 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Directors’ report The Directors present their report for the financial year ended 31 December 2007. Certain information required for disclosure in this report is provided in other appropriate sections of the full Annual Report and Financial Statements 2007. These include the Business Review, the Corporate Governance and Remuneration Reports, and the Group financial statements and these are, accordingly, incorporated into this Directors’ Report by reference. Activities of the Group The principal activities of the Group are in hotels and resorts, with franchising, management, ownership and leasing interests in almost 4,000 establishments, with over 585,000 guest rooms in nearly 100 countries and territories around the world. Business review This Directors’ Report should be read in conjunction with the Message from the Chairman and Chief Executive on pages 2 and 3, and the Business Review on pages 6 to 24. Taken together, these provide a fair review of the Group’s strategy and business and a description of the principal risks and uncertainties it faces. The development and performance of the business during and at the end of the year are described, together with main trends, factors and likely developments, environmental and employee matters, and social and community issues. Significant growth during the year During 2007, the Group increased its development pipeline to 1,674 hotels (225,872 rooms), up by 35% and 43% respectively compared with 2006. Return of shareholders’ funds and share consolidation In June 2007, the Company completed a £250m share repurchase programme and commenced a further £150m share repurchase programme which is well under way. Additionally, £709m was returned to shareholders on 15 June 2007 by way of a special interim dividend of 200p per share. This special dividend was accompanied by a consolidation of the Company’s ordinary share capital on the basis of 47 new ordinary shares for every 56 existing ordinary shares, effective from 4 June 2007. The nominal value of the new shares is 13 29⁄47p per share. Results and dividends The profit on ordinary activities before taxation was £230m. In addition to the special dividend referred to above, an interim dividend of 5.7p per share was paid on 5 October 2007. The Directors are recommending a final dividend of 14.9p per share to be paid on 6 June 2008 to shareholders on the Register at close of business on 28 March 2008. Total dividends relating to the year are expected to amount to £770m. 28 IHG Annual Report and Financial Statements 2007 Share repurchases During the year, 7,724,844 ordinary shares were purchased and cancelled at a cost of £80,772,397 (excluding transaction costs) under IHG’s planned share repurchase programmes. Of these shares, 2,237,264 were 11 3⁄7p shares in the capital of the Company, purchased at an average price of 1227p per share and 5,487,580 were 13 29⁄47p shares in the capital of the Company, purchased at an average price of 972p per share. Shares purchased and cancelled represented approximately 2% of the issued share capital of the Company at the start of the year and were purchased and cancelled under the authorities granted by shareholders at an Extraordinary General Meeting held on 1 June 2006 and at the Annual and Extraordinary General Meetings held on 1 June 2007. The share buyback authority remains in force until the Annual General Meeting in 2008, and a resolution to renew the authority will be put to shareholders at that Meeting. Share plans 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 InterContinental Hotels Group PLC shares. At 31 December 2007, 2,696,883 such options were outstanding. During 2007, 101,846 options granted to employees in December 2003 under IHG’s Sharesave Plan matured. Of these, 99,678 were exercised during the year. During 2007, 6,211,990 options granted in April 2004 under the IHG Executive Share Option Plan, vested in full. Of these, 3,428,514 had been exercised by 31 December 2007. During 2007, conditional rights over 3,538,535 shares were awarded to employees under the Performance Restricted Share Plan (now called the Long Term Incentive Plan) and 1,694,173 shares were released to employees under the plan. A number of employees participated in the Short Term Deferred Incentive Plan (now called the Annual Bonus Plan) during the year. Conditional rights over 675,515 shares were awarded to participants. 418,450 shares were released under the plan during the year. A number of participants are eligible to receive a bonus award in shares on 25 February 2008. No options were granted under either the Executive Share Option Plan or the Sharesave Plan during the year. Neither the Hotels Group Share Incentive Plan nor the US Employee Stock Purchase Plan was operated during the year. During the year, no awards or grants over shares were made that would be dilutive of the Company’s ordinary share capital. Current policy is to settle all awards or grants under the Company’s share plans with shares purchased in the market, with the exception of a number of options granted before 2005, which are yet to be exercised and settled with the issue of new shares. Share capital During the year, 3,512,783 new shares were issued under employee share plans and, following the share capital consolidation, the Company’s share capital at 31 December 2007 consisted of 294,623,308 ordinary shares of 13 29⁄47p each. There are no special control rights or restrictions on transfer attaching to these ordinary shares. Charitable donations During the year, the Group donated £626,000 in support of community initiatives and charitable causes. 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, such as hotel accommodation. Taking these contributions into account, total donations in 2007 are estimated at £770,000. The Company has not utilised the authority given by shareholders at any of its Annual General Meetings, to allot shares for cash without offering such shares to existing shareholders. Substantial shareholdings As at 18 February 2008, the Company had been notified by shareholders of the following substantial interests, representing 3% or more of its ordinary share capital: Ellerman Corporation Limited 10% Morgan Stanley Investment Management Limited 5.60% Cedar Rock Capital Limited 5.07% Legal & General Group Plc 4.09% Lloyds TSB Group Plc 3.84% Directors Details of Directors who served on the Board during the year are shown on page 31. Details of the beneficial share interests of Directors who were on the Board at the year end are shown on page 43. No changes to these interests occurred between the year end and the date of this report. 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 by the Companies Act 2006. The Group has provided to all of its Directors, limited indemnities in respect of costs of defending claims against them, and third-party liabilities. These are all qualifying third-party indemnity provisions for the purposes of the Companies Act 2006 and are all currently in force. There were no indemnity provisions relating to the UK pension plan, for the benefit of the Directors of the Company, in place during the period. Employees IHG directly employed an average of 10,366 people worldwide in the year ended 31 December 2007. When the managed and franchised estate is included, approximately 315,000 people work for IHG’s brands across the globe. Further information regarding the Group’s employment policies, including its obligations under equal opportunities legislation, its commitment to employee communications and its approach towards staff development, can be found on pages 9 and 10 of the Business Review. Political donations The Group made no political donations during the year and proposes to maintain its policy of not making such payments. Financial risk management The Group’s financial risk management objectives and policies, including its use of financial instruments, are set out on pages 20 and 21 of the Business Review and in notes 21 and 22 to the Group financial statements on pages 73 to 76. A number of IHG’s banking arrangements are terminable upon a change of control of the Company. Policy on payment of suppliers InterContinental Hotels Group PLC is a holding company and has no trade creditors. Group companies aim to adhere to the payment terms agreed with suppliers. Payments are contingent on the supplier providing goods or services to the required standard, and purchasing is sometimes coordinated between Group undertakings. Going concern The financial statements which appear on pages 48 to 88 have been prepared on a going concern basis as, after making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Auditors The Directors who held office as at the date of approval of this report confirm that they have taken steps to make themselves aware of relevant audit information. None of the Directors is aware of any relevant audit information which has not been disclosed to the auditors. 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 11.00am on Friday, 30 May 2008 is contained in a circular sent to shareholders with this Report. By order of the Board Richard Winter Company Secretary 18 February 2008 Directors’ report 29 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Corporate governance Combined Code compliance The Board is committed to compliance with the principles set out in the Combined Code on Corporate Governance (the Code) and considers that the Company has complied with the Code requirements throughout the year ended 31 December 2007. As InterContinental Hotels Group PLC’s shares are also listed on the New York Stock Exchange (NYSE), the Company is subject to the rules of the NYSE, US securities laws and the rules of the Securities and Exchange Commission (SEC). As required by the SEC, a statement outlining the differences between the Company’s corporate governance practices and those followed by US companies may be found on the Company’s website at www.ihg.com/investors under corporate governance/ NYSE differences. Control environment The Board is responsible for the Group’s system of internal control and risk management and for reviewing its effectiveness. In order to discharge that responsibility, the Board has established the procedures necessary to apply the Code, including clear operating procedures, lines of responsibility and delegated authority. Business performance is managed closely and, in particular, the Board, the Executive Committee and the Regional Operating 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; • financial performance, within a comprehensive financial planning and accounting framework; • capital investment performance, with detailed appraisal and authorisation processes; and • risk management, (through an ongoing process, which has been in place up to the date of the accounts) providing assurance through reports from both the Head of Risk Management and the Head of Internal Audit that the significant risks faced by the Group are being identified, evaluated and appropriately managed, having regard to the balance of risk, cost and opportunity. 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 Board has conducted a review of the effectiveness of the system of internal control during the year ended 31 December 2007, taking account of any material developments which have taken place since the year end. 30 IHG Annual Report and Financial Statements 2007 The review was carried out through the monitoring process set out above, which accords with the Turnbull Guidance. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and it must be recognised that it can only provide reasonable and not absolute assurance against material misstatement or loss. In that context, the review, in the opinion of the Board, did not indicate that the system was ineffective or unsatisfactory. To comply with the Group’s US obligations, arising from the Sarbanes-Oxley Act 2002, a project has been completed to identify, evaluate and test key financial controls across all our business units. This enabled appropriate representations regarding the effectiveness of internal financial controls to be made in the Company’s Annual Report on Form 20-F for the December 2006 year end, in compliance with these US obligations, and will enable similar representations to be made in the Company’s 2007 Annual Report on Form 20-F. With regard to insurance against risk, it is not practicable to insure against every risk to the fullest extent. While the insurance market has eased in some areas, certain risks, eg natural catastrophe, remain difficult to insure both as to breadth and cost of coverage. In some cases external insurance is not available at all or not at an economic price. The Group regularly reviews both the type and amount of external insurance that it buys, bearing in mind the availability of such cover, its price and the likelihood and magnitude of the risks involved. 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, three Executive and seven Non-Executive Directors meets the requirement of the Combined Code for at least half the Board, excluding the Chairman, to be independent Non-Executive Directors. In the Board’s view, all of the current Non-Executive Directors are independent. The Board is responsible to the shareholders for the strategic direction, development, performance and control of the Group. It therefore approves strategic plans and capital and revenue budgets. It reviews significant investment proposals and the performance of past investments and maintains an overview and control of the Group’s operating and financial performance. It monitors 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. These may be found on the Company’s website. 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 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 structured way. Eight regular Board meetings are scheduled each year and further meetings are held as needed. During 2007, 11 Board meetings were held. These were attended by all Directors with the exception that Jennifer Laing and Sir David Prosser could not attend one meeting each. Ralph Kugler and Jonathan Linen could not attend two meetings each. Despite being unable to attend meetings, these Directors were provided with all the papers and information relevant to those meetings and were able to discuss matters arising with the Chairman and the Chief Executive. It is unavoidable that, from time to time, particularly given the other corporate and international responsibilities of the very experienced people concerned, individual Non-Executive Directors may be unable to attend a Board meeting. Any such non-attendance is occasional and the Board is satisfied that all Directors remain committed to their roles and responsibilities. All Directors are briefed by means of comprehensive papers in advance of Board meetings and by presentations at meetings. Their understanding of the Group’s operations is enhanced by regular business presentations outside Board meetings and visits to the regions. At least two Board meetings a year are held overseas. Formal performance evaluations of the Board and the Directors were undertaken during 2007. An independent third-party facilitator assists in the performance evaluation in alternate years. The 2007 evaluation involved such external assistance. The 2007 Board evaluation, including that of the Chairman and the Executive Directors, involved completion of comprehensive questionnaires and the Chairman having discussions with each Director individually. A number of areas for assessment had been identified in advance of these meetings, and these were used as a framework for the discussions. Feedback was provided to the Board through a formal report and the findings were discussed. The Board concluded that it was operating in an effective manner but identified certain areas to which more emphasis might be given. With regard to the performance of individual Directors, as part of the evaluation process, the Chairman held meetings with each Director and it was concluded that they continue to make an effective contribution to the work of the Board. All Directors are well prepared and informed concerning items to be considered by the Board, have a good understanding of the Group’s businesses and retain a strong commitment to their roles. During the year, the Non-Executive Directors met together without the Chairman present, under the chairmanship of the Senior Independent Director, to appraise the Chairman’s performance. The outcome of this appraisal was positive. The work and effectiveness during the year of the Audit Committee were also evaluated, and the results were reported to the Board. The performance of the Remuneration and Nomination Committees was also considered. These reviews concluded that each Committee was operating in an effective manner. The following were Directors of the Company during the year: David Webster Andrew Cosslett Richard Solomons Richard Hartman2 Stevan Porter David Kappler Ralph Kugler Jennifer Laing Robert C Larson Jonathan Linen Sir David Prosser Ying Yeh Position Non-Executive Chairman Chief Executive Finance Director President, Europe, Middle East and Africa President, The Americas Non-Executive Director and Senior Independent Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Date of original appointment1 15.4.03 3.2.05 10.2.03 15.4.03 15.4.03 21.6.04 15.4.03 25.8.05 15.4.03 1.12.05 15.4.03 1.12.07 1 The capital reorganisation of the Group, effective on 27 June 2005, entailed the insertion of a new parent company of the Group. All Directors serving at that time signed new letters of appointment effective from that date. The dates shown above represent the original dates of appointment of each of the Directors to the Group’s parent company. 2 Richard Hartman retired as a Director of the Company on 25 September 2007. Current Directors’ biographical details are set out on page 26 of this Report. These include their main external commitments. On appointment, Non-Executive Directors participate in induction programmes designed to meet their individual needs and to introduce them to, and familiarise them with, the principal activities of the Group and with central and regional management. Ying Yeh, as a Non-Executive Director appointed during the year, has been invited and intends to participate in such a programme. Comprehensive induction programmes are also put in place for any Executive Director who may join the Group. These induction programmes accord with the guidelines referred to in the Combined Code. The updating of all Directors’ skills and knowledge is a progressive exercise. This is accomplished at Board and strategy meetings, through presentations and visits to hotels and other business premises, and through contact with employees at all levels. Corporate governance 31 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Corporate governance continued Chairman David Webster was Non-Executive Chairman throughout the year. He is also Non-Executive Chairman of Makinson Cowell Limited. During 2007 he became a member of the Appeals Committee of the Panel on Takeovers and Mergers. The Chairman has responsibility for ensuring the efficient operation of the Board and its Committees, for seeing that corporate governance matters are addressed, and for representing the Group externally and communicating particularly with shareholders. He also ensures that Directors receive a full, formal and tailored induction to the Group and its businesses and that all Directors are fully informed of relevant matters, working closely with the Chief Executive and the Company Secretary. The Chairman also meets with the Non-Executive Directors, without Executive Directors present. Chief Executive Andrew Cosslett was Chief Executive throughout the year. He has responsibility to recommend to the Board and to implement the Group’s strategic objectives. He is responsible for the executive management of the Group. Andrew Cosslett is Non-Executive Chairman of Duchy Originals Limited. He receives no remuneration for this role. The Board is satisfied that this additional commitment has no adverse impact on the successful fulfilment of his duties to IHG. Senior Independent Director David Kappler was Senior Independent Director throughout the year. His responsibilities include being available to liaise with shareholders who have issues to raise and leading the performance evaluation of the Chairman. Non-Executive Directors A team of experienced independent Non-Executive Directors represents a strong source of advice and judgement. There are currently seven such Directors, in addition to the Non-Executive Chairman, each of whom has significant external commercial experience. The Non-Executive Directors, including the Chairman, meet during the year to consider the Group’s business and management. Robert C Larson was first appointed to the Board of the Group’s predecessor parent company, Bass PLC, in 1996. He may therefore be regarded as having served for over nine years as a Director. The Combined Code requires such Directors to be subject to rigorous performance review, and to be subject to election annually. The formal performance evaluation referred to above has confirmed Mr Larson’s valuable contribution during 2007 and he is seeking re-election by shareholders at the 2008 Annual General Meeting. The transformed structure of the Group, and of the parent company Board, since 1996, have ensured that the length of Mr Larson’s service has no bearing on his independence. Mr Larson will be retiring from the Board on 31 December 2008. 32 IHG Annual Report and Financial Statements 2007 Non-Executive Directors have the opportunity of continuing professional development during the year and of gaining further insight into the Group’s business. During 2007, visits to operating premises, including hotels across the brand portfolio, were undertaken. In addition, the training requirements of the Non-Executive Directors are kept under review. Company Secretary All Directors have access to the advice and services of the Company Secretary, Richard Winter. His responsibilities include ensuring good information flows to the Board and its Committees and between senior management and the Non-Executive Directors. He facilitates the induction of Directors, the regular updating and refreshing of their skills and knowledge, and he assists them in fulfilling their duties and responsibilities. Through the Chairman, he is responsible for advising the Board on corporate governance and generally for keeping the Board up to date on all legal, regulatory and other developments. He also has responsibility for developing the Group’s position on corporate responsibility. The Company Secretary acts as secretary to each of the main Board Committees. Committees Each Committee of the Board has written terms of reference which have been approved by the Board and which are subject to review every year. 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. Throughout 2007, the other Committee members were Sir David Prosser, Ralph Kugler and Jennifer Laing. The Committee is scheduled to meet at least four times a year. The Committee met six times in the year. These meetings were attended by all Committee members, with the exception that Jennifer Laing and Ralph Kugler could not attend one meeting each. The Audit Committee’s role is described on page 35. Remuneration Committee The Remuneration Committee, chaired by Sir David Prosser, also comprises the following Non-Executive Directors: David Kappler, Robert C Larson, Jonathan Linen and, from 1 December 2007, Ying Yeh. It meets at least three times a year. Its role is described on page 36. The Committee met six times during the year. All Directors who were Committee members throughout the year attended all these meetings. Ying Yeh attended the meeting held in December 2007 following her appointment. Election and re-election of Directors The Company’s Articles provide that only those Directors who have not been subject to election by shareholders within the last three years, need retire and stand for re-election at the next Annual General Meeting. In 2008, three Directors fall into this category. Therefore Andrew Cosslett, David Kappler and Ralph Kugler will retire by rotation and offer themselves for re-election at the Annual General Meeting on 30 May 2008. In addition, Robert C Larson, in accordance with the provisions of the Combined Code, is subject to annual retirement and re-election, if he wishes to continue to serve as a Director. Mr Larson has expressed his wish to continue to serve as a Director until his planned retirement on 31 December 2008 and a resolution to propose his re-election will therefore be put to the Annual General Meeting. Ying Yeh, having been appointed as a Director since the last Annual General Meeting, will also retire and stand for election at the next Annual General Meeting. The Notice of Annual General Meeting, sent to shareholders with this Report, provides further information about the Directors standing for election and re-election. Information on Executive Directors’ service contracts is set out on page 39. The Non-Executive Chairman and the seven independent Non-Executive Directors have letters of appointment. 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. Nomination Committee The Nomination Committee comprises any three Non-Executive Directors although, where possible, all Non-Executive Directors are present. It is chaired by the Chairman of the Company. Its terms of reference reflect the principal duties proposed as good practice and referred to in the Combined Code. The Committee nominates, for approval by the Board, candidates for appointment to the Board. The Committee generally engages external consultants to advise on candidates for Board appointments and did so in connection with the appointment of Ying Yeh. Candidate profiles and objective selection criteria are prepared in advance of any engagements. The Committee also has responsibility for succession planning and assists in identifying and developing the role of the Senior Independent Director. The Committee met seven times during the year. Jennifer Laing and Jonathan Linen were unable to attend one meeting each. Ralph Kugler was unable to attend two meetings. 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. 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 of the regional Hotels businesses. It is authorised to approve capital and revenue investment within levels agreed by the Board. It reviews and recommends to the Board the most significant investment proposals. 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 represents the Group’s position in all material respects. General Purposes Committee The General Purposes Committee comprises any one Executive Committee member together with a senior officer from an agreed and restricted list of senior executives. It is always chaired by an Executive Committee member. 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. Corporate governance 33 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Corporate governance continued Shareholder relations The Group reports formally to shareholders twice a year when its half-year and full-year results are announced. The Chief Executive and the Finance Director give presentations on these results to institutional investors, analysts and the media. Telephone dial-in facilities and live audio webcasts enable access to these presentations for all shareholders. In addition, there are telephone conferences after the release of the first and third quarter results. The data used in these presentations and conferences may be found at www.ihg.com/investors under financial library/presentations. IHG also has a programme of meetings throughout the year with its major institutional shareholders, which provides an opportunity to discuss, using publicly available information, the progress of the business, its performance, plans and objectives. The Chairman, the Senior Independent Director and other Non-Executive Directors are available to meet with major shareholders to understand their issues and concerns and to discuss governance and strategy. Any new Director is available for meetings with major shareholders as a matter of course. 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 the Annual General Meeting to answer questions. Information about the Group is maintained and available to shareholders 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 all the Committees were reviewed during the year and it was confirmed that they continue to reflect best practice. Main Committee terms of reference are available on the Company’s website www.ihg.com/investors under corporate governance/committees or from the Company Secretary’s office on request. The terms and conditions of appointment of Non-Executive Directors are also available on request. Richard Winter Company Secretary 18 February 2008 34 IHG Annual Report and Financial Statements 2007 Audit Committee report The Audit Committee assists the Board in meeting its responsibilities in relation to the integrity of the Group’s financial 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 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, and the attendance of its members, all of whom served throughout 2007, are set out on page 32. The Committee’s Chairman and financial expert, David Kappler, is a chartered management accountant and until April 2004 was Chief Financial Officer of Cadbury Schweppes plc. He also chairs the Audit Committee of another UK FTSE 100 company. The Committee’s principal responsibilities are to: • review the Group’s public statements on internal control and corporate governance compliance prior to their consideration by the Board; • review the Group’s processes for detecting and addressing fraud, misconduct and control weaknesses and to consider the response to any such occurrence, including overseeing the process enabling the anonymous submission of concerns; • review reports from management, internal audit and external audit concerning the effectiveness of internal control, financial reporting and risk management processes; • review with management and the external auditor any financial statements required under UK or US legislation before submission to the Board; • establish, review and maintain the role and effectiveness of the internal audit function, including overseeing the appointment of the Head of Internal Audit; • assume responsibility for the appointment, compensation, 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; and • oversee the Group’s Code of Ethics and Business Conduct and associated procedures for monitoring adherence. The Committee discharges its responsibilities through a series of Audit Committee meetings during the year, at which detailed reports are presented for review. The Committee commissions reports, either from external advisers, the Head of Internal Audit, or Group management, after consideration of the major risks to the Group 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 Group management, at the conclusion of each meeting. All proposals for the provision of non-audit services by the external auditor are pre-approved by the Audit Committee or its delegated member, the overriding consideration being to ensure that the provision of non-audit services does not impact the external auditor’s independence and objectivity. During the year, the Committee’s deliberations included the following matters: • quarterly, interim and full-year financial results. These public financial statements are reviewed by the 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 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 quarterly, interim and full-year reports; • the effectiveness of the external auditor and consideration of their objectivity, independence and reappointment; • the scope of the annual internal audit plan, the internal audit department’s approach to delivering assurance, its resourcing and the results of its reviews; • the effectiveness of the internal audit function and its compliance with professional standards; • any major changes in the Group’s internal controls; • the co-ordination of the internal and external audit functions; • the Group’s framework for the identification and control of major risks, and the results of the Group’s 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; • consideration of the results of the Group’s tangible asset impairment review; • overseeing the Group’s Sarbanes-Oxley Act compliance work; • the disclosure controls and procedures operated by the Group, with reference to periodic reports from the Chairman of the Disclosure Committee; • reviewing the Group’s approach to managing tax risk; • consideration of the Group’s treasury objectives and policies; • a review of changes to the Group’s policy on delegation of authority; • a review of the funding position and governance of the Group’s main pension plan; • periodic reports on any significant incidents of fraud or any allegations made via the Group’s whistleblowing procedures and the effectiveness of these procedures; • any material litigation involving the Group; and • consideration of the effectiveness of the Audit Committee and the continuing appropriateness of its terms of reference. David Kappler Chairman of the Audit Committee 18 February 2008 Corporate governance and Audit Committee report 35 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Remuneration report This report has been prepared by the Remuneration Committee and has been approved by the Board. It complies with Schedule 7A to the Companies Act 1985, which incorporates the Directors’ Remuneration Report Regulations 2002, and also with the Combined Code applicable for the 2007 financial year. This report will be put to shareholders for approval at the forthcoming Annual General Meeting. Group. Towers Perrin did not provide any other services to the Group. Linklaters provided other legal services to the Group. Ms Robbins and Ms Gaytan, Linklaters and Towers Perrin were originally appointed by the Group. PWC were appointed by the Committee. The terms of engagement for PWC and Towers Perrin are available from the Company Secretary’s office on request. 1 The Remuneration Committee During the year, the Committee comprised the following Non-Executive Directors: Sir David Prosser – Chairman David Kappler Robert C Larson Jonathan Linen Ying Yeh (from 1 December 2007) Sir David Prosser will retire from the Board and as Chairman of the Committee on 31 May 2008. He will be succeeded as Chairman by Ralph Kugler, who previously served on the Committee from 2003 until May 2005. 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. All meetings were fully attended by Committee members. The Committee advises the Board on overall remuneration policy. The Committee also determines, on behalf of the Board, and with the benefit of advice from external consultants and members of the Human Resources department, the remuneration of the Executive Directors and other members of the Executive Committee. During 2007, with the assistance of PricewaterhouseCoopers LLP (PWC), the Committee also undertook a review of executive remuneration arrangements and, as a consequence of this, made some changes which are described later in this report. Those who provided material advice or services to the Committee during the year were: David Webster – Chairman Andrew Cosslett – Chief Executive Tracy Robbins – Executive Vice President, Global Human Resources Lori Gaytan – Senior Vice President, Global Human Resources Linklaters Towers Perrin PricewaterhouseCoopers LLP The Executive Vice President, Global Human Resources has direct access to the Chairman of the Committee. Ms Robbins and Ms Gaytan, who are human resource professionals and employees, advised the Committee on all aspects of the Group’s reward policies and structures. PWC advised the Committee on remuneration issues, having been formally appointed by the Committee in May 2007. PWC also provided additional services to IHG with regard to employer and employee tax compliance processes for expatriate employees and on tax withholding obligations in relation to employee share plans. Towers Perrin, an external consultancy, also advised the Committee on reward structures and levels applicable in the markets relevant to the 36 IHG Annual Report and Financial Statements 2007 2 Policy on remuneration of Executive Directors and senior executives The following policy has applied throughout the year and, except where stated, will apply in future years, subject to regular review. 2.1 Total level of remuneration The Committee aims to ensure that overall remuneration is offered which: • attracts high-quality executives in an environment where compensation levels are based on global market practice; • provides appropriate retention strength against loss of key executives; • drives aligned focus and attention to key business initiatives and appropriately rewards their achievement; • supports equitable treatment between members of the same executive team; and • facilitates global assignments and relocation. The Committee is aware that, as its primary listing is on the London Stock Exchange, IHG’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 between domestic and international expectations. 2.2 Key developments During 2007, the Committee undertook a major review of the executive remuneration structure. The purpose of the review was to ensure that executive remuneration arrangements are simple, relevant to participants and easily understood. The review resulted in two main amendments to the executive incentives: • restructuring of the Short Term Incentive Plan and the Short Term Deferred Incentive Plan into a single plan, renamed the Annual Bonus Plan; and • a change to the Total Shareholder Return (TSR) performance measure linked to the Performance Restricted Share Plan, which has been renamed the Long Term Incentive Plan. Further details of the changes are included in the relevant sections below. The Committee believes that the changes will enhance the effectiveness of the arrangements in support of the aims of attracting, retaining, and motivating high-quality executives in the highly competitive global environment in which the Company operates. The greater simplification introduced will make overall reward more transparent and motivational to executives. The changes to the performance measures are intended to generate a more robust alignment between reward and performance. 2.3 Main components The components of overall reward place a strong emphasis on performance-related reward. The individual elements 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. The normal policy for all Executive Directors is that, using ‘target’ or ‘expected value’ calculations, their performance- related incentives will equate to approximately 70% of total annual remuneration (excluding pensions and benefits). A summary of the fixed and variable elements of executive remuneration is shown below: Fixed (approx 30%) Variable (approx 70%) Base salary Short-term incentive Long-term incentive Annual Bonus Plan (Cash and Deferred Shares) Long Term Incentive Plan (Performance Shares) Key TSR = Total shareholder return EPS = Earnings per share Linked to individual performance, financial and operational measures Linked to relative TSR (50%) and adjusted EPS growth (50%) The main components of remuneration are as follows: Base salary and benefits The salary for each Executive Director is reviewed annually and based on both individual performance and on the most recent relevant market information provided from independent professional sources on comparable salary levels. Internal relativities and salary levels in the wider employment market are also taken into account. Base salary is the only element of remuneration which is pensionable. In addition, benefits are provided to Executive Directors in accordance with the policy applying to other executives in their geographic location. In assessing levels of pay and benefits, IHG analyses those 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; and • relevance to the hotel industry. Annual bonus During 2007, and in previous years, the annual performance bonus consisted of two elements, the Short Term Incentive Plan (STI) and the Short Term Deferred Incentive Plan (STDIP). Both elements required the achievement of challenging performance goals before target bonus is payable. Any bonus for 2007 earned under the STI arrangement is payable in cash in 2008, based on individual performance relative to personal objectives and leadership competencies. 100% of any bonus earned under the STDIP for 2007 is payable in 2008 in shares and deferred on a mandatory basis. Participants could also receive matching shares up to half of the total deferred amount. This matching award was taken into account when the Committee decided the basic level of payment under the STDIP. Therefore, there is no separate performance test governing the vesting of matching awards. Such awards are, however, conditional on the Directors’ continued employment with the Group until the release date. The shares will normally be released at the end of the three years following deferral. For awards to be made in respect of financial year 2008 onwards, the STI and STDIP will be combined, so that all Executive Directors will participate in the Annual Bonus Plan. Cash bonuses will no longer be payable under the STI. Existing powers within the STDIP, renamed the Annual Bonus Plan, will be used to pay both cash and share bonuses. The maximum bonus amount a participant can receive in any one year is 200% of salary. The target award level will be 115% of salary. Half of any bonus earned will be deferred in the form of shares for three years. Matching shares will no longer be awarded. The first cash and share awards will be made under the new arrangements in 2009, in respect of the 2008 financial year. A summary of the way in which the new bonus arrangements work is shown below: Structure 50% Deferred Shares 50% Cash Performance measures EBIT (50%) Rooms Growth (20%) Individual (30%) Key EBIT = Earnings before interest and tax Annual Bonus Plan Target 115% Maximum 200% Remuneration report 37 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Remuneration report continued Awards under the Annual Bonus Plan will be linked to individual performance (30% of total award), EBIT (50% of total award) and net annual rooms additions (20% of total award). Individual performance is measured by the achievement of specific Key Performance Objectives that are linked directly to the Group’s strategic priorities, and an assessment of performance against leadership competencies and behaviours. Under the financial measure (EBIT), threshold payout is 90% of target performance, with maximum payout at 110% of target. If performance under the financial measure in any year is below threshold, payouts on all other measures are reduced by half. Long Term Incentive Plan The Long Term Incentive Plan (LTIP) was formerly called the Performance Restricted Share Plan. It allows Executive Directors and eligible employees to receive share awards, subject to the satisfaction of a performance condition, set by the Committee, which is normally measured over a three-year period. Awards are normally made annually and, other than in exceptional circumstances, will not exceed three times annual salary for Executive Directors. For the 2007/09 LTIP cycle, performance will be measured by reference to: • the increase in IHG’s Total Shareholder Return (TSR) over the performance period relative to eight* identified comparator companies: Accor, Choice, Marriott Hotels, Millennium & Copthorne, NH Hotels, Sol Melia, Starwood Hotels and Wyndham Worldwide; and • growth in adjusted Earnings Per Share (EPS) over the period. * Following the delisting of Hilton Hotels Corp. shares in October 2007. In respect of TSR performance, 10% of the award will be released for the achievement of median performance and 50% of the award will be released for the achievement of first place only (previously first or second place). In respect of EPS performance, 10% of the award will be released if adjusted EPS growth is 10% per annum and 50% of the award will be released if adjusted EPS growth is 20% per annum or more. Vesting between all stated points will continue to be on a straight-line basis. Awards under the LTIP lapse if the performance conditions are not met – there is no retesting. For the 2008/10 cycle, the performance measures for the LTIP will be as follows: • 50% of the award will be based on IHG’s TSR relative to the Dow Jones World Hotels index. 10% of the award will be released for the achievement of growth equal to the index and 50% of the award will be released for the out-performance of the index by 8% per annum. Vesting between all stated points will continue to be on a straight-line basis; and 38 IHG Annual Report and Financial Statements 2007 • the other 50% of the award will depend on growth in adjusted EPS over the period. 10% of the award will be released for threshold performance and 50% of the award will be released for superior performance. The Committee reviews the EPS targets each year and, at the time of this report, the target had not yet been determined. It will be disclosed when awards are made in due course. In setting the target, the Committee will take into account a range of factors, including IHG’s strategic plans, City analysts’ expectations for IHG’s performance and for the industry as a whole, the historical performance of the industry and FTSE 100 market practice. Executive share options Since 2006, executive share options have not formed part of the Group’s remuneration strategy. Details of prior share option grants are given in the table on page 43. For options granted in 2005, a performance condition has to be met before options can be exercised. The Company’s adjusted EPS over a three-year period must increase by at least nine percentage points over the increase in the UK Retail Price Index (RPI) for the same period for one-third of the options granted to vest; 12 percentage points over the increase in RPI for the same period for two-thirds of the options granted to vest; and 15 percentage points over the increase in RPI for the same period for the full award to vest. Share capital During 2007, no awards or grants over shares were made that would be dilutive of the Company’s ordinary share capital. Current policy is to settle all awards or grants under any of the Company’s share plans with shares purchased in the market, with the exception of a number of options granted before 2005, which are yet to be exercised and settled with the issue of new shares. Share ownership The Committee believes that share ownership by Executive Directors and senior executives strengthens the link between the individual’s personal interest and that of the shareholders. The Executive Directors are expected to hold all shares earned (net of any share sales required to meet personal tax liabilities) from the Group’s remuneration plans while the value of their holding is less than twice their base salary or three times in the case of the Chief Executive. 2.4 Policy on external appointments The Company recognises that its Directors may be invited to become Non-Executive Directors of other companies and that such duties can broaden experience and knowledge, and benefit the business. Executive Directors are, therefore, allowed to accept one non-executive appointment (not including positions where the Director is appointed as the Group’s representative), subject to Board approval, as long as this is not likely to lead to a conflict of interest, and to retain the fees received. Andrew Cosslett is Non-Executive Chairman of Duchy Originals Limited, for which he receives no remuneration. 2.5 Performance graph Throughout the year, the Company has been a member of the FTSE 100 index. Accordingly, the Committee has determined that this is the most appropriate market index against which to test the Company’s performance. The graph below shows the TSR performance of Six Continents PLC from 1 October 2002 up to 14 April 2003, and subsequently the performance of InterContinental Hotels Group PLC, assuming dividends are reinvested, compared with the TSR performance achieved by the FTSE 100 index. Total Shareholder Return: InterContinental Hotels Group PLC v FTSE 100 450 400 350 300 250 200 150 100 50 0 1 Oct 2002 IHG shares listed 15 April 2003 31 Dec 2003 31 Dec 2004 31 Dec 2005 31 Dec 2006 31 Dec 2007 InterContinental Hotels Group PLC – Total Shareholder Return Index (Six Continents PLC up to 14 April 2003) FTSE 100 – Total Shareholder Return Index Source: Datastream 2.6 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. Andrew Cosslett, Stevan Porter and Richard Solomons have service agreements with a notice period of 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 termination of an Executive Director’s contract, the policy is to seek to minimise any liability. Non-Executive Directors have letters of appointment. David Webster’s appointment as Non-Executive Chairman, effective from 1 January 2004, is subject to six months’ notice. The dates of appointment of the other Non-Executive Directors are set out on page 31. All Directors’ appointments and subsequent reappointments are subject to election and re-election by shareholders. b) Directors’ contracts Director Andrew Cosslett Richard Hartman2 Stevan Porter Richard Solomons Contract effective date1 03.02.05 15.04.03 15.04.03 15.04.03 Unexpired term/ notice period 12 months N/A 12 months 12 months 1 Each of the Executive Directors signed a letter of appointment, effective from completion of the June 2005 capital reorganisation of the Group on the same terms as their original service agreements. 2 Richard Hartman retired in September 2007, at which point his rolling contract with 12 months’ notice expired. 2.7 Policy regarding pensions Andrew Cosslett, Richard Solomons and other senior UK-based employees participate on the same basis in the executive section of the registered InterContinental Hotels UK Pension Plan and, if appropriate, the InterContinental Executive Top-Up Scheme. The latter is an unfunded arrangement, but with appropriate security provided via a fixed charge on a hotel asset. As an alternative to these arrangements, a cash allowance may be taken. Stevan Porter and senior US-based executives participate in US retirement benefits plans. With effect from 30 January 2006, Richard Hartman ceased to be an active member of the InterContinental Hotels UK Pension Plan and InterContinental Executive Top-Up Scheme, and from that date up to his retirement on 25 September 2007, he participated in the InterContinental Hotels Group International Savings and Retirement Plan. Executives in other countries participate in these plans or local plans. Remuneration report 39 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Remuneration report continued 3 Policy on remuneration of Non-Executive Directors 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. Non-Executive Directors’ fee levels were last established by the Board on 1 January 2007. Having taken into account the global nature, scale and complexity of the Group’s business, and current competitive fee levels, the following annual fee rates apply: Role Chairman Senior Independent Director & Chairman of Audit Committee Chairman of Remuneration Committee Other Non-Executive Directors Fee £390,000 £95,000 £80,000 £60,000 The information provided in the following pages of this report has been audited by Ernst & Young LLP. 4 Directors’ emoluments Executive Directors Andrew Cosslett Richard Hartman3 Stevan Porter4 Richard Solomons Non-Executive Directors David Webster David Kappler Ralph Kugler5 Jennifer Laing Robert C Larson Jonathan Linen Sir David Prosser Sir Howard Stringer6 Ying Yeh7 Former Directors8 Total Base salaries and fees £000 732 398 416 468 390 95 60 60 60 60 80 – 5 – 2,824 Total emoluments excluding pensions Performance payments1 £000 Benefits2 £000 1 Jan 2007 to 31 Dec 2007 £000 1 Jan 2006 to 31 Dec 2006 £000 519 201 253 285 – – – – – – – – – – 1,258 25 247 8 18 2 – – – – – – – – 1 301 1,276 846 677 771 392 95 60 60 60 60 80 – 5 1 4,383 1,268 1,005 726 806 354 80 50 50 50 50 65 43 – 1 4,548 1 Performance payments include bonus awards in cash in respect of 3 Richard Hartman retired as a Director on 25 September 2007. participation in the Short Term Incentive Plan (STI) and the Short Term Deferred Incentive Plan (STDIP) but exclude bonus awards in deferred shares and any matching shares, details of which are set out in the STDIP table on page 41. 2 Benefits incorporate all tax assessable benefits arising from the individual’s employment. For Messrs Cosslett, Hartman 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. 4 Emoluments for Stevan Porter include £79,051 that was chargeable to UK income tax. 5 All fees due to Ralph Kugler were paid to Unilever. 6 Sir Howard Stringer resigned as a Director on 10 November 2006. 7 Ying Yeh was appointed as a Director on 1 December 2007. 8 Sir Ian Prosser retired as a Director on 31 December 2003. However, he had an ongoing healthcare benefit of £1,150 during the year. 40 IHG Annual Report and Financial Statements 2007 5 Long-term reward Short Term Deferred Incentive Plan (STDIP) – now called the Annual Bonus Plan Messrs Cosslett, Hartman, Porter and Solomons participated in the STDIP during the year ended 31 December 2007, and are expected to receive an award on 25 February 2008. Directors’ pre-tax interests during the year were: Directors Andrew Cosslett STDIP shares held at 1 Jan 2007 39,9161 32,1683 32,1673,8 32,1683,8 Total Richard Hartman 29,4472 29,4472 19,7143 19,7143,8 19,7133,8 STDIP shares awarded during the year 1 Jan 2007 to 31 Dec 2007 Award date 1.4.05 8.3.06 8.3.06 8.3.06 62,5754,8,9 26.2.07 16.3.05 16.3.05 8.3.06 8.3.06 8.3.06 26.2.07 51,2815,9 Total Stevan Porter 26,9782 26,9782 20,6433 20,6423,8 20,6423,8 16.3.05 16.3.05 8.3.06 8.3.06 8.3.06 33,3526,8,9 26.2.07 Total Richard Solomons 29,0202 29,0212 20,5633 20,5623,8 20,5633,8 Total 16.3.05 16.3.05 8.3.06 8.3.06 8.3.06 40,0487,8,9 26.2.07 653.67p 653.67p 853.67p 853.67p 853.67p 1235p 653.67p 653.67p 853.67p 853.67p 853.67p 1235p 653.67p 653.67p 853.67p 853.67p 853.67p 1235p Market price STDIP shares vested during the year per share 1 Jan 2007 to at award 31 Dec 2007 39,916 32,168 617.5p 853.67p 853.67p 853.67p 1235p Market price Value per share at vesting at vesting £ 1260.0p 502,942 1239.6p 398,755 Vesting date 1.4.07 8.3.07 29,447 16.3.07 1210.5p 356,456 19,714 8.3.07 1239.6p 244,375 26,978 16.3.07 20,643 8.3.07 1210.5p 326,56910 1239.6p 255,89110 29,020 16.3.07 1210.5p 351,287 20,563 8.3.07 1239.6p 254,899 Value based on share price of 884.0p at 31 Dec 07 £ Planned vesting date 8.3.08 8.3.09 26.2.10 255,273 255,282 493,891 1,004,446 16.3.08 260,312 8.3.08 8.3.09 26.2.10 156,451 156,433 453,325 1,026,521 16.3.08 238,486 8.3.08 8.3.09 26.2.10 163,815 163,806 263,238 829,345 16.3.08 256,546 8.3.08 8.3.09 26.2.10 163,178 163,178 316,092 898,994 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I STDIP shares held at 31 Dec 2007 – – 28,877 28,878 55,870 113,625 – 29,447 – 17,698 17,696 51,281 116,122 – 26,978 – 18,531 18,530 29,778 93,817 – 29,021 – 18,459 18,459 35,757 101,696 1 This special award was made to Andrew Cosslett as part of his overall recruitment terms. The shares were to vest in equal portions on the first and second anniversary of the award date, subject to his continued employment until that time. The second half of the award vested on 1 April 2007. 6 This award was based on financial year 2006 performance and the bonus target was 50% of base salary. Stevan Porter was awarded 50% for EPS performance and 33.8% for Americas EBIT performance. Stevan Porter's total bonus was therefore 83.8% of his base salary. One matching share was awarded for every two bonus shares earned. 2 This award was based on financial year 2004 performance where the performance measures were related to earnings per share (EPS), earnings before interest and tax (EBIT) and personal performance. Total shares held include matching shares. 3 This award was based on financial year 2005 performance where the performance measures were related to EPS, EBIT and personal performance. Total shares held include matching shares. 4 This award was based on financial year 2006 performance and the bonus target was 50% of base salary. Andrew Cosslett was awarded 50% for EPS performance and 42% for Group EBIT performance. Andrew Cosslett's total bonus was therefore 92% of his base salary. One matching share was awarded for every two bonus shares earned. 5 This award was based on financial year 2006 performance and the bonus target was 50% of base salary. Richard Hartman was awarded 50% for EPS performance and 34.3% for EMEA EBIT performance. Richard Hartman's total bonus was therefore 84.3% of his base salary. One matching share was awarded for every two bonus shares earned. 7 This award was based on financial year 2006 performance and the bonus target was 50% of base salary. Richard Solomons was awarded 50% for EPS performance and 42% for Group EBIT performance. Richard Solomons' total bonus was therefore 92% of his base salary. One matching share was awarded for every two bonus shares earned. 8 A proportion of these share interests were in InterContinental Hotels Group PLC 113/7p ordinary shares which were subject to the share consolidation effective from 4 June 2007. For every 56 existing InterContinental Hotels Group PLC shares held on 1 June 2007, shareholders received 47 new ordinary shares of 13 29/47p each and a special dividend of 200p per existing ordinary share. As a consequence, shares held at 31 December 2007 have been reduced accordingly. 9 Under the financial year 2006 STDIP, paid in 2007, 80% of the bonus award was paid in shares and deferred for a full three-year period. Participants could also defer the remaining 20% of bonus on the same terms. 10 The value of Stevan Porter's shares at vesting includes £67,953 that was chargeable to UK income tax. Remuneration report 41 Remuneration report continued Long Term Incentive Plan (LTIP) – previously called the Performance Restricted Share Plan In 2007, there were three cycles in operation and one cycle which vested. The awards made in respect of cycles ending on 31 December 2006, 2007, 2008 and 2009 and the maximum pre-tax number of ordinary shares due if performance targets are achieved in full are set out in the table below. In respect of the cycle ending on 31 December 2007, the Company finished in fourth place in the TSR group and achieved a relative cumulative annual rooms growth (CAGR) of 3.1%. Accordingly, 55.3% of the award will vest on 20 February 2008. Maximum LTIP shares awarded Maximum during LTIP shares the year held at 1 Jan 2007 to 1 Jan 2007 31 Dec 2007 136,4321 276,2002 200,7403 159,5064 Award date 1.4.05 29.6.05 3.4.06 2.4.07 LTIP shares vested during Market price per the year share at 1 Jan 2007 to award 31 Dec 2007 85,133 617.5p – 706p – 941.5p – 1256p Maximum value based on share price of 884.0p at Expected value based on share price of 884.0p at 31 Dec 2007 31 Dec 2007 £ Value at vesting £ Market price per share at vesting 1249p 1,063,311 21.2.07 20.2.08 18.2.09 17.2.10 Actual/ Maximum planned LTIP shares held at vesting date 31 Dec 2007 – 2,441,608 1,350,0108 276,200 1,774,542 200,740 159,506 1,410,034 636,446 5,626,184 £ 165,1301 214,8702 146,1103 142,2901 174,9002 132,2403 24.6.04 29.6.05 3.4.06 113,7314 2.4.07 549.5p 103,041 – – – 706p 941.5p 1256p 1249p 1,286,982 21.2.07 20.2.08 18.2.09 17.2.10 24.6.04 29.6.05 3.4.06 92,6674 2.4.07 144,9901 176,5502 128,4703 24.6.04 29.6.05 3.4.06 102,1094 2.4.07 549.5p 706p 941.5p 1256p 549.5p 706p 941.5p 1256p 88,788 – – – 90,473 – – – 1249p 1,108,9626 21.2.07 20.2.08 18.2.09 17.2.10 1249p 1,130,008 21.2.07 20.2.08 18.2.09 17.2.10 144,9931,7 24.6.04 549.5p 90,475 1249p 1,130,033 21.2.07 962,8638 855,0038 863,0698 – 196,9645 1,741,162 753,434 251,339 310,626 2,745,935 85,2305 28,4325 – 174,900 132,240 92,667 1,546,116 1,169,002 819,177 399,807 3,534,295 – 1,560,702 176,550 1,135,675 128,470 102,109 902,644 407,129 3,599,021 – – Directors Andrew Cosslett Total Richard Hartman Total Stevan Porter Total Richard Solomons Total Former Directors Richard North Total 1 This award was based on performance to 31 December 2006 where the 3 This award is based on performance to 31 December 2008 where the performance measure related to both the Company's TSR against a group of eight other comparator companies and growth in return on capital employed (ROCE). The number of shares released was graded, according to a) where the Company finished in the TSR comparator group, with 50% of the award being released for first or second position and 10% of the award being released for fifth place; and b) growth in ROCE, with 50% of the award being released for 141.6% growth and 10% of the award being released for 70% growth. The Company finished in third place in the TSR group and achieved ROCE growth of 98.2%. Accordingly, 62.4% of the award vested on 21 February 2007. 2 This award is based on performance to 31 December 2007 where the performance measure relates to both the Company’s TSR against a group of seven other comparator companies and the cumulative annual growth rate (CAGR) of rooms in the IHG system relative to a group of five other comparator companies. The number of shares released is graded, according to a) where the Company finished in the TSR comparator group, with 50% of the award being released for first or second position and 10% of the award being released for median position; and b) relative CAGR with 50% of the award being released for 3.4% (upper quartile) CAGR and 10% of the award being released for 2.4% (median) CAGR. performance measure relates to both the Company’s TSR against a group of eight other comparator companies and the relative CAGR of rooms in the IHG system. 4 This award is based on performance to 31 December 2009 where the performance measure relates to both the Company's TSR against a group of eight other comparator companies and the compound annual growth rate in earnings per share (EPS) over the performance period. 5 Richard Hartman’s awards were pro-rated to reflect his contractual service during the applicable performance periods. 6 The value of Stevan Porter’s shares at vesting includes £129,378 that was chargeable to UK income tax. 7 Richard North’s award was pro-rated to reflect his contractual service during the applicable performance period. 8 The Company finished in fourth place in the TSR group and achieved CAGR of 3.1%. Accordingly, 55.3% of the award will vest on 20 February 2008. 42 IHG Annual Report and Financial Statements 2007 Share options Between 2003 and 2005, grants of options were made under the IHG Executive Share Option Plan. No executive share options have been granted since 2005. In 2003, a grant of options was made under the IHG all-employee Sharesave Plan. Directors Andrew Cosslett B Total Richard Hartman B Total Stevan Porter A B Total Richard Solomons A B C Total Options held at 1 Jan 2007 157,300 157,300 337,760 337,760 321,630 321,630 334,639 334,639 Ordinary shares under option Granted during the year Lapsed during the year Exercised during the year Options held at 31 Dec 2007 – – – – 157,300 157,300 – 218,950 218,950 – – 118,810 118,810 225,260 96,370 321,630 230,320 100,550 3,769 334,639 – – – – Weighted average option price (p) 619.83 619.83 531.82 531.10 Option price (p) 619.83 494.17 619.83 494.17 619.83 494.17 619.83 420.50 A Where options are exercisable at 31 December 2007. Executive share options granted in 2004 are exercisable up to April 2014. B Where options are not yet exercisable at 31 December 2007. Executive share options granted in 2005 are exercisable up to April 2015. The performance condition relating to the 2005 grant of executive share options is set out on page 38. C Sharesave options granted in 2003. These are exercisable between March and September 2009. Option prices range from 420.50p to 619.83p per IHG share. The closing market value share price on 31 December 2007 was 884.00p and the range during the year was 873.50p to 1413.00p per share. No serving Director exercised options during the year; therefore there is no disclosable gain by Directors in aggregate for the year ended 31 December 2007 (2006 £6,662,750). Richard Hartman was a Director until his retirement on 25 September 2007. He subsequently exercised options at an option price of 494.17p per share. The market value share price on exercise was 911.78p per share. 6 Directors’ shareholdings Executive Directors Andrew Cosslett Stevan Porter Richard Solomons Non-Executive Directors David Kappler Ralph Kugler Jennifer Laing Robert C Larson Jonathan Linen Sir David Prosser David Webster Ying Yeh 31 December 2007 InterContinental Hotels Group PLC ordinary shares of 13 29⁄47p2 1 January 2007 InterContinental Hotels Group PLC ordinary shares of 11 3⁄7p1 133,101 168,162 156,810 1,400 1,169 1,404 10,2693 7,3433 2,402 31,938 – 42,063 114,446 104,247 1,669 572 875 6,8743 8,7503 2,863 31,975 – 1 These share interests were in InterContinental Hotels Group PLC 11 3⁄7p 2 These shareholdings are all beneficial interests and include shares held ordinary shares prior to the share consolidation effective from 4 June 2007. For every 56 existing InterContinental Hotels Group PLC shares held on 1 June 2007, shareholders received 47 new ordinary shares of 13 29⁄47p each and 200p per existing ordinary share. by Directors’ spouses and other connected persons. None of the Directors has a beneficial interest in the shares of any subsidiary. 3 Held in the form of American Depositary Receipts. Remuneration report 43 I T H E R R E S P O N S B I L I T I E S I T H E B O A R D , S E N O R I T M H A E N B A O G A E R M D E N S T E A N N O D R I , I M T H A E N R A G R E E M S E P N O T N S A N B D I L I T I E S I Remuneration report continued 7 Directors’ pensions The following information relates to the pension arrangements provided for Messrs Cosslett, Hartman and Solomons under the executive section of the InterContinental Hotels UK Pension Plan (the IC Plan) and the unfunded InterContinental Executive Top-Up Scheme (ICETUS). The executive section of the IC Plan is a funded, registered, final salary, occupational pension scheme. The main 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’, partners’ and dependants’ pensions on death. When benefits would otherwise exceed a member’s lifetime allowance under the post-April 2006 pensions regime, these benefits are limited in the IC Plan, but the balance is provided instead by ICETUS. Directors’ pension benefits Richard Hartman, who reached the IC Plan normal pension age of 60 on 30 January 2006, ceased to be an active member of the IC Plan and ICETUS with effect from that date, and, up to his retirement on 25 September 2007, instead participated in the InterContinental Hotels Group International Savings and Retirement Plan (IS&RP), which is a Jersey-based defined contribution plan to which the Company contributes. Stevan Porter has retirement benefits provided via the 401(k) Retirement Plan for employees of Six Continents Hotels Inc. (401(k)) and the Six Continents Hotels Inc. Deferred Compensation Plan (DCP). 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 Andrew Cosslett Richard Hartman Richard Solomons Directors’ contributions in the year1 £ 34,400 – 22,000 Transfer value of accrued benefits 1 Jan 2007 £ 595,300 1,935,400 1,470,500 31 Dec 2007 £ 1,184,200 1,812,600 2,371,600 Age at 31 Dec 2007 52 61 46 Increase/ (decrease) in transfer value over the year, less Directors’ contributions £ 554,500 (122,800) 879,100 Increase/ (decrease) in accrued pension2 £ pa 27,100 (19,300) 24,900 Increase/ (decrease) in accrued pension3 £ pa 25,300 (23,300) 18,700 Accrued pension at 31 Dec 20074 £ pa 70,900 75,4005 168,700 1 Contributions paid in the year by the Directors under the terms of the 4 Accrued pension is that which would be paid annually on retirement at 60, plans. Contributions have been 5% of full pensionable salary. based on service to 31 December 2007. 2 The absolute increase or decrease in accrued pension during the year. 3 The increase or decrease in accrued pension during the year, excluding any increase for inflation, on the basis that increases or decreases to accrued pensions are applied at 1 October. 5 When Richard Hartman retired on 25 September 2007, his pension was £97,600 per annum pre-commutation. He took a tax-free cash sum of £385,400, leaving a residual pension of £75,400 per annum. 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 Director’s contribution to 401(k) £ 5,600 DCP £ 105,000 Stevan Porter Company contribution to 401(k) £ 4,500 DCP £ 74,700 The Company contributions made in respect of Richard Hartman to the IS&RP during the year were £159,300. He made no contributions. By order of the Board Richard Winter Company Secretary 18 February 2008 44 IHG Annual Report and Financial Statements 2007 Group financial statements In this section we present the statement of Directors’ responsibilities, the independent auditor’s report and the consolidated financial statements of the Group for 2007. Group financial statements Statement of Directors’ responsibilities Independent auditor’s report to the members Group income statement Group statement of recognised income and expense Group cash flow statement Group balance sheet Corporate information and accounting policies Inventories Intangible assets Investments in associates Notes to the Group financial statements 1 Exchange rates 2 Segmental information 3 Staff costs and Directors’ emoluments 4 Auditor’s remuneration paid to Ernst & Young LLP 5 Exceptional items 6 Finance costs 7 Tax 8 Dividends paid and proposed 9 Earnings per ordinary share 10 Property, plant and equipment 11 Held for sale and discontinued operations 12 Goodwill 13 14 15 Other financial assets 16 17 Trade and other receivables 18 Cash and cash equivalents 19 Trade and other payables 20 Loans and other borrowings 21 Financial risk management policies 22 Financial instruments 23 Net debt 24 Retirement benefits 25 Share-based payments 26 Deferred tax payable 27 Authorised and issued share capital 28 29 Minority equity interest 30 Operating leases 31 Capital and other commitments 32 Contingencies 33 Related party disclosures 34 Acquisition of subsidiary 35 Principal operating subsidiary undertakings IHG shareholders’ equity 46 47 48 49 50 51 52 57 57 62 62 63 63 64 65 65 66 67 68 69 70 70 71 71 72 72 72 73 75 77 77 81 84 85 86 87 87 87 87 88 88 88 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Group financial statements 45 Statement of Directors’ responsibilities In relation to the Group financial statements The following statement, which should be read in conjunction with the independent auditor’s report set out opposite, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the auditor in relation to the Group financial statements. The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union. The Directors are required to prepare Group financial statements for each financial year which present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period. The Directors consider that in preparing the Group financial statements on pages 48 to 88 inclusive, the Group 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 Group keeps accounting records which disclose with reasonable accuracy the financial position of the Group and which enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. 46 IHG Annual Report and Financial Statements 2007 Independent auditor’s report to the members of InterContinental Hotels Group PLC In relation to the Group financial statements We have audited the Group financial statements of InterContinental Hotels Group PLC for the year ended 31 December 2007 which comprise the Group income statement, Group statement of recognised income and expense, Group cash flow statement, Group balance sheet, corporate information and accounting policies and the related notes 1 to 35. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of InterContinental Hotels Group PLC for the year ended 31 December 2007 and on the information in the Directors’ Remuneration Report 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 auditor’s 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. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information that is cross referred from the Business review, Directors and Employees sections of the Directors’ Report. In addition we report to you if, in our opinion we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined 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. We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Highlights, Message from the Chairman and Chief Executive, Business Review, Directors’ Report, Corporate Governance Statement, Audit Committee Report and the Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. Opinion In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2007 and of its profit for the year then ended; • the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • the information given in the Directors’ Report is consistent with the Group financial statements. Ernst & Young LLP, Registered auditor, London. 18 February 2008 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Statement of Directors’ responsibilities and Independent auditor’s report 47 Group financial statements GROUP INCOME STATEMENT For the year ended 31 December 2007 Revenue Cost of sales Administrative expenses Other operating income and expenses Depreciation and amortisation Operating profit Financial income Financial expenses Profit before tax Tax Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year attributable to the equity holders of the parent Earnings per ordinary share Continuing operations: Note 2 2 2 6 6 7 11 9 Basic Diluted Adjusted Adjusted diluted Total operations: Basic Diluted Adjusted Adjusted diluted Before exceptional items £m 883 (411) (188) 8 292 (55) 237 9 (54) 192 (42) 150 5 Exceptional items (note 5) £m – – (7) 38 31 (1) 30 – – 30 30 60 16 2007 Total £m 883 (411) (195) 46 323 (56) 267 9 (54) 222 (12) 210 21 Before exceptional items £m 786 (355) (180) 4 255 (55) 200 26 (37) 189 (41) 148 19 Exceptional items (note 5) £m – – – 27 27 – 27 – – 27 94 121 117 2006 Total £m 786 (355) (180) 31 282 (55) 227 26 (37) 216 53 269 136 155 76 231 167 238 405 46.9p 45.6p 48.4p 47.1p 65.6p 63.8p 72.2p 70.2p 38.0p 37.1p 42.9p 41.8p 69.1p 67.4p 104.1p 101.5p Notes on pages 52 to 88 form an integral part of these financial statements. 48 IHG Annual Report and Financial Statements 2007 GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2007 Income and expense recognised directly in equity Gains on valuation of available-for-sale assets (Losses)/gains on cash flow hedges Exchange differences on retranslation of foreign operations Actuarial gains/(losses) on defined benefit pension plans Transfers to the income statement On cash flow hedges: interest payable On disposal of foreign operations: gain on disposal of assets On disposal of available-for-sale assets: other operating income and expenses Tax Tax on items above taken directly to or transferred from equity Tax related to share schemes recognised directly in equity Net income recognised directly in equity Profit for the year Total recognised income and expense for the year attributable to the equity holders of the parent Notes on pages 52 to 88 form an integral part of these financial statements. 2007 £m 4 (1) 10 12 25 (1) – (10) (11) (3) (2) (5) 9 231 240 2006 £m 16 1 (30) (2) (15) (1) 4 (14) (11) 4 26 30 4 405 409 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Group income statement and Group statement of recognised income and expense 49 Group financial statements continued GROUP CASH FLOW STATEMENT For the year ended 31 December 2007 Profit for the year Adjustments for: Net financial expense Income tax charge/(credit) Exceptional operating items before depreciation Gain on disposal of assets, net of tax Depreciation and amortisation Equity-settled share-based cost, net of payments Other non-cash items Operating cash flow before movements in working capital Increase in trade and other receivables Increase in trade and other payables Retirement benefit contributions, net of charge Cash flow from operations Interest paid Interest received Tax paid on operating activities Net cash from operating activities Cash flow from investing activities Purchases of property, plant and equipment Purchases of intangible assets Purchases of associates and other financial assets Acquisition of subsidiary, net of cash acquired Disposal of assets, net of costs and cash disposed of Proceeds from associates and other financial assets Tax paid on disposals Net cash from investing activities Cash flow from financing activities Proceeds from the issue of share capital Purchase of own shares Purchase of own shares by employee share trusts Proceeds on release of own shares by employee share trusts Dividends paid to shareholders Dividends paid to minority interests Increase/(decrease) in borrowings Net cash from financing activities Net movement in cash and cash equivalents in the year Cash and cash equivalents at beginning of the year Exchange rate effects Cash and cash equivalents at end of the year Notes on pages 52 to 88 form an integral part of these financial statements. 50 IHG Annual Report and Financial Statements 2007 2007 £m 231 45 15 (31) (16) 58 24 (2) 324 (15) 26 (33) 302 (42) 9 (37) 232 (57) (20) (16) – 49 57 (32) (19) 16 (81) (69) 10 (773) – 553 (344) (131) 179 4 52 2006 £m 405 11 (41) (27) (117) 64 14 – 309 (31) 10 – 288 (33) 24 (43) 236 (87) (23) (8) (6) 620 124 (6) 614 20 (260) (47) 19 (561) (1) (172) (1,002) (152) 324 7 179 GROUP BALANCE SHEET 31 December 2007 ASSETS Property, plant and equipment Goodwill Intangible assets Investment in associates Retirement benefit assets Other financial assets Total non-current assets Inventories Trade and other receivables Current tax receivable Cash and cash equivalents Other financial assets Total current assets Non-current assets classified as held for sale Total assets LIABILITIES Loans and other borrowings Trade and other payables Current tax payable Total current liabilities Loans and other borrowings Retirement benefit obligations Trade and other payables Deferred tax payable Total non-current liabilities Liabilities classified as held for sale Total liabilities Net assets EQUITY Equity share capital Capital redemption reserve Shares held by employee share trusts Other reserves Unrealised gains and losses reserve Currency translation reserve Retained earnings IHG shareholders’ equity Minority equity interest Total equity Signed on behalf of the Board Richard Solomons 18 February 2008 Note 10 12 13 14 24 15 16 17 18 15 11 2 20 19 20 24 19 26 11 2 28 28 28 28 28 28 28 29 2007 £m 962 110 167 33 32 93 1,397 3 235 54 52 9 353 57 1,807 (8) (390) (212) (610) (869) (55) (139) (82) (1,145) (3) (1,758) 49 81 5 (41) (1,528) 19 6 1,504 46 3 49 2006 £m 997 109 154 32 – 96 1,388 3 237 23 179 13 455 50 1,893 (10) (402) (231) (643) (303) (71) (109) (79) (562) (2) (1,207) 686 66 4 (17) (1,528) 27 (3) 2,129 678 8 686 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes on pages 52 to 88 form an integral part of these financial statements. Group cash flow statement and Group balance sheet 51 Corporate information and accounting policies Corporate information The consolidated financial statements of InterContinental Hotels Group PLC (the Group or IHG) for the year ended 31 December 2007 were authorised for issue in accordance with a resolution of the Directors on 18 February 2008. InterContinental Hotels Group PLC (the Company) is incorporated in Great Britain and registered in England and Wales. Summary of significant accounting policies Basis of preparation The consolidated financial statements are presented in sterling and all values are rounded to the nearest million (£m) except where otherwise indicated. Statement of compliance The consolidated financial statements of IHG have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 1985. The Group has early adopted International Financial Reporting Interpretations Committee 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ (IFRIC 14). IFRIC 14 provides guidance on assessing the limit in International Accounting Standard 19 ‘Employee Benefits’ (IAS 19) on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. Under IFRIC 14, the Group has recognised retirement benefit assets of £32m on the balance sheet at 31 December 2007. The Group has also adopted International Financial Reporting Standard 7 ‘Financial Instruments: Disclosures’ (IFRS 7) for the first time in these financial statements. This is a disclosure standard only which has had no impact on the Group’s results or net assets. The new disclosures are included throughout the financial statements. Other new accounting standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), becoming effective during the year, have not had a material impact on the Group’s financial statements. The principal accounting policies of the Group are set out below. Basis of consolidation The Group financial statements comprise the financial statements of the parent company and entities controlled by the Company. All inter-company balances and transactions have been eliminated. The results of those businesses acquired or disposed of are consolidated for the period during which they were under the Group’s control. 52 IHG Annual Report and Financial Statements 2007 Foreign currencies Transactions in foreign currencies are translated to the functional currency at the exchange rates ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency at the relevant rates of exchange ruling at the balance sheet date. All foreign exchange differences arising on translation are recognised in the income statement except on foreign currency borrowings that provide a hedge against a net investment in a foreign operation. These are taken directly to the currency translation reserve until the disposal of the net investment, at which time they are recycled against the gain or loss on disposal. The assets and liabilities of foreign operations, including goodwill, are translated into sterling at the relevant rates of exchange ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at weighted average rates of exchange for the period. The exchange differences arising on the retranslation are taken directly to the currency translation reserve. On disposal of a foreign operation, the cumulative amount recognised in the currency translation reserve relating to that particular foreign operation is recycled against the gain or loss on disposal. Derivative financial instruments and hedging Derivatives designated as hedging instruments are accounted for in line with the nature of the hedging arrangement. The Group’s detailed accounting policies with respect to hedging instruments are set out in note 21. Documentation outlining the measurement and effectiveness of the hedging arrangement is maintained throughout the life of the hedge relationship. Any ineffective element of a hedge arrangement is recognised in financial income or expense. Interest arising from currency swap agreements is taken to financial income or expense on a gross basis over the term of the relevant agreements. Interest arising from other currency derivatives and interest rate swaps is taken to financial income or expense on a net basis over the term of the agreement. Foreign exchange gains and losses on currency instruments are recognised in financial income and expense unless they form part of effective hedge relationships. The fair value of derivatives is calculated by discounting the expected future cash flows at prevailing interest rates. Property, plant and equipment Property, plant and equipment are stated at cost less depreciation and any impairment. Borrowing costs are not capitalised. Repairs and maintenance costs are expensed as incurred. Land is not depreciated. All other property, plant and equipment are depreciated to a residual value over their estimated useful lives, namely: buildings – lesser of 50 years and unexpired term of lease; and fixtures, fittings and equipment – 3 to 25 years. All depreciation is charged on a straight-line basis. Residual value is reassessed annually. Property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Assets that do not generate independent cash flows are combined into cash- generating units. If carrying values exceed estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. Recoverable amount is the greater of fair value less cost to sell and value in use. Value in use is assessed based on estimated future cash flows discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. On adoption of IFRS, the Group retained previous revaluations of property, plant and equipment at deemed cost as permitted by IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’. Goodwill Goodwill arises on consolidation and is recorded at cost, being the excess of the cost of acquisition over the fair value at the date of acquisition of the Group’s share of identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at least annually by comparing carrying values of cash-generating units with their recoverable amounts. Intangible assets Software Acquired software licences and software developed in-house are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Costs are amortised over estimated useful lives of three to five years on a straight-line basis. Management contracts When assets are sold and a purchaser enters into a management or franchise contract with the Group, the Group capitalises as part of the gain or loss on disposal an estimate of the fair value of the contract entered into. The value of management contracts is amortised over the life of the contract which ranges from six to 50 years on a straight-line basis. Other intangible assets Amounts paid to hotel owners to secure management contracts and franchise agreements are capitalised and amortised over the shorter of the contracted period and 10 years on a straight- line basis. Internally generated development costs are expensed unless forecast revenues exceed attributable forecast development costs, at which time they are capitalised and amortised over the life of the asset. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Associates An associate is an entity over which the Group has the ability to 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 associate is classified as held for sale. Under the equity method, the Group’s investment is recorded at cost adjusted by the Group’s share of post acquisition profits and losses. When the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to £nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate. Financial assets The Group classifies its financial assets into one of the two following categories: loans and receivables or available-for-sale financial assets. Management determines the classification on initial recognition and they are subsequently held at amortised cost (loans and receivables) or fair value (available-for-sale financial assets). Interest on loans and receivables is calculated using the effective interest rate method and is recognised in the income statement as interest income. Changes in fair values of available-for-sale financial assets are recorded directly in equity within the unrealised gains and losses reserve. On disposal, the accumulated fair value adjustments recognised in equity are recycled to the income statement. Dividends from available-for- sale financial assets are recognised in the income statement as other operating income and expenses. Financial assets are tested for impairment at each balance sheet date. If an available-for-sale financial asset is impaired, the difference between original cost and fair value is transferred from equity to the income statement to the extent of any cumulative loss recorded in equity, with any excess charged directly to the income statement. Financial liabilities Financial liabilities are measured at amortised cost using the effective interest rate method. A financial liability is derecognised when the obligation under the liability expires, is discharged or cancelled. Inventories Inventories are stated at the lower of cost and net realisable value. Trade receivables Trade receivables are recorded at their original amount less provision for impairment. It is the Group’s policy to provide for 100% of the previous month’s aged receivables balances which are more than 180 days past due. Adjustments to the policy may be made due to specific or exceptional circumstances when collection is no longer considered probable. The carrying amount of the receivable is reduced through the use of a provision account and movements in the provision are recognised in the income statement within cost of sales. When a previously provided trade receivable is uncollectable, it is written off against the provision. S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Corporate information and accounting policies 53 Corporate information and accounting policies continued Cash and cash equivalents Cash comprises cash in hand and demand deposits. Cash equivalents are short-term highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. In the cash flow statement cash and cash equivalents are shown net of short-term overdrafts which are repayable on demand and form an integral part of the Group’s cash management. Assets held for sale Non-current assets and associated 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. Assets designated as held for sale are held at the lower of carrying amount at designation and sales value less cost to sell. Depreciation is not charged against property, plant and equipment classified as held for sale. Trade payables Trade payables are non interest bearing and are stated at their nominal value. Loyalty programme The hotel loyalty programme, Priority Club Rewards, enables members to earn points, funded through hotel assessments, during each stay at an IHG hotel and redeem the points at a later date for free accommodation or other benefits. The future redemption liability is included in trade and other payables and is estimated using eventual redemption rates determined by actuarial methods and points values. The Group pays interest to the loyalty programme on the accumulated cash received in advance of redemption of the points awarded. Self insurance The Group is self insured for various insurable risks including 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. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, it is probable that a payment will be made and a reliable estimate of the amount payable can be made. If the effect of the time value of money is material, the provision is discounted. Bank and other borrowings Bank and other borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. They are subsequently measured at amortised cost. Finance charges, including issue costs, are charged to the income statement using an effective interest rate method. 54 IHG Annual Report and Financial Statements 2007 Borrowings are classified as non-current when the repayment date is more than 12 months from the balance sheet date or where they are drawn on a facility with more than 12 months to expiry. Retirement benefits Defined contribution plans Payments to defined contribution schemes are charged to the income statement as they fall due. Defined benefit plans Plan assets are measured at fair value and plan liabilities are measured on an actuarial basis, using the projected unit credit method and discounting at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities. The difference between the value of plan assets and liabilities at the balance sheet date is the amount of surplus or deficit recorded on the balance sheet as an asset or liability. An asset is recognised in full when the employer has an unconditional right to use the surplus at some point during the life of the plan or on its wind up. The service cost of providing pension benefits to employees for the year is charged to the income statement. The cost of making improvements to pensions is recognised in the income statement on a straight-line basis over the period during which any increase in benefits vests. To the extent that improvements in benefits vest immediately, the cost is recognised immediately as an expense. Actuarial gains and losses may result from: differences between the expected return and the actual return on plan assets; differences between the actuarial assumptions underlying the plan liabilities and actual experience during the year; or changes in the actuarial assumptions used in the valuation of the plan liabilities. Actuarial gains and losses, and taxation thereon, are recognised in the Group statement of recognised income and expense. Actuarial valuations are normally carried out every three years and are updated for material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the balance sheet date. Taxes Current tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities including interest. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred tax Deferred tax assets and liabilities are recognised in respect of temporary differences between the tax base and carrying value of assets and liabilities, including accelerated capital allowances, unrelieved tax losses, unremitted profits from overseas where the Group does not control remittance, gains rolled over into replacement assets, gains on previously revalued properties and other short-term temporary differences. Deferred tax assets are recognised to the extent that it is regarded as probable that the deductible temporary differences can be realised. The recoverability of all deferred tax assets is reassessed at each balance sheet date. The Group has taken advantage of the transitional provisions of IFRS 2 ‘Share-based Payments’ in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005. Deferred tax is calculated at the tax rates that are expected to apply in the periods in which the asset or liability will be settled, based on rates enacted or substantively enacted at the balance sheet date. Revenue recognition Revenue is derived from the following sources: owned and leased properties; management fees; franchise fees and other revenues which are ancillary to the 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. Owned and leased – primarily derived from hotel operations, including the rental of rooms and food and beverage sales from owned and leased hotels operated under the Group’s brand names. Revenue is recognised when rooms are occupied and food and beverages are sold. Management fees – earned from hotels managed by the Group, usually under long-term contracts with the hotel owner. Management fees include a base fee, which is generally a percentage of hotel revenue, and an incentive fee, which is generally based on the hotel’s profitability or cash flows. Revenue is recognised when earned and realised or realisable under the terms of the contract. Franchise fees – received in connection with the license 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 and realised or realisable under the terms of the agreement. Share-based payments The cost of equity-settled transactions with employees is measured by reference to fair value at the date at which the shares are granted. Fair value is determined by an external valuer using option pricing models. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which any performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). The income statement charge for a period represents the movement in cumulative expense recognised at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Leases Operating lease rentals are charged to the income statement on a straight-line basis over the term of the lease. Assets held under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease, with a corresponding liability being recognised for the fair value of the leased asset or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between the reduction of the lease liability and finance charges in the income statement so as to achieve a constant rate of interest on the remaining balance of the liability. Assets held under finance leases are depreciated over the shorter of the estimated useful life of the asset and the lease term. Disposal of non-current assets The Group recognises the sales proceeds and related gain or loss on disposal on completion of the sales process. In determining whether the gain or loss should be recorded, the Group considers whether it: • has a continuing managerial involvement to the degree associated with asset ownership; • has transferred the significant risks and rewards associated with asset ownership; and • can reliably measure and will actually receive the proceeds. Discontinued operations Discontinued operations are those relating to hotels sold or those classified as held for sale when the results relate to a separate line of business, geographical area of operations, or where there is a co-ordinated plan to dispose of a separate line of business or geographical area of operations. Exceptional items The Group discloses certain financial information both including and excluding exceptional items. The presentation of information excluding exceptional items allows a better understanding of the underlying trading performance of the Group and provides consistency with the Group’s internal management reporting. Exceptional items are identified by virtue of either their size or nature so as to facilitate comparison with prior periods and to assess underlying trends in financial performance. Exceptional items can include, but are not restricted to, gains and losses on the disposal of assets, impairment charges and reversals, restructuring costs and the release of tax provisions. Amounts that have previously been disclosed as special items have now been called exceptional items in accordance with market practice. There has been no change to the Group’s accounting policy for identifying these items. S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Corporate information and accounting policies 55 Corporate information and accounting policies continued Use of accounting estimates and judgements 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 may differ from these estimates under different assumptions and conditions. New standards and interpretations The IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements. They have not been adopted early by the Group and the Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s reported income or net assets in the period of adoption. IFRS 3R Business Combinations Effective from 1 July 2009 IFRS 8 IAS 23 Operating Segments Effective from 1 January 2009 Borrowing Costs (Amendment) Effective from 1 January 2009 IAS 27R Consolidated and Separate Financial Statements Effective from 1 July 2009 IFRIC 11 Group and Treasury Share Transactions Effective from 1 March 2007 IFRIC 13 Customer Loyalty Programmes Effective from 1 July 2008 Note: the effective dates are in respect of accounting periods beginning on or after the date. The estimates and assumptions that have the most significant effect on the amounts recognised in the financial statements are: Impairment – the Group determines whether goodwill is impaired on an annual basis or more frequently if there are indicators of impairment. Other non-current assets, including property, plant and equipment, are tested for impairment if there are indicators of impairment. Impairment testing requires an estimate of future cash flows and the choice of a suitable discount rate and, in the case of hotels, an assessment of recoverable amount based on comparable market transactions. Retirement and other post-employment benefits – the cost of defined benefit pension plans and other post-employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Tax – provisions for tax accruals require judgements on the interpretation of tax legislation, developments in tax case law and the potential outcomes of tax audits and appeals. In addition, deferred tax assets are recognised for unused tax attributes to the extent that it is probable that taxable profit will be available against which they can be utilised. Judgement is required as to the amount that can be recognised based on the likely amount and timing of future taxable profits, taking into account expected tax planning. Loyalty programme – the future redemption liability included in trade and other payables is estimated using actuarial methods based on statistical formulae that project the timing of future point redemptions based on historical levels to give eventual redemption rates and points values. Trade receivables – a provision for impairment of trade receivables is made on the basis of historical experience and other factors considered relevant by management. Other – the Group also makes estimates and judgements in the valuation of management and franchise agreements acquired on asset disposals, the valuation of financial assets classified as available-for-sale, the outcome of legal proceedings and claims and in the valuation of share-based payment costs. 56 IHG Annual Report and Financial Statements 2007 Notes to the Group financial statements 1 EXCHANGE RATES 2 SEGMENTAL INFORMATION The results of foreign operations have been translated into sterling at the weighted average rates of exchange for the period. In the case of the US dollar, the translation rate is £1=$2.01 (2006 £1=$1.84). In the case of the euro, the translation rate is £1=€1.46 (2006 £1=€1.47). Foreign currency denominated assets and liabilities have been translated into sterling at the rates of exchange on the balance sheet date. In the case of the US dollar, the translation rate is £1=$2.01 (2006 £1=$1.96). In the case of the euro, the translation rate is £1=€1.36 (2006 £1=€1.49). The primary segmental reporting format is determined to be three main geographical regions: Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific. These, together with Central functions, form the principal format by which management is organised and makes operational decisions. The Group further breaks each geographical region into three distinct business models which offer different growth, return, risk and reward opportunities: Franchised Where Group companies neither own nor manage the hotel, but license the use of a Group brand and provide access to reservation systems, loyalty schemes and know-how. The Group derives revenues from a brand royalty or licensing fee, based on a percentage of room revenue. Managed Where, in addition to licensing the use of a Group brand, a Group company manages the hotel for third party owners. The Group derives revenues from base and incentive management fees and provides the system infrastructure necessary for the hotel to operate. Management contract fees are generally a percentage of hotel revenue and may have an additional incentive fee linked to profitability or cash flow. The terms of these agreements vary, but are often long term (for example, 10 years or more). The Group’s responsibilities under the management agreement typically include hiring, training and supervising the managers and employees that operate the hotels under the relevant brand standards. In order to gain access to central reservation systems, global and regional brand marketing and brand standards and procedures, owners are typically required to make a further contribution. Owned and leased Where a Group company both owns (or leases) and operates the hotel and, in the case of ownership, takes all the benefits and risks associated with ownership. Segmental results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Corporate information and accounting policies and Notes to the Group financial statements 57 Notes to the Group financial statements continued 2 SEGMENTAL INFORMATION (CONTINUED) Year ended 31 December 2007 Revenue Owned and leased Managed Franchised Central Continuing operations Discontinued operations – owned and leased Segmental result Owned and leased Managed Franchised Regional and central Continuing operations Discontinued operations – owned and leased Exceptional operating items Operating profit Operating profit Net finance costs Profit before tax Tax Profit after tax Gain on disposal of assets, net of tax Profit for the year Americas £m EMEA £m Asia Pacific £m Central £m 128 78 244 – 450 31 481 121 84 40 – 245 9 254 73 49 8 – 130 – 130 – – – 58 58 – 58 Americas £m EMEA £m Asia Pacific £m Central £m 20 21 212 (33) 220 8 228 9 237 17 43 29 (22) 67 – 67 10 77 18 23 3 (13) 31 – 31 8 39 – – – (81) (81) – (81) 3 (78) Continuing £m 267 (45) 222 (12) 210 – 210 Discontinued £m 8 – 8 (3) 5 16 21 Group £m 322 211 292 58 883 40 923 Group £m 55 87 244 (149) 237 8 245 30 275 Group £m 275 (45) 230 (15) 215 16 231 58 IHG Annual Report and Financial Statements 2007 2 SEGMENTAL INFORMATION (CONTINUED) Year ended 31 December 2007 Assets and liabilities Segment assets Non-current assets classified as held for sale Unallocated assets: Current tax receivable Cash and cash equivalents Total assets Segment liabilities Liabilities classified as held for sale Unallocated liabilities: Current tax payable Deferred tax payable Loans and other borrowings Total liabilities Other segmental information Continuing operations: Capital expenditurea Additions to: Property, plant and equipment Intangible assets Depreciation and amortisationb Reversal of previously recorded impairment Discontinued operations: Capital expenditurea Depreciation and amortisationb Americas £m EMEA £m Asia Pacific £m Central £m 614 57 671 (280) (3) (283) 613 – 613 (237) – (237) 334 – 334 (67) – (67) 83 – 83 – – – Americas £m EMEA £m Asia Pacific £m Central £m 29 16 4 16 – 1 1 20 14 5 18 – – 1 20 14 3 11 3 – – 23 10 13 11 – – – Group £m 1,644 57 1,701 54 52 1,807 (584) (3) (587) (212) (82) (877) (1,758) Group £m 92 54 25 56 3 1 2 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I a Comprises purchases of property, plant and equipment, intangible assets and other financial assets and acquisitions of subsidiaries as included in the Group cash flow statement. b Included in the £58m of depreciation and amortisation is £20m relating to administrative expenses and £38m relating to cost of sales. Notes to the Group financial statements 59 Notes to the Group financial statements continued 2 SEGMENTAL INFORMATION (CONTINUED) Year ended 31 December 2006 Revenue Owned and leased Managed Franchised Central Continuing operations Discontinued operations – owned and leased Segmental result Owned and leased Managed Franchised Regional and central Continuing operations Discontinued operations – owned and leased Exceptional operating items Operating profit Operating profit Net finance costs Profit before tax Tax Profit after tax Gain on disposal of assets, net of tax Profit for the year Americas £m EMEA £m Asia Pacific £m Central £m Group £m 104 77 241 – 422 41 463 92 71 35 – 198 133 331 71 36 4 – 111 – 111 – – – 55 55 – 55 Americas £m EMEA £m Asia Pacific £m Central £m 12 27 208 (32) 215 6 221 25 246 (4) 37 24 (20) 37 25 62 2 64 17 21 3 (12) 29 – 29 – 29 – – – (81) (81) – (81) – (81) Continuing £m 227 (11) 216 53 269 – 269 Discontinued £m 31 – 31 (12) 19 117 136 267 184 280 55 786 174 960 Group £m 25 85 235 (145) 200 31 231 27 258 Group £m 258 (11) 247 41 288 117 405 60 IHG Annual Report and Financial Statements 2007 2 SEGMENTAL INFORMATION (CONTINUED) Year ended 31 December 2006 Assets and liabilities Segment assets Non-current assets classified as held for sale Unallocated assets: Current tax receivable Cash and cash equivalents Total assets Segment liabilities Liabilities classified as held for sale Unallocated liabilities: Current tax payable Deferred tax payable Loans and other borrowings Total liabilities Other segmental information Continuing operations: Capital expenditurea Additions to: Property, plant and equipment Intangible assets Depreciation and amortisationb Reversal of previously recorded impairment Discontinued operations: Capital expenditurea Additions to property, plant and equipment Depreciation and amortisationb Impairment of assets held for sale Americas £m EMEA £m Asia Pacific £m Central £m 647 40 687 (295) (2) (297) 583 10 593 (234) – (234) 338 – 338 (53) – (53) 73 – 73 – – – Americas £m EMEA £m Asia Pacific £m Central £m 34 116 10 15 – 1 – 4 3 49 53 31 17 2 8 4 5 – 17 9 1 10 – – – – – 15 4 11 13 – – – – – Group £m 1,641 50 1,691 23 179 1,893 (582) (2) (584) (231) (79) (313) (1,207) Group £m 115 182 53 55 2 9 4 9 3 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I a Comprises purchases of property, plant and equipment, intangible assets and other financial assets and acquisitions of subsidiaries as included in the Group cash flow statement. b Included in the £64m of depreciation and amortisation is £21m relating to administrative expenses and £43m relating to cost of sales. Notes to the Group financial statements 61 Notes to the Group financial statements continued 3 STAFF COSTS AND DIRECTORS’ EMOLUMENTS Staff Costs: Wages and salaries Social security costs Pension and other post-retirement benefits: Defined benefit plans (note 24) Defined contribution plans Average number of employees, including part-time employees: Americas EMEA Asia Pacific Central Directors’ emoluments Base salaries, fees, performance payments and benefits Gains on exercise of share options 2007 £m 292 31 4 12 339 2007 3,761 2,739 2,716 1,150 10,366 2007 £m 4.4 – More detailed information on the emoluments, pensions, option holdings and shareholdings for each Director is shown in the Remuneration Report on pages 36 to 44. 4 AUDITOR’S REMUNERATION PAID TO ERNST & YOUNG LLP Group audit fees Audit fees in respect of subsidiaries Tax fees Fees in respect of reporting under Sarbanes Oxley Act Interim review fees Other services pursuant to legislation Corporate finance fees Other 2007 £m 0.8 1.3 0.4 0.6 0.2 0.1 – 1.2 4.6 2006 £m 301 38 6 11 356 2006 3,771 4,437 2,225 1,023 11,456 2006 £m 4.5 6.7 2006 £m 0.9 1.4 0.7 1.0 0.2 0.1 0.1 0.8 5.2 Audit fees in respect of the pension scheme were not material. The Audit Committee has a process to ensure that any non-audit services do not compromise the independence and objectivity of the external auditor 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. 62 IHG Annual Report and Financial Statements 2007 5 EXCEPTIONAL ITEMS Exceptional operating items* Gain on sale of associate investments** Gain of sale of investment in FelCor Lodging Trust, Inc.** Gain on sale of other financial assets** Reversal of previously recorded impairment** Office reorganisations Tax* Tax charge on exceptional operating items Exceptional tax credit Gain on disposal of assets (note 11) Gain on disposal of assets Tax charge * Relates to continuing operations. ** Included within other operating income and expenses. The above items are treated as exceptional by reason of their size or nature. Note 2007 £m a b 11 – 18 3 (2) 30 – 30 30 20 (4) 16 2006 £m – 25 – 2 – 27 (6) 100 94 123 (6) 117 a Profit on sale and leaseback of new head office less costs incurred to date on the office move and closure of the Group’s Aylesbury facility. Costs will continue to be incurred during the first half of 2008. Costs of £7m are included in administrative expenses and £1m in depreciation and amortisation. Income of £6m is included in other operating income and expenses. b The exceptional tax credit relates to the release of provisions which are exceptional by reason of their size or nature relating to tax matters which have been settled or in respect of which the relevant statutory limitation period has expired, together with, in 2006, a credit in respect of previously unrecognised losses. 6 FINANCE COSTS Financial income Interest income Fair value gains Financial expenses Interest expense Finance charge payable under finance leases 2007 £m 8 1 9 45 9 54 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I 2006 £m 21 5 26 33 4 37 Interest income and expense relate to financial assets and liabilities held at amortised cost, calculated using the effective interest rate method. Included within interest expense is £10m (2006 £10m) payable to the Group’s loyalty programme relating to interest on the accumulated balance of cash received in advance of the redemption of points awarded. Notes to the Group financial statements 63 Notes to the Group financial statements continued 7 TAX Income tax UK corporation tax at 30% (2006 30%): Current period Benefit of tax reliefs on which no deferred tax previously recognised Adjustments in respect of prior periods Foreign tax: Current period Benefit of tax reliefs on which no deferred tax previously recognised Adjustments in respect of prior periods Total current tax Deferred tax: Origination and reversal of temporary differences Changes in tax rates Adjustments to estimated recoverable deferred tax assets Adjustments in respect of prior periods Total deferred tax Total income tax charge/(credit) on profit for the year Further analysed as tax relating to: Profit before exceptional items Exceptional items (note 5): Exceptional operating items Exceptional tax credit* Gain on disposal of assets The total tax charge/(credit) can be further analysed as relating to: Profit on continuing operations Profit on discontinued operations Gain on disposal of assets 2007 £m 23 (1) (16) 6 100 (8) (50) 42 48 (34) (2) 3 4 (29) 19 45 – (30) 4 19 12 3 4 19 2006 £m 16 (10) (4) 2 72 (1) (94) (23) (21) 27 (4) (13) (24) (14) (35) 53 6 (100) 6 (35) (53) 12 6 (35) * Represents the release of provisions which are exceptional by reason of their size or nature relating to tax matters which have been settled or in respect of which the relevant statutory limitation period has expired, together with, in 2006, a credit in respect of previously unrecognised losses. Reconciliation of tax charge/(credit) on total profit, including gain on disposal of assets UK corporation tax at standard rate Permanent differences Net effect of different rates of tax in overseas businesses Effect of changes in tax rates Benefit of tax reliefs on which no deferred tax previously recognised Effect of adjustments to estimated recoverable deferred tax assets Adjustment to tax charge in respect of prior periods Other Exceptional items and gain on disposal of assets 2007 % 30.0 5.6 1.8 (1.0) (3.3) 1.3 (11.0) 0.4 (16.3) 7.5 2006 % 30.0 3.7 3.5 (1.0) (3.0) (0.2) (6.9) 0.4 (36.1) (9.6) Tax paid Total tax paid during the year of £69m (2006 £49m) comprises £37m (2006 £43m) in respect of operating activities and £32m (2006 £6m) in respect of investing activities. 64 IHG Annual Report and Financial Statements 2007 8 DIVIDENDS PAID AND PROPOSED Paid during the year: Final (declared in previous year) Interim Special interim 2007 pence per share 2006 pence per share 13.3 5.7 200.0 219.0 10.7 5.1 118.0 133.8 2007 £m 47 17 709 773 2006 £m 46 18 497 561 Proposed for approval at the Annual General Meeting (not recognised as a liability at 31 December): Final 14.9 13.3 44 47 The proposed final dividend is payable on the shares in issue at 28 March 2008. 9 EARNINGS PER ORDINARY SHARE Basic earnings per ordinary share is calculated by dividing the profit for the year available for IHG equity holders by the weighted average number of ordinary shares, excluding investment in own shares, in issue during the year. 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 year. On 1 June 2007, shareholders approved a share capital consolidation on the basis of 47 new ordinary shares for every 56 existing ordinary shares, together with a special dividend of 200p per existing ordinary 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 disclosed in order to show performance undistorted by exceptional items, to give a more meaningful comparison of the Group’s performance. Basic earnings per share Profit available for equity holders (£m) Basic weighted average number of ordinary shares (millions) Basic earnings per share (pence) Diluted earnings per share Profit available for equity holders (£m) Diluted weighted average number of ordinary shares (millions) Diluted earnings per share (pence) Diluted weighted average number of ordinary shares is calculated as: Basic weighted average number of ordinary shares Dilutive potential ordinary shares – employee share options Continuing operations 210 320 65.6 210 329 63.8 Continuing operations 269 389 69.1 269 399 67.4 2007 Total 231 320 72.2 231 329 70.2 2007 millions 320 9 329 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I 2006 Total 405 389 104.1 405 399 101.5 2006 millions 389 10 399 Notes to the Group financial statements 65 Notes to the Group financial statements continued 9 EARNINGS PER ORDINARY SHARE (CONTINUED) Adjusted earnings per share Profit available for equity holders (£m) Less adjusting items (note 5): Exceptional operating items (£m) Tax on exceptional operating items (£m) Exceptional tax credit (£m) Gain on disposal of assets, net of tax (£m) Adjusted earnings (£m) Basic weighted average number of ordinary shares (millions) Adjusted earnings per share (pence) Adjusted earnings (£m) Diluted weighted average number of ordinary shares (millions) Adjusted diluted earnings per share (pence) 10 PROPERTY, PLANT AND EQUIPMENT Cost At 1 January 2006 Additions Transfers to non-current assets classified as held for sale Disposals Exchange and other adjustments At 31 December 2006 Additions Reclassifications Net transfers to non-current assets classified as held for sale Disposals Exchange and other adjustments At 31 December 2007 Depreciation At 1 January 2006 Provided Transfers to non-current assets classified as held for sale On disposals Exchange and other adjustments At 31 December 2006 Provided Net transfers to non-current assets classified as held for sale Reversal of impairment On disposals Exchange and other adjustments At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006 At 1 January 2006 Continuing operations 210 (30) – (30) – 150 320 46.9 150 329 45.6 2007 Total 231 (30) – (30) (16) 155 320 48.4 155 329 47.1 Continuing operations 269 (27) 6 (100) – 148 389 38.0 148 399 37.1 Land and buildings £m Fixtures, fittings and equipment £m 1,155 104 (363) (2) (73) 821 5 15 (38) (7) 3 799 (101) (7) 17 2 7 (82) (6) 17 – 7 – (64) 735 739 1,054 615 82 (118) (31) (42) 506 49 (20) (44) (19) 3 475 (313) (41) 55 28 23 (248) (33) 15 3 18 (3) (248) 227 258 302 2006 Total 405 (27) 6 (100) (117) 167 389 42.9 167 399 41.8 Total £m 1,770 186 (481) (33) (115) 1,327 54 (5) (82) (26) 6 1,274 (414) (48) 72 30 30 (330) (39) 32 3 25 (3) (312) 962 997 1,356 At 31 December 2007, a previously recorded impairment charge of £3m was reversed following an impairment review of hotel assets based on current market conditions. No impairment charge, or subsequent reversal, was required at 31 December 2006. The carrying value of land and buildings held under finance leases at 31 December 2007 was £104m (2006 £93m). 66 IHG Annual Report and Financial Statements 2007 11 HELD FOR SALE AND DISCONTINUED OPERATIONS During the year ended 31 December 2007, the Group sold three hotels (2006 32 hotels) and two associates (2006 nil), continuing the asset disposal programme commenced in 2003. An additional three hotels were classified as held for sale during the year, whilst one hotel previously classified as held for sale was reclassified as property, plant and equipment. At 31 December 2007, three hotels (2006 four hotels and two associates) were classified as held for sale. At 31 December 2006, an impairment loss of £3m was recognised on the remeasurement of a property that was classified as held for sale. The loss, which reduced the carrying amount of the asset to fair value less costs to sell, was recognised in the income statement in gain on disposal of assets. Fair value was determined by an independent property valuation. No impairment losses have been recognised at 31 December 2007. Net assets of hotels sold Property, plant and equipment Net working capital Cash and cash equivalents Loans and other borrowings Deferred tax Minority equity interest Group’s share of net assets disposed of Consideration Current year disposals: Cash consideration, net of costs paid Deferred consideration Management contract value Other Net assets disposed of Provision against deferred consideration Other, including impairment of held for sale asset Tax Gain on disposal of assets, net of tax* Net cash inflow Current year disposals: Cash consideration, net of costs paid Cash disposed of Prior year disposals Assets and liabilities held for sale Non-current assets classified as held for sale: Property, plant and equipment Associates Liabilities classified as held for sale: Deferred tax * Reported within discontinued operations. 2007 £m 35 1 – – – (6) 30 47 – 3 – 50 (30) – – (4) 16 47 – 2 49 57 – 57 (3) 2006 £m 648 (22) 31 (10) (117) (13) 517 628 10 30 (14) 654 (517) (10) (4) (6) 117 628 (31) 23 620 40 10 50 (2) S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes to the Group financial statements 67 Notes to the Group financial statements continued 11 HELD FOR SALE AND DISCONTINUED OPERATIONS (CONTINUED) Results of discontinued operations Revenue Cost of sales Depreciation and amortisation Operating profit Tax Profit after tax Gain on disposal of assets, net of tax (note 5) Profit for the year from discontinued operations Earnings per share from discontinued operations Basic Diluted Cash flows attributable to discontinued operations Operating profit before interest, depreciation and amortisation Investing activities Financing activities The effect of discontinued operations on segmental results is shown in note 2. 12 GOODWILL At 1 January Acquisition of subsidiary (note 34) Exchange and other adjustments At 31 December 2007 £m 40 (30) 10 (2) 8 (3) 5 16 21 2006 £m 174 (134) 40 (9) 31 (12) 19 117 136 2007 pence per share 2006 pence per share 6.6 6.4 2007 £m 10 (1) – 2007 £m 109 – 1 110 35.0 34.1 2006 £m 40 (9) (25) 2006 £m 118 2 (11) 109 Goodwill arising on business combinations that occurred before 1 January 2005 was not restated on adoption of IFRS as permitted by IFRS 1. Goodwill has been allocated to cash-generating units (CGUs) for impairment testing as follows: Americas managed operations Asia Pacific managed and franchised operations 2007 £m 70 40 110 2006 £m 72 37 109 The Group tests goodwill for impairment annually, or more frequently if there are any indications that an impairment may have arisen. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates and growth rates. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Growth rates are based on management expectations and industry growth forecasts. The growth rates used to determine cash flows beyond five years do not exceed the average long-term growth rate for the relevant markets. 68 IHG Annual Report and Financial Statements 2007 12 GOODWILL (CONTINUED) Americas managed operations The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next year and extrapolates cash flows for the following four years based on an estimated growth rate of 4.0% (2006 4.0%). After this period, the terminal value of future cash flows is calculated based on a perpetual growth rate of approximately 2.7% (2006 3.0%). The rate used to discount the forecast cash flows is 10.0% (2006 10.5%). Asia Pacific managed and franchised operations The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next year and extrapolates cash flows for the following four years based on an estimated growth rate of 15.0% (2006 15.0%). After this period, the terminal value of future cash flows is calculated based on a perpetual growth rate of approximately 4.0% (2006 4.0%). The rate used to discount the forecast cash flows is 11.0% (2006 11.0%). With regard to the assessment of value in use, management believe that the carrying values of the CGUs would only exceed their recoverable amounts in the event of highly unlikely changes in the key assumptions. 13 INTANGIBLE ASSETS Cost At 1 January 2006 Additions Acquisition of subsidiary Disposals Exchange and other adjustments At 31 December 2006 Additions Reclassification Disposals Exchange and other adjustments At 31 December 2007 Amortisation At 1 January 2006 Provided Exchange and other adjustments At 31 December 2006 Provided Disposals Exchange and other adjustments At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006 At 1 January 2006 Software £m Management contracts £m Other intangibles £m 38 10 1 – (6) 43 13 5 – (1) 60 (17) (9) 3 (23) (9) – 1 (31) 29 20 21 84 30 7 – (4) 117 5 – – 2 124 (3) (4) – (7) (6) – – (13) 111 110 81 28 13 – (2) (3) 36 7 – (1) – 42 (10) (3) 1 (12) (4) 1 – (15) 27 24 18 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Total £m 150 53 8 (2) (13) 196 25 5 (1) 1 226 (30) (16) 4 (42) (19) 1 1 (59) 167 154 120 The weighted average remaining amortisation period for management contracts is 24 years (2006 24 years). Notes to the Group financial statements 69 Notes to the Group financial statements continued 14 INVESTMENTS IN ASSOCIATES The Group holds seven investments (2006 six) accounted for as associates. The following table summarises the financial information of the associates. Share of associates’ balance sheet Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of associates’ revenue and profit Revenue Net profit Related party transactions Revenue from related parties Amounts owed by related parties 15 OTHER FINANCIAL ASSETS Non-current Equity securities available-for-sale Other Current Equity securities available-for-sale Derivatives Other 2007 £m 3 52 (8) (14) 33 16 1 3 1 2007 £m 46 47 93 – – 9 9 2006 £m 2 50 (5) (15) 32 22 2 4 1 2006 £m 48 48 96 9 4 – 13 Available-for-sale financial assets, which are held on the balance sheet at fair value, consist of equity investments in listed and unlisted shares. Of the total amount of equity investments at 31 December 2007, £2m (2006 £nil) were listed securities and £44m (2006 £57m) unlisted; £28m (2006 £27m) were denominated in US dollars, £8m (2006 £11m) in Hong Kong dollars and £10m (2006 £19m) in other currencies. Unlisted equity shares are mainly investments in entities that own hotels which the Group manages. The fair value of unlisted equity shares has been estimated using valuation guidelines issued by the British Venture Capital Association and is based on assumptions regarding expected future earnings. Listed equity share valuation is based on observable market prices. Dividend income from available-for-sale equity securities of £8m (2006 £4m) is reported as other operating income and expenses in the Group income statement. Other financial assets consist of trade deposits, restricted cash and deferred consideration on asset disposals. These amounts have been designated as ‘loans and receivables’ and are held at amortised cost. Restricted cash of £27m (2006 £25m) relates to cash held in bank accounts which is pledged as collateral to insurance companies for risks retained by the Group. Derivatives, including those within trade and other payables, are held on the balance sheet at fair value. Fair value is estimated using discounted future cash flows taking into consideration interest and exchange rates prevailing at the balance sheet date. 70 IHG Annual Report and Financial Statements 2007 15 OTHER FINANCIAL ASSETS (CONTINUED) The movement in the provision for impairment of other financial assets during the year is as follows: At 1 January Provided and charged to gain on disposal of assets Recoveries Disposals Amounts written off against the financial asset Exchange and other adjustments At 31 December 2007 £m (21) – 2 3 12 – (4) 2006 £m (16) (10) 3 – 1 1 (21) The provision is used to record impairment losses unless the Group is satisfied that no recovery of the amount is possible; at that point the amount considered irrecoverable is written off against the financial asset directly with no impact on the income statement. 16 INVENTORIES Finished goods Consumable stores 17 TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Prepayments 2007 £m 1 2 3 2007 £m 180 29 26 235 2006 £m 1 2 3 2006 £m 163 51 23 237 Trade and other receivables are designated as ‘loans and receivables’ and are held at amortised cost. Trade receivables are non-interest bearing and are generally on payment terms of up to 30 days. The fair value of trade and other receivables approximates their carrying value. The maximum exposure to credit risk for trade and other receivables, excluding prepayments, at the balance sheet date by geographic region is: Americas Europe, Middle East and Africa Asia Pacific The aging of trade and other receivables, excluding prepayments, at the balance sheet date is: Not past due Past due 1 to 30 days Past due 31 to 180 days More than 180 days Gross £m 141 37 39 40 257 Provision £m (1) (1) (8) (38) (48) 2007 Net £m 140 36 31 2 209 Gross £m 118 62 49 28 257 2007 £m 115 70 24 209 Provision £m – (1) (16) (26) (43) 2006 £m 105 78 31 214 2006 Net £m 118 61 33 2 214 Notes to the Group financial statements 71 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes to the Group financial statements continued 17 TRADE AND OTHER RECEIVABLES (CONTINUED) The movement in the provision for impairment of trade and other receivables during the year is as follows: At 1 January Provided Amounts written off Exchange and other adjustments At 31 December 18 CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits 2007 £m (43) (12) 6 1 (48) 2007 £m 26 26 52 Short-term deposits are highly liquid investments with an original maturity of three months or less, in various currencies. 19 TRADE AND OTHER PAYABLES Current Trade payables Other tax and social security payable Other payables Accruals Derivatives Non-current Other payables 2007 £m 49 19 172 148 2 390 139 Trade payables are non-interest bearing and are normally settled within 45 days. Other payables include £212m (2006 £180m) relating to the future redemption liability of the Group’s loyalty programme, of which £84m (2006 £83m) is classified as current and £128m (2006 £97m) as non-current. 20 LOANS AND OTHER BORROWINGS Secured bank loans Finance leases Unsecured bank loans Total borrowings Denominated in the following currencies: Pounds sterling US dollars Euro Other Current £m – 8 – 8 Non-current £m 3 92 774 869 – 8 – – 8 275 425 121 48 869 2007 Total £m 3 100 774 877 275 433 121 48 877 Current £m 4 3 3 10 – 10 – – 10 Non-current £m 3 94 206 303 102 145 54 2 303 72 IHG Annual Report and Financial Statements 2007 2006 £m (47) (16) 15 5 (43) 2006 £m 30 149 179 2006 £m 47 26 190 139 – 402 109 2006 Total £m 7 97 209 313 102 155 54 2 313 20 LOANS AND OTHER BORROWINGS (CONTINUED) Secured bank loans These mortgages are secured on the hotel properties to which they relate. The rates of interest and currencies of these loans vary. Finance leases Finance lease obligations, which relate to the 99 year lease on the InterContinental Boston, are payable as follows: Less than one year Between one and five years More than five years Less: amount representing finance charges Minimum lease payments £m 8 32 1,689 1,729 (1,629) 100 2007 Present value of payments £m 8 24 68 100 – 100 Minimum lease payments £m 3 33 1,745 1,781 (1,684) 97 2006 Present value of payments £m 3 24 70 97 – 97 The Group has the option to extend the term of the lease for two additional 20 year terms. Payments under the lease step up at regular intervals over the lease term. Unsecured bank loans Unsecured bank loans are borrowings under the Group’s 2009 £1.1bn Syndicated Facility and its short-term bilateral loan facilities. Amounts are classified as non-current when the facilities have more than 12 months to expiry. These facilities contain financial covenants and as at the balance sheet date the Group was not in breach of these covenants, nor had any breaches or defaults occurred during the year. Facilities provided by banks Committed Uncommitted Unutilised facilities expire: Within one year After one but before two years After two years Utilised £m 777 – 777 Unutilised £m 377 25 402 2007 Total £m 1,154 25 1,179 Utilised £m 213 3 216 Unutilised £m 944 36 980 2007 £m 75 327 – 402 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I 2006 Total £m 1,157 39 1,196 2006 £m 86 – 894 980 21 FINANCIAL RISK MANAGEMENT POLICIES Overview The Group’s 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 audit. The treasury function does not operate as a profit centre. The treasury function seeks to reduce the financial risk of the Group and manages liquidity to meet all foreseeable cash needs. 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 mitigate the adverse impact of movements in interest rates and foreign exchange rates. Market risk exposure The US dollar is the predominant currency of the Group’s revenue and cash flows. 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 the Group matches the currency of its debt (either directly or via derivatives) to the currency of its net assets, whilst maximising the amount of US dollars borrowed. 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. Notes to the Group financial statements 73 Notes to the Group financial statements continued 21 FINANCIAL RISK MANAGEMENT POLICIES (CONTINUED) Market risk exposure (continued) 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 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 annual net interest charge by approximately £2.9m (2006 £1.4m). A similar rise in euro and sterling interest rates would increase the annual net interest charge by approximately £0.6m (2006 £0.4m) and £1.6m (2006 £1.0m) respectively. A general weakening of the US dollar (specifically a five cent rise in the sterling:US dollar rate) would reduce the Group’s profit before tax by an estimated £4.2m (2006 £4.9m) and increase net assets by an estimated £4.4m (2006 £2.6m). Similarly, a general weakening of the euro (specifically a five cent rise in the sterling: euro rate) would reduce the Group’s profit before tax by an estimated £0.8m (2006 £0.9m) and decrease net assets by an estimated £3.0m (2006 £4.0m). Liquidity risk exposure The treasury function ensures that the Group has access to sufficient funds to allow the implementation of the strategy set by the Board. At the year end, the Group had access to £377m of undrawn committed facilities. Medium and long-term borrowing requirements are met through the £1.1bn Syndicated Facility and short-term borrowing requirements are met from drawings under bilateral bank facilities. The Group is in compliance with all of the financial covenants in its loan documents, none of which is expected to present a material restriction on funding or investment policy in the near future. At the year end, the Group had surplus cash of £52m which is held in short-term deposits and cash funds which allow daily withdrawals of cash. Most of the Group’s surplus funds are held in the UK or US and there are no material funds where repatriation is restricted as a result of foreign exchange regulations. Credit risk exposure Credit risk on treasury transactions is minimised by operating a policy on the investment of surplus cash that generally restricts counterparties to those with an A credit rating or better or those providing adequate security. The Group trades only with recognised, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In respect of credit risk arising from financial assets, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern. The capital structure consists of net debt, issued share capital and reserves. The structure is managed to minimise the Group’s cost of capital, to provide ongoing returns 74 IHG Annual Report and Financial Statements 2007 to shareholders and to service debt obligations, whilst maintaining maximum operational flexibility. Surplus cash is either reinvested in the business, used to repay debt or returned to shareholders. The Group maintains a conservative level of debt. The level of debt is monitored on the basis of a cash flow leverage ratio, which is net debt divided by EBITDA. Net debt is calculated as total borrowings less cash and cash equivalents. EBITDA is earnings before interest, tax, depreciation and amortisation. Hedging Interest rate risk The Group hedges its interest rate risk by taking out interest rate swaps to fix the interest flows on between 25% and 75% of its net borrowings in major currencies. At 31 December 2007, the Group held interest rate swaps with notional principals of USD100m, GBP150m and EUR75m (2006 USD100m and EUR80m). The interest rate swaps are designated as cash flow hedges of borrowings under the syndicated loan facility and they are held on the balance sheet at fair value in other financial assets and other payables. Changes in the fair value of cash flow hedges are recognised in the unrealised gains and losses reserve to the extent that the hedges are effective. When the hedged item is recognised, the cumulative gains and losses on the hedging instrument are recycled to the income statement. No ineffectiveness was recognised during the current or prior year. Foreign currency risk The Group is exposed to foreign currency risk on income streams denominated in foreign currencies. When appropriate, the Group hedges a portion of forecast foreign currency income by taking out forward exchange contracts. The designated risk is the spot foreign exchange risk. Forward contracts are held at fair value on the balance sheet as other financial assets and other payables. During the year, a £nil (2006 £3m) foreign exchange gain was recognised in financial income, relating to gains on forward contracts that were not classified as hedging instruments under IAS 39. Hedge of net investment in foreign operations The Group designates its foreign currency bank borrowings and currency derivatives as net investment hedges of foreign operations. The designated risk is the spot foreign exchange risk; the interest on these financial instruments is taken through financial income or expense and the derivatives are held on the balance sheet at fair value in other financial assets and other payables. Hedge effectiveness is measured at calendar quarter ends. Variations in fair value due to changes in the underlying exchange rates are taken to the currency translation reserve until an operation is sold, at which point the cumulative currency gains and losses are recycled against the gain or loss on sale. No ineffectiveness was recognised on net investment hedges during the current or prior year. At 31 December 2007, the Group held foreign exchange derivatives with a principal of £6m (2006 £220m) and a fair value of £nil (2006 £3.5m). The maximum amount of foreign exchange derivatives held during the year as net investment hedges and measured at calendar quarter ends had a principal of £272m (2006 £220m) and a fair value of £1.6m (2006 £3.5m). 22 FINANCIAL INSTRUMENTS Liquidity risk The following are the undiscounted contractual cash flows of financial liabilities, including interest payments. 31 December 2007 Secured bank loans Finance lease obligations Unsecured bank loans Trade and other payables Derivatives 31 December 2006 Secured bank loans Finance lease obligations Unsecured bank loans Trade and other payables Derivatives Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m More than 5 years £m 1 8 781 388 6 1 8 – 64 – 4 24 – 50 – – 1,689 – 55 – Less than 1 year £m Between 1 and 2 years £m Between 2 and 5 years £m More than 5 years £m 4 3 214 402 57 1 8 – 47 – 5 25 – 36 – – 1,745 – 53 – Total £m 6 1,729 781 557 6 Total £m 10 1,781 214 538 57 Cash flows relating to unsecured bank loans are classified according to the maturity date of the loan drawdown rather than the facility maturity date. Credit risk The carrying amount of financial assets represents the maximum exposure to credit risk. Equity securities available-for-sale Loans and receivables: Cash and cash equivalents Other financial assets Trade and other receivables, excluding prepayments Derivatives 2007 £m 46 52 56 209 – 363 2006 £m 57 179 48 214 4 502 S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Interest rate risk For each class of interest bearing financial asset and financial liability, the following table indicates the range of interest rates effective at the balance sheet date, the carrying amount on the balance sheet and the periods in which they reprice, if earlier than the maturity date. 31 December 2007 Cash and cash equivalents Secured bank loans Finance lease obligations* Unsecured bank loans: Euro floating rate – effect of euro interest rate swaps* US dollar floating rate – effect of US dollar interest rate swaps* Sterling floating rate – effect of sterling interest rate swaps HK dollar floating rate Net debt * These items bear interest at a fixed rate. Effective interest rate % 0.0-5.9 8.2 9.7 5.3 (0.6) 5.5 (0.4) 6.9 0.0 4.5 Total carrying amount £m Less than 6 months £m Between 6 months and 1 year £m Between 1 and 2 years £m More than 5 years £m Repricing analysis (52) 3 100 121 – 333 – 275 – 45 825 (52) 3 – 121 (55) 333 (50) 275 (75) 45 545 – – – – – – 50 – – – 50 – – – – 55 – – – 75 – 130 – – 100 – – – – – – – 100 Notes to the Group financial statements 75 Notes to the Group financial statements continued 22 FINANCIAL INSTRUMENTS (CONTINUED) Interest rate risk (continued) 31 December 2006 Cash and cash equivalents Secured bank loans Finance lease obligations* Unsecured bank loans: Euro floating rate – effect of euro interest rate swaps* US dollar floating rate – effect of US dollar interest rate swaps* Sterling floating rate Net debt Foreign exchange contracts * These items bear interest at a fixed rate. Effective interest rate % 0.0 – 5.2 8.5 9.7 4.0 (1.0) 5.7 (1.2) 5.6 Total carrying amount £m Less than 6 months £m Between 6 months and 1 year £m Between 1 and 2 years £m More than 5 years £m Repricing analysis (179) 7 97 54 – 53 – 102 134 (4) 130 (179) 7 – 54 (54) 53 (51) 102 (68) (4) (72) – – – – – – – – – – – – – – – 54 – 51 – 105 – 105 – – 97 – – – – – 97 – 97 Interest rate swaps are included in the above tables to the extent that they affect the Group’s interest rate repricing risk. The swaps hedge the floating rate debt by fixing the interest rate. The effect shown above is their impact on the debt’s floating rate, for an amount equal to their notional principal (principal and maturity of swap is shown in repricing analysis). The fair values of derivatives are recorded in other financial assets and other payables. Trade and other receivables and trade and other payables are not included above as they are not interest bearing. Fair values The table below compares carrying amounts and fair values of the Group’s financial assets and liabilities. Financial assets Equity securities available-for-sale Loans and receivables: Cash and cash equivalents Other financial assets Trade and other receivables, excluding prepayments Derivatives Financial liabilities Borrowings, excluding finance lease obligations Finance lease obligations Trade and other payables Derivatives Carrying value £m Note 2007 Fair value £m Carrying value £m 2006 Fair value £m 15 18 15 17 15 20 20 19 19 46 52 56 209 – (777) (100) (527) (2) 46 52 56 209 – (777) (126) (527) (2) 57 179 48 214 4 (216) (97) (511) – 57 179 48 214 4 (216) (97) (511) – The fair value of cash and cash equivalents approximates book value due to the short maturity of the investments and deposits. Equity securities available-for-sale and derivatives are held on the balance sheet at fair value as set out in note 15. The fair value of other financial assets approximates book value based on prevailing market rates. The fair value of borrowings, excluding finance lease obligations, approximates book value as interest rates reset to market rates on a frequent basis. The fair value of the finance lease obligation is calculated by discounting future cash flows at prevailing interest rates. The fair value of trade and other receivables and trade and other payables approximates to their carrying value, including the future redemption liability of the Group’s loyalty programme. 76 IHG Annual Report and Financial Statements 2007 23 NET DEBT Cash and cash equivalents Loans and other borrowings – current – non-current Net debt Movement in net debt Net decrease in cash and cash equivalents Add back cash flows in respect of other components of net debt: (Increase)/decrease in borrowings (Increase)/decrease in net debt arising from cash flows Non-cash movements: Finance lease liability Exchange and other adjustments Increase in net debt Net debt at beginning of the year Net debt at end of the year 24 RETIREMENT BENEFITS 2007 £m 52 (8) (869) (825) (131) (553) (684) (9) 2 (691) (134) (825) 2006 £m 179 (10) (303) (134) (152) 172 20 (103) 37 (46) (88) (134) Retirement and death in service benefits are provided for eligible Group employees in the UK principally by the InterContinental Hotels UK Pension Plan. The plan, which is funded and HM Revenue & Customs registered, covers approximately 440 (2006 410) employees, of which 200 (2006 220) are in the defined benefit section which provides pensions based on final salaries and 240 (2006 190) are in the defined contribution section. The defined benefit section of the plan closed to new entrants during 2002 with new members provided with defined contribution arrangements. The assets of the plan are held in self-administered trust funds separate from the Group’s assets. In addition, there are unfunded UK pension arrangements for certain members affected by the lifetime allowance. The Group also maintains the following US-based defined benefit plans; the funded InterContinental Hotels Pension Plan, unfunded InterContinental Hotels non-qualified pension plans and post-employment benefits schemes. These plans are now closed to new members. The Group also operates a number of minor pension schemes outside the UK, the most significant of which is a defined contribution scheme in the US; there is no material difference between the pension costs of, and contributions to, these schemes. The amounts recognised in the Group income statement in respect of the defined benefit plans are: S T A T E M E N T S S G T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Recognised in administrative expenses Current service cost Interest cost on benefit obligation Expected return on plan assets 2007 £m 5 15 (17) 3 UK 2006 £m 5 13 (14) 4 Pension plans US and other Post-employment benefits 2007 £m 2006 £m 2007 £m 2006 £m – 5 (5) – – 5 (4) 1 – 1 – 1 – 1 – 1 The amounts recognised in the Group statement of recognised income and expense are: Actuarial gains and losses Actual return on plan assets Less: expected return on plan assets Other actuarial gains and losses 2007 £m 14 (17) (3) 15 12 UK 2006 £m 21 (14) 7 (12) (5) Pension plans US and other Post-employment benefits 2007 £m 2006 £m 2007 £m 2006 £m 5 (5) – – – 6 (4) 2 – 2 – – – – – – – – 1 1 2007 £m 5 21 (22) 4 2007 £m 19 (22) (3) 15 12 Total 2006 £m 5 19 (18) 6 Total 2006 £m 27 (18) 9 (11) (2) Notes to the Group financial statements 77 Notes to the Group financial statements continued 24 RETIREMENT BENEFITS (CONTINUED) The assets and liabilities of the schemes and the amounts recognised in the Group balance sheet are: Schemes in surplus Fair value of plan assets Present value of benefit obligations Retirement benefit assets Schemes in deficit Fair value of plan assets Present value of benefit obligations Retirement benefit obligations Total fair value of plan assets Total present value of benefit obligations 2007 £m 304 (274) 30 – (23) (23) 304 (297) UK 2006 £m – – – 269 (298) (29) 269 (298) Pension plans US and other Post-employment benefits 2007 £m 2006 £m 2007 £m 2006 £m 7 (5) 2 65 (87) (22) 72 (92) – – – 56 (89) (33) 56 (89) – – – – (10) (10) – (10) – – – – (9) (9) – (9) The ‘US and other’ surplus of £2m relates to a defined benefit pension scheme in Hong Kong. Assumptions The principal financial assumptions used by the actuaries to determine the benefit obligation are: Wages and salaries increases Pensions increases Discount rate Inflation rate Healthcare cost trend rate assumed for next year Ultimate rate that the cost trend rate trends to 2007 % 4.9 3.4 5.5 3.4 UK 2006 % 4.6 3.1 5.0 3.1 Pension plans US 2006 % – – 5.8 – 2007 % – – 5.8 – 2007 £m 311 (279) 32 65 (120) (55) 376 (399) Total 2006 £m – – – 325 (396) (71) 325 (396) Post-employment benefits 2007 % 4.0 – 5.8 – 10.0 5.0 2006 % 4.0 – 5.8 – 10.0 5.0 Mortality is the most significant demographic assumption. In respect of the UK plans, the specific mortality rates used are in line with the PA92 medium cohort tables, with age rated down by one year, implying the following life expectancies at retirement. In the US, life expectancy is determined by reference to the RP-2000 healthy tables. Current pensioners at 65a – male Future pensioners at 65b – male – female – female a Relates to assumptions based on longevity (in years) following retirement at the balance sheet date. b Relates to assumptions based on longevity (in years) relating to an employee retiring in 2027. The assumptions allow for expected increases in longevity. 2007 Years 23 26 24 27 UK 2006 Years 23 26 24 27 Pension plans US 2006 Years 18 20 18 20 2007 Years 18 20 18 20 78 IHG Annual Report and Financial Statements 2007 24 RETIREMENT BENEFITS (CONTINUED) Sensitivities The value of plan assets is sensitive to market conditions, particularly equity values. Changes in assumptions used for determining retirement benefit costs and obligations may have a material impact on the income statement and the balance sheet. The main assumptions are the discount rate, the rate of inflation and the assumed mortality rate. The following table provides an estimate of the potential impact of each of these variables on the principal pension plans. Discount rate – 0.25% decrease – 0.25% increase Inflation rate – 0.25% increase – 0.25% decrease Mortality rate – one year increase Higher/(lower) pension cost £m 0.4 (0.4) 0.9 (0.9) 0.6 UK Increase/ (decrease) in liabilities £m 15.6 (14.7) 14.6 (13.8) 6.8 Higher/(lower) pension cost £m – – – – – US Increase/ (decrease) in liabilities £m 2.4 (2.3) – – 2.7 In 2018 the healthcare cost trend rate reaches the assumed ultimate rate. A one percentage point increase/(decrease) in assumed healthcare costs trend rate would increase/(decrease) the accumulated post-employment benefit obligations as of 31 December 2007 and 2006 by approximately £1m and would increase/(decrease) the total of the service and interest cost components of net post- employment healthcare cost for the period then ended by approximately £nil. Movement in benefit obligation Benefit obligation at beginning of year Current service cost Members’ contributions Interest expense Benefits paid Reclassification* Actuarial (gain)/loss arising in the year Exchange adjustments Benefit obligation at end of year Comprising: Funded plans Unfunded plans Movement in plan assets Fair value of plan assets at beginning of year Company contributions Members’ contributions Benefits paid Reclassification* Expected return on plan assets Actuarial (loss)/gain arising in the year Exchange adjustments Fair value of plan assets at end of year 2007 £m 298 5 1 15 (7) – (15) – 297 274 23 297 2007 £m 269 27 1 (7) – 17 (3) – 304 UK 2006 £m 274 5 1 13 (7) – 12 – 298 275 23 298 UK 2006 £m 250 4 1 (7) – 14 7 – 269 Pension plans US and other Post-employment benefits 2006 £m 103 – – 5 (6) – – (13) 89 65 24 89 2007 £m 9 – – 1 (1) – – 1 10 – 10 10 2006 £m 11 – – 1 (1) – (1) (1) 9 – 9 9 Pension plans US and other Post-employment benefits 2006 £m 62 1 – (6) – 4 2 (7) 56 2007 £m – 1 – (1) – – – – – 2006 £m – 1 – (1) – – – – – 2007 £m 89 – – 5 (5) 5 – (2) 92 70 22 92 2007 £m 56 10 – (5) 7 5 – (1) 72 2007 £m 396 5 1 21 (13) 5 (15) (1) 399 344 55 399 2007 £m 325 38 1 (13) 7 22 (3) (1) 376 Total 2006 £m 388 5 1 19 (14) – 11 (14) 396 340 56 396 Total 2006 £m 312 6 1 (14) – 18 9 (7) 325 * Relates to the recognition of the gross assets and obligations of the Hong Kong pension scheme. Normal company contributions are expected to be £8m in 2008. In addition, the Group has agreed to pay further special contributions of £20m to the UK pension plan; £10m in 2008 and £10m in 2009. Notes to the Group financial statements 79 S T A T E M E N T S G S T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes to the Group financial statements continued 24 RETIREMENTS BENEFITS (CONTINUED) The combined assets of the principal plans and expected rate of return are: UK pension plans Equities Bonds Other Total market value of assets US pension plans Equities Fixed income Total market value of assets Long-term rate of return expected % 7.9 4.8 7.9 9.5 5.5 2007 Value £m 109 179 16 304 39 26 65 Long-term rate of return expected % 7.9 4.6 7.9 9.5 5.5 2006 Value £m 128 123 18 269 34 22 56 The expected rate of return on assets has been determined following advice from the plans’ independent actuaries and is based on the expected return on each asset class together with consideration of the long-term asset strategy. History of experience gains and losses UK pension plans Fair value of plan assets Present value of benefit obligations Surplus/(deficit) in the plans Experience adjustments arising on plan liabilities Experience adjustments arising on plan assets US pension plans Fair value of plan assets Present value of benefit obligations Deficit in the plans Experience adjustments arising on plan liabilities Experience adjustments arising on plan assets US post-employment benefits Present value of benefit obligations Experience adjustments arising on plan liabilities 2007 £m 304 (297) 7 15 (3) 2007 £m 65 (87) (22) – – 2007 £m (10) – 2006 £m 269 (298) (29) (12) 7 2006 £m 56 (89) (33) – 2 2006 £m (9) 1 2005 £m 250 (274) (24) (67) 47 2005 £m 62 (103) (41) (3) (1) 2005 £m (11) 1 2004 £m 470 (600) (130) (60) 14 2004 £m 56 (88) (32) (5) 1 2004 £m (11) (1) 2003 £m 353 (477) (124) 2003 £m 48 (91) (43) 2003 £m (11) The cumulative amount of actuarial gains and losses recognised since 1 January 2004 in the Group statement of recognised income and expense is £64m (2006 £76m). The Group is unable to determine how much of the pension scheme deficit recognised on transition to IFRS of £178m and taken directly to total equity is attributable to actuarial gains and losses since inception of the schemes. Therefore, the Group is unable to determine the amount of actuarial gains and losses that would have been recognised in the Group statement of recognised income and expense before 1 January 2004. 80 IHG Annual Report and Financial Statements 2007 25 SHARE-BASED PAYMENTS Short Term Deferred Incentive Plan The IHG Short Term Deferred Incentive Plan (STDIP), now called the Annual Bonus Plan, enables eligible employees, including Executive Directors, to receive all or part of their bonus in the form of shares together with, in certain cases, a matching award of free shares up to half the deferred amount. The bonus and matching shares in the 2004 and 2005 plans are deferred and released in three equal tranches on the first, second and third anniversaries of the award date. The bonus and matching shares in the 2006 and 2007 plans are released on the third anniversary of the award date. Under the 2006 and 2007 plans a percentage of the award (Board members – 100% (2006 80%); other eligible employees – 50%) must be taken in shares and deferred. Participants may defer the remaining amount on the same terms or take it in cash. The awards in all of the plans are conditional on the participants remaining in the employment of a participating company. Participation in the STDIP is at the discretion of the Remuneration Committee. The number of shares is calculated by dividing a specific percentage of the participant’s annual performance related bonus by the middle market quoted prices on the three consecutive dealing days immediately preceding the date of grant. A number of executives participated in the plan during the year and conditional rights over 675,515 (2006 606,573) shares were awarded to participants. Long Term Incentive Plan The Long Term Incentive Plan (LTIP), previously called the Performance Restricted Share Plan (PRSP), allows Executive Directors and eligible employees to receive share awards, subject to the satisfaction of a performance condition, set by the Remuneration Committee, which is normally measured over a three year period. Awards are normally made annually and, except in exceptional circumstances, will not exceed three times salary for Executive Directors and four times salary in the case of other eligible employees. During the year, conditional rights over 3,538,535 (2006 4,277,550) shares were awarded to employees under the plan. The plan provides for the grant of ‘nil cost options’ to participants as an alternative to conditional share awards. Executive Share Option Plan For options granted, the option price is not less than the market value of an ordinary share, or the nominal value if higher. The market value is the quoted price on the business day preceding the date of grant, or the average of the middle market quoted prices on the three consecutive dealing days immediately preceding the date of grant. A performance condition has to be met before options can be exercised. The performance condition is set by the Remuneration Committee. The plan was not operated during 2007 and no options were granted in the year under the plan. The latest date that any options may be exercised is April 2015. Sharesave Plan The Sharesave Plan is a savings plan whereby employees contract to save a fixed amount each month with a savings institution for three or five years. At the end of the savings term, employees are given the option to purchase shares at a price set before savings began. The Sharesave Plan is available to all UK employees (including Executive Directors) employed by participating Group companies provided that they have been employed for at least one year. The plan provides for the grant of options to subscribe for ordinary shares at the higher of nominal value and not less than 80% of the middle market quotations of the ordinary shares on the three dealing days immediately preceding the invitation date. The plan was not operated during 2007 and no options were granted in the year under the plan. The latest date that any options may be exercised under the three-year plan is 29 February 2008 and under the five-year plan is 28 February 2010. US Employee Stock Purchase Plan The US Employee Stock Purchase Plan will allow eligible employees resident in the US an opportunity to acquire Company American Depositary Shares (ADSs) on advantageous terms. The plan, when operational, will comply with Section 423 of the US Internal Revenue Code of 1986. The option to purchase ADSs may be offered only to employees of designated subsidiary companies. The option price may not be less than the lesser of either 85% of the fair market value of an ADS on the date of grant or 85% of the fair market value of an ADS on the date of exercise. Options granted under the plan must generally be exercised within 27 months from the date of grant. The plan was not operated during 2007 and at 31 December 2007 no options had been granted under the plan. 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 PLC options for equivalent value new options over IHG shares. As a result of this exchange, 23,195,482 shares were put under option at prices ranging from 308.5p to 593.3p. The exchanged options were immediately exercisable and are not subject to performance conditions. During 2007, 1,358,791 (2006 3,678,239) such options were exercised, leaving a total of 2,696,883 (2006 4,055,674) such options outstanding at prices ranging from 308.5p to 593.3p. The latest date that any options may be exercised is October 2012. S T A T E M E N T S G S T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes to the Group financial statements 81 Notes to the Group financial statements continued 25 SHARE-BASED PAYMENTS (CONTINUED) The Group recognised a cost of £30m (2006 £18m) in operating profit related to equity-settled share-based payment transactions during the year. The aggregate consideration in respect of ordinary shares issued under option schemes during the year was £16m (2006 £20m). The following table sets forth awards and options granted during 2007. No awards were granted under the Executive Share Option Plan, Sharesave Plan or US Employee Stock Purchase Plan during the year. Number of shares awarded in 2007 Short Term Deferred Incentive Plan 675,515 Long Term Incentive Plan 3,538,535 In 2007 and 2006, the Group used separate option pricing models and assumptions for each plan. The following tables set forth information about how the fair value of each option grant is calculated: Short Term Deferred Incentive Plan Long Term Incentive Plan 2007 Valuation model Weighted average share price Expected dividend yield Risk-free interest rate Volatility* Term (years) 2006 Valuation model Weighted average share price Expected dividend yield Risk-free interest rate Volatility* Term (years) Binomial 1252.0p 2.13% 3.0 Short Term Deferred Incentive Plan Binomial 831.0p 2.0 Monte Carlo Simulation and Binomial 1262.0p 2.13% 5.40% 19% 3.0 Long Term Incentive Plan Monte Carlo Simulation and Binomial 946.0p 2.32% 4.90% 20% 3.0 * The expected volatility was determined by calculating the historical volatility of the Company’s share price corresponding to the expected life of the option or share award. 82 IHG Annual Report and Financial Statements 2007 25 SHARE-BASED PAYMENTS (CONTINUED) Movements in the awards and options outstanding under the schemes are as follows: Outstanding at 1 January 2006 Granted Vested Share capital consolidation Lapsed or cancelled Outstanding at 31 December 2006 Granted Vested Share capital consolidation Lapsed or cancelled Outstanding at 31 December 2007 Fair value of awards granted during the year 2007 2006 Weighted average remaining contract life (years) At 31 December 2007 At 31 December 2006 Short Term Deferred Incentive Plan Number of shares thousands 829 607 (328) (50) (57) 1,001 675 (418) (68) (86) 1,104 1190.6p 894.5p 1.5 1.0 Long Term Incentive Plan Number of shares thousands 10,634 4,277 (1,395) – (2,191) 11,325 3,539 (1,694) – (1,707) 11,463 453.8p 287.0p 1.1 1.3 The above awards do not vest until the performance conditions have been met. Options outstanding at 1 January 2006 Exercised Lapsed or cancelled Options outstanding at 31 December 2006 Exercised Lapsed or cancelled Options outstanding at 31 December 2007 Options exercisable At 31 December 2007 At 31 December 2006 Number of shares thousands 864 (389) (310) 165 (101) (7) 57 Range of option prices pence 420.5 420.5 420.5 420.5 420.5 420.5 420.5 Sharesave Plan Executive Share Option Plan Weighted average option price pence 420.5 420.5 420.5 420.5 420.5 420.5 420.5 Number of shares thousands 22,619 (8,365) (175) 14,079 (5,568) (317) 8,194 Range of option prices pence 308.5-619.8 308.5-619.8 345.6-619.8 308.5-619.8 308.5-619.8 438.0-619.8 308.5-619.8 Weighted average option price pence 465.4 438.7 404.6 482.2 471.9 526.8 487.4 S T A T E M E N T S G S T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I – – – – – – 6,583 6,002 308.5-619.8 308.5-619.8 455.0 430.2 Included within the options outstanding of the Executive Share Option Plan are options over 2,696,883 (2006 4,055,674; 2005 7,909,002) shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before 7 November 2002. These options, relating to former Six Continents share schemes, have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. The weighted average share price at the date of exercise for share options vested during the year was 1259.0p. The closing share price on 31 December 2007 was 884.0p and the range during the year was 873.5p to 1413.0p per share. Notes to the Group financial statements 83 Notes to the Group financial statements continued 25 SHARE-BASED PAYMENTS (CONTINUED) Summarised information about options outstanding at 31 December 2007 under the share option schemes is as follows: Options outstanding Options exercisable Number outstanding thousands Weighted average remaining contract life years Weighted average option price pence Number exercisable thousands Weighted average option price pence 57 565 5,905 1,724 8,194 1.0 2.3 5.3 6.8 5.4 420.5 347.7 462.6 618.1 487.4 – – 565 5,905 113 6,583 347.7 462.6 593.7 455.0 Range of exercise prices (pence) Sharesave Plan 420.5 Executive Share Option Plan 308.5 to 349.1 349.2 to 498.0 498.1 to 619.8 26 DEFERRED TAX PAYABLE At 1 January 2006 Disposals Income statement Statement of recognised income and expense Acquisition of subsidiary (note 34) Exchange and other adjustments At 31 December 2006 Income statement Statement of recognised income and expense Exchange and other adjustments At 31 December 2007 Property, plant and equipment £m 256 (126) (2) – – (9) 119 1 – 3 123 Deferred gains on loan notes £m 122 – (26) – – (4) 92 (4) – (1) 87 Losses £m (123) 2 31 – – 1 (89) (2) – (3) (94) Employee benefits £m (16) – (1) 1 – 2 (14) 3 3 – (8) Intangible assets £m (1) – 16 – 1 1 17 3 – 1 21 * Other short-term temporary differences relate primarily to provisions and accruals and share-based payments. Analysed as: Deferred tax payable Liabilities classified as held for sale At 31 December Other short-term temporary differences* £m 6 7 (32) (27) – 2 (44) (30) 27 3 (44) 2007 £m 82 3 85 Total £m 244 (117) (14) (26) 1 (7) 81 (29) 30 3 85 2006 £m 79 2 81 The deferred tax asset of £94m (2006 £89m) recognised in respect of losses includes £60m (2006 £64m) of capital losses available to be utilised against the realisation of capital gains which are recognised as a deferred tax liability and £34m (2006 £25m) in respect of revenue tax losses. Revenue losses include £3m (2006 £1m) in respect of losses which arose during a period of hotel refurbishment and which are expected to be utilised against future operating profit. 84 IHG Annual Report and Financial Statements 2007 26 DEFERRED TAX PAYABLE (CONTINUED) Tax losses with a value of £191m (2006 £192m), including capital losses with a value of £109m (2006 £87m), have not been recognised as their use is uncertain or not currently anticipated. These losses may be carried forward indefinitely with the exception of £1m (2006 £nil) which expires after five years, £nil (2006 £1m) which expires after seven years and £nil (2006 £1m) which expires after 15 years. Deferred tax assets of £4m (2006 £6m) in respect of share-based payments, £7m (2006 £7m) in respect of employee benefits and £13m (2006 £17m) in respect of other items have not been recognised as the timing of their realisation and consequent use is uncertain or not currently anticipated and, in part, is dependent upon the outcome of EU case law. Other items include £nil (2006 £7m) which expire after nine years. At 31 December 2007, the Group has not provided deferred tax in relation to temporary differences associated with undistributed earnings of subsidiaries. Quantifying the temporary differences is not practical. However, based on current enacted law and on the basis that the Group is in a position to control the timing and realisation of these temporary differences, no material tax consequences are expected to arise. 27 AUTHORISED AND ISSUED SHARE CAPITAL Authorised (ordinary shares and redeemable preference share) At 31 December 2007, the authorised share capital was £160,050,000, comprising 1,175,000,000 ordinary shares of 13 29⁄47p each and one redeemable preference share of £50,000. Allotted, called up and fully paid (ordinary shares) At 1 January 2006 Share capital consolidation Issued under option schemes Repurchased and cancelled under repurchase programmes At 31 December 2006 Share capital consolidation Issued under option schemes Repurchased and cancelled under repurchase programmes At 31 December 2007 Number of shares millions Note a b c b 433 (53) 4 (28) 356 (57) 4 (8) 295 £m 43 – 1 (3) 41 – – (1) 40 a On 1 June 2006, shareholders approved a share capital consolidation on the basis of seven new ordinary shares for every eight existing ordinary shares. This provided for all the authorised ordinary shares of 10p each (whether issued or unissued) to be consolidated into new ordinary shares of 11 3⁄7p each. The share capital consolidation became effective on 12 June 2006. b During 2004 and 2005, the Company undertook to return funds of up to £750m to shareholders by way of three consecutive £250m share repurchase programmes, the third of which was completed in the first half of 2007. In June 2007, a further £150m share repurchase programme commenced. During the year, 7,724,844 (2006 28,409,753) ordinary shares were repurchased and cancelled under the authorities granted by shareholders at an Extraordinary General Meeting held on 1 June 2006 and at the Annual and Extraordinary General Meetings held on 1 June 2007. Of these, 2,237,264 were 11 3⁄7p shares and 5,487,580 were 13 29⁄47p shares. c On 1 June 2007, shareholders approved a share capital consolidation on the basis of 47 new ordinary shares for every 56 existing ordinary shares. This provided for all the authorised ordinary shares of 11 3⁄7p each (whether issued or unissued) to be consolidated into new ordinary shares of 13 29⁄47p each. The share capital consolidation became effective on 4 June 2007. d Whilst the authorised share capital comprises one redeemable preference share of £50,000, following its redemption in September 2005, this redeemable preference share has not been re-issued. The authority given to the Company at the Annual General Meeting on 1 June 2007 to purchase its own shares was still valid at 31 December 2007. A resolution to renew the authority will be put to shareholders at the Annual General Meeting on 30 May 2008. S T A T E M E N T S G S T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I Notes to the Group financial statements 85 Notes to the Group financial statements continued 28 IHG SHAREHOLDERS’ EQUITY At 1 January 2006 Total recognised income and expense for the year Issue 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 Equity-settled share-based cost Equity dividends paid At 31 December 2006 Total recognised income and expense for the year Issue 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 Equity-settled share-based cost Equity dividends paid At 31 December 2007 Equity share capital £m 49 Capital redemption reserve £m 1 Shares held by employee share trusts £m (22) Unrealised gains and losses reserve £m 23 Other reserves £m (1,528) Currency translation reserve £m 19 IHG Retained shareholders’ equity earnings £m £m 1,084 2,542 – 20 (3) – – – – – 66 – 16 (1) – – – – – 81 – – – 3 – – – – 4 – – – 1 – – – – 5 – – – – (47) 52 – – (17) – – – – (69) 45 – – (41) – – – – – – – – (1,528) – – – – – – – – (1,528) 4 – – – – – – – 27 (8) – – – – – – – 19 (22) – – – – – – – (3) 9 – – – – – – – 6 427 – (257) (3) 409 20 (260) – – (47) (37) 18 (561) 2,129 239 – (80) (1) – (40) 30 (773) 1,504 15 18 (561) 678 240 16 (81) – (69) 5 30 (773) 46 Equity share capital The balance classified as share capital includes the total net proceeds (both nominal value and share premium) on issue of the Company’s equity share capital, comprising 13 29⁄47p shares. Shares held by employee share trusts Comprises £41.1m (2006 £16.8m) in respect of 3.4m (2006 1.7m) InterContinental Hotels Group PLC ordinary shares held by employee share trusts, with a market value at 31 December 2007 of £30m (2006 £21m). Other reserves Comprises the revaluation reserve previously recognised under UK GAAP and the merger reserve. Unrealised gains and losses reserve This reserve records movements for available-for-sale financial assets to fair value and the effective portion of the cumulative net change in the fair value of the cash flow hedging instruments related to hedged transactions that have not yet occurred. The fair value of cash flow hedging instruments outstanding at 31 December 2007 was a £2m liability (2006 £1m asset). Currency translation reserve This reserve records the movement in exchange differences arising from the translation of the financial statements of foreign operations and exchange differences on foreign currency borrowings and derivative instruments that provide a hedge against net investments in foreign operations. On adoption of IFRS, cumulative exchange differences were deemed to be £nil as permitted by IFRS 1. During the year ended 31 December 2007, the impact of hedging net investments in foreign operations was to reduce the amount recorded in the currency translation reserve by £7m (2006 £32m). The fair value of derivative instruments designated as hedges of net investments in foreign operations outstanding at 31 December 2007 was £nil (2006 £3m net asset). 86 IHG Annual Report and Financial Statements 2007 29 MINORITY EQUITY INTEREST At 1 January Dividends paid to minority interests Disposal of hotels (note 11) Acquisition of subsidiary (note 34) Exchange and other adjustments At 31 December 30 OPERATING LEASES 2007 £m 8 – (6) – 1 3 During the year ended 31 December 2007, £32m (2006 £39m) was recognised as an expense in the income statement in respect of operating leases. Total commitments under non-cancellable operating leases are as follows: Due within one year One to two years Two to three years Three to four years Four to five years More than five years 2007 £m 28 19 16 14 11 108 196 The average remaining term of these leases, which generally contain renewal options, is approximately 17 years. No material restrictions or guarantees exist in the Group’s lease obligations. 31 CAPITAL AND OTHER COMMITMENTS Contracts placed for expenditure on property, plant and equipment not provided for in the financial statements 2007 £m 10 On 24 October 2007, the Group announced a worldwide relaunch of its Holiday Inn brand family. In support of this relaunch, IHG will make a non-recurring revenue investment of up to £30m which it is anticipated will be charged to the income statement as an exceptional item during 2008. 32 CONTINGENCIES Contingent liabilities not provided for in the financial statements relating to guarantees 2007 £m 5 2006 £m 20 (1) (13) 3 (1) 8 2006 £m 27 21 19 14 9 100 190 2006 £m 24 2006 £m 11 S T A T E M E N T S G S T R A O T U E P M F E I N N T A S N C A L I G R O U P F I N A N C A L I In limited cases, the Group may provide performance guarantees to third-party owners to secure management contracts. The maximum exposure under such guarantees is £121m (2006 £142m). 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 and hotels. 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. Notes to the Group financial statements 87 Notes to the Group financial statements continued 33 RELATED PARTY DISCLOSURES Key management personnel comprises the Board and Executive Committee. Total compensation of key management personnel Short-term employment benefits Post-employment benefits Equity compensation benefits 2007 £m 9.4 0.5 9.1 19.0 There were no transactions with key management personnel during the year ended 31 December 2007 or the previous year. 34 ACQUISITION OF SUBSIDIARY On 1 December 2006, the Group acquired a 75% interest in ANA Hotels & Resorts Co., Ltd (subsequently renamed IHG ANA Hotels Group Japan LLC), a hotel management company based in Japan. Intangible assets Current assets (excluding cash and cash equivalents) Cash and cash equivalents Trade and other payables Current tax payable Deferred tax payable Minority interest Net assets acquired Goodwill on acquisition Consideration, satisfied in cash (including costs of £2m) Cash and cash equivalents acquired Net cash outflow Carrying values pre-acquisition £m 1 4 4 (3) (1) – 5 2006 £m 9.5 0.5 7.9 17.9 Fair value £m 8 4 4 (3) (1) (1) 11 (3) 8 2 10 (4) 6 Management contracts acquired were recognised as intangible assets at their fair value. The residual excess over the net assets acquired was recognised as goodwill. 35 PRINCIPAL OPERATING SUBSIDIARY UNDERTAKINGS InterContinental Hotels Group PLC was the beneficial owner of all (unless specified) of the equity share capital, either itself or through subsidiary undertakings, of the following companies during the year: Six Continents Limiteda Hotel Inter-Continental London Limiteda Six Continents Hotels, Inc.b InterContinental Hotels Corporationb Barclay Operating Corporationb IHG Resources Inc.b InterContinental Hong Kong Limitedc Société Nouvelle du-Grand Hotel, SAd The companies listed above include those which principally affect the amount of profit and assets of the Group. a Incorporated in Great Britain and registered in England and Wales. b Incorporated in the United States. c Incorporated in Hong Kong. d Incorporated in France. 88 IHG Annual Report and Financial Statements 2007 Parent company financial statements In this section we present the balance sheet of our parent company, InterContinental Hotels Group PLC, and the related notes supporting the parent company balance sheet for 2007. Parent company financial statements Statement of Directors’ responsibilities Independent auditor’s report to the members Parent company balance sheet Investments Notes to the parent company financial statements 1 Accounting policies 2 Employees and Directors 3 4 Debtors 5 Creditors: amounts falling due within one year 6 Creditors: amounts falling due after more than one year 7 Share capital 8 Movements in reserves 9 Profit and dividends 10 Contingencies 90 91 92 93 93 93 93 93 93 94 94 94 94 P A R E N T C O M P A N Y I F I N A N C A L S T A T E M E N T S F P A I N R A E N N C T I A C L O M S T P A A T N E Y M E N T S Notes to the Group financial statements and Parent company financial statements 89 Statement of Directors’ responsibilities In relation to the parent company financial statements The following statement, which should be read in conjunction with the independent auditor’s report, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the auditor in relation to the Company financial statements. The Directors are responsible for preparing the parent company financial statements and Remuneration Report in accordance with applicable United Kingdom law and United Kingdom Generally Accepted Accounting Practice (UK GAAP). The Directors are required to prepare Company financial statements for each financial year which present fairly the financial position of the Company and the financial performance of the Company for that period. The Directors consider that, in preparing the Company financial statements, the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all applicable accounting standards have been followed. The Company financial statements have been prepared on a going concern basis as the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. 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 Company 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. 90 IHG Annual Report and Financial Statements 2007 Independent auditor’s report to the members of InterContinental Hotels Group PLC In relation to the parent company financial statements We have audited the parent company financial statements of InterContinental Hotels Group PLC for the year ended 31 December 2007 which comprise the Company balance sheet and related notes 1 to 10. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Remuneration Report that is described as having been audited. We have reported separately on the Group financial statements of InterContinental Hotels Group PLC for the year ended 31 December 2007. 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 auditor’s 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. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent company financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether, in our opinion, the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information that is cross referred from the Business review, Directors and Employees sections of the Directors’ Report. In addition we report to you if, in our opinion, 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 regarding Directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the Highlights, Message from the Chairman and Chief Executive, Business Review, Directors’ Report, Corporate Governance Statement, Audit Committee Report and the unaudited part of the Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors’ 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 parent company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • • • the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 December 2007; the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with the parent company financial statements. P A R E N T C O M P A N Y I F I N A N C A L S T A T E M E N T S F P A I N R A E N N C T I A C L O M S T P A A T N E Y M E N T S Ernst & Young LLP, Registered auditor, London. 18 February 2008 Statement of Directors’ responsibilities and Independent auditor’s report 91 Parent company financial statements PARENT COMPANY BALANCE SHEET 31 December 2007 Fixed assets Investments Current assets Debtors Creditors: amounts falling due within one year Net current liabilities Creditors: amounts due after more than one year Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Profit and loss account Equity shareholders’ funds Signed on behalf of the Board Richard Solomons 18 February 2008 Note 2007 £m 2006 £m 3 4 5 6 7 8 8 8 2,767 2,767 207 (2,631) (2,424) – 343 40 41 5 257 343 29 (1,624) (1,595) (102) 1,070 41 25 4 1,000 1,070 No profit and loss account is presented for InterContinental Hotels Group PLC as permitted by Section 230 of the Companies Act 1985. Profit on ordinary activities after taxation amounts to £111m (2006 £53m). Notes on pages 93 to 94 form an integral part of these financial statements. 92 IHG Annual Report and Financial Statements 2007 Notes to the parent company financial statements 1 ACCOUNTING POLICIES Basis of accounting The financial statements are prepared under the historical cost convention. They have been drawn up to comply with applicable accounting standards in the United Kingdom (UK GAAP). These accounts are for the Company and are not consolidated financial statements. Fixed asset investments Fixed asset investments are stated at cost less any provision for impairment. Bank and other borrowings Bank and other borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. Finance costs are charged to the profit and loss account using the effective interest rate method. Borrowings are classified as due after more than one year when the repayment date is more than 12 months from the balance sheet date or where they are drawn on a facility with more than 12 months to expiry. 2 EMPLOYEES AND DIRECTORS Average number of employees (Non-Executive Directors) Staff costs 2007 7 2007 £m 1 2006 8 2006 £m 1 Detailed information on the emoluments, pensions, option holdings and shareholdings for each Director is shown in the Remuneration Report on pages 36 to 44. 3 INVESTMENTS At 1 January 2007 and 31 December 2007 The Company is the beneficial owner of all of the equity share capital of InterContinental Hotels Limited. The principal operating subsidiary undertakings of that company are listed in note 35 of the Group financial statements. 4 DEBTORS Amounts due from subsidiary undertakings Corporate taxation 5 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Amounts due to subsidiary undertakings 6 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Unsecured bank loan 2007 £m 166 41 207 2007 £m 2,631 2007 £m – The unsecured bank borrowings were drawn under a 2009 £1.1bn Syndicated Facility. Covenants exist on this facility and as at the balance sheet date the Group and the Company were not in breach of these covenants. £m 2,767 2006 £m 8 21 29 2006 £m 1,624 2006 £m 102 P A R E N T C O M P A N Y I F I N A N C A L S T A T E M E N T S F P A I N R A E N N C T I A C L O M S T P A A T N E Y M E N T S Parent company balance sheet and Notes to the parent company financial statements 93 Notes to the parent company financial statements continued 7 SHARE CAPITAL Authorised (ordinary shares) At 31 December 2006 (1,400,000,000 shares of 11 3⁄7p each) Share capital consolidation At 31 December 2007 (1,175,000,000 shares of 13 29⁄47p each) Authorised (preference shares) One redeemable preference share (£50,000) Allotted, called up and fully paid (ordinary shares) At 31 December 2006 (11 3⁄7p each) Share capital consolidation Issued under option schemes Repurchase of shares At 31 December 2007 (13 29⁄47p each) Note Number of shares millions a a b 1,400 (225) 1,175 – 356 (57) 4 (8) 295 £m 160 – 160 – 41 – – (1) 40 a On 1 June 2007, shareholders approved a share capital consolidation on the basis of 47 new ordinary shares for every 56 existing ordinary shares. This provided for all the authorised ordinary shares of 11 3⁄7p each (whether issued or unissued) to be consolidated into new ordinary shares of 13 29⁄47p each. The share capital consolidation became effective on 4 June 2007. b During the year, 7,724,844 (2006 28,409,753) ordinary shares were repurchased and cancelled under the authorities granted by shareholders at an Extraordinary General Meeting held on 1 June 2006 and at the Annual and Extraordinary General Meetings held on 1 June 2007. Of these, 2,237,264 were 11 3⁄7p shares and 5,487,580 were 13 29⁄47p shares. The aggregate consideration in respect of ordinary shares issued under option schemes during the year was £16m (2006 £20m). Options to subscribe for ordinary shares At 31 December 2006 Exercised Lapsed or cancelled At 31 December 2007 Option exercise price per ordinary share (pence) Final exercise date Thousands 14,244 (5,669) (324) 8,251 308.5-619.8 4 April 2015 The authority given to the Company at the Annual General Meeting on 1 June 2007 to purchase its own shares was still valid at 31 December 2007. A resolution to renew the authority will be put to shareholders at the Annual General Meeting on 30 May 2008. 8 MOVEMENTS IN RESERVES At 31 December 2006 Premium on allotment of ordinary shares Repurchase of shares Transfer to capital redemption reserve Profit after tax Dividends At 31 December 2007 9 PROFIT AND DIVIDENDS Share premium account £m 25 16 – – – – 41 Capital redemption reserve £m 4 – – 1 – – 5 Profit and loss account £m 1,000 – (80) (1) 111 (773) 257 Profit on ordinary activities after tax amounts to £111m (2006 £53m). A final dividend, declared in the previous year, of 13.3p (2006 10.7p) per share was paid during the year, amounting to £47m (2006 £46m). A special interim dividend of 200.0p (2006 118.0p) per share was paid during the year, amounting to £709m (2006 £497m). An interim dividend of 5.7p (2006 5.1p) per share was paid during the year, amounting to £17m (2006 £18m). A final dividend of 14.9p (2006 13.3p) per share, amounting to £44m (2006 £47m), is proposed for approval at the Annual General Meeting. The proposed final dividend is payable on shares in issue at 28 March 2008. The audit fee for both years was borne by a subsidiary undertaking. 10 CONTINGENCIES Contingent liabilities of £840m (2006 £169m) in respect of guarantees of the liabilities of subsidiaries have not been provided for in the financial statements. 94 IHG Annual Report and Financial Statements 2007 Useful information In this section we present a glossary of terms used in the Annual Report and Financial Statements 2007 and some analyses of our share ownership at the end of 2007. We also provide a range of information designed to be helpful to shareholders, and contact details for the Company and for a number of service providers. 96 97 98 99 100 101 Glossary Shareholder profiles Investor information Financial calendar Contacts Forward-looking statements U S E F U L I N F O R M A T I O N U S E F U L I N F O R M A T I O N Notes to the parent company financial statements and Useful information 95 Glossary Adjusted excluding the effect of exceptional items, IFRS International Financial Reporting Average daily rate Basic earnings per share Capital expenditure Cash-generating unit gain/loss on disposal of assets and any relevant tax. room revenue divided by the number of room nights sold. Also known as average room rate. profit available for IHG equity holders divided by the weighted average number of ordinary shares in issue during the year. cash expended on purchases of property, plant and equipment and purchases of intangible assets, associates and other financial assets. a portfolio of similar assets that are subject to the same economic and commercial influences. 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 Continuing operations a liability that is contingent upon the occurrence of one or more uncertain future events. 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. Derivatives Discontinued operations a financial instrument used to reduce risk, the price of which is derived from an underlying asset, index or rate. operations that have been sold and assets classified as held for sale when the results relate to a separate line of business, geographical area of operations, or where there is a coordinated plan to dispose of a separate line of business or geographical area of operations. Standards. Interest rate swap an agreement to exchange fixed for Management contract floating interest rate streams (or vice versa) on a notional principal. a contract to operate a hotel on behalf of the hotel owner. 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 (eg Holiday Inn, Holiday Inn Express). Net debt borrowings less cash and cash equivalents. Occupancy rate rooms occupied by hotel guests, expressed as a percentage of rooms that are available. Operating profit margin operating profit before exceptional operating items expressed as a percentage of revenue. Pipeline signed/executed agreements, including franchises and management contracts, for hotels which will enter the Group’s system at a future date. Revenue per room revenue divided by the number of available room room nights that are available (can be (RevPAR) mathematically derived from occupancy rate multiplied by average daily rate). Room count number of rooms owned, managed or franchised by IHG. 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 control. System size the number of hotels/rooms owned, managed or franchised by IHG. Exceptional items items which are disclosed separately because of their size or nature. Total gross revenue 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 (eg Staybridge Suites, Candlewood Suites). Total Shareholder Return (TSR) total room revenue from franchised hotels and total hotel revenue from managed, owned and leased hotels. the theoretical growth in value of a shareholding over a period, by reference to the beginning and ending share price, and assuming that gross dividends, including special dividends, are reinvested to purchase additional units of the equity. Upscale hotel a four/five star full-service hotel characterised by superior service (eg InterContinental, Crowne Plaza). UK GAAP United Kingdom generally accepted accounting practice. Weighted average exchange rate the average of the monthly exchange rates, weighted by reference to monthly operating profit. Working capital the sum of inventories, receivables and payables of a trading nature, excluding financing items such as corporate taxation. Franchisee operator who uses a brand under licence from the brand owner (eg IHG). Franchisor brand owner (eg IHG) who licenses brands for use by operators. Goodwill the difference between the consideration given for a business and the total of the fair values of the separable assets and liabilities comprising that business. Hedging the reduction of risk, normally in relation Holidex fees to 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. 96 IHG Annual Report and Financial Statements 2007 Shareholder profiles Shareholder profile as at 31 December 2007 by type Category of holdings Private individuals Nominee companies Limited and public limited companies Other corporate bodies Pension funds, insurance companies and banks Total Number of shareholders Percentage of total shareholders Ordinary shares Percentage of issued share capital 57,992 3,887 345 176 19 62,419 92.92 6.24 0.56 0.28 0.00 100 20,584,116 267,864,281 1,551,687 2,546,987 2,076,237 294,623,308 6.99 90.92 0.53 0.86 0.70 100 Shareholder profile as at 31 December 2007 by size 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 Percentage of total shareholders Ordinary shares Percentage of issued share capital 37,081 13,234 6,584 4,580 287 330 76 157 40 50 62,419 59.41 21.20 10.55 7.34 0.46 0.53 0.12 0.25 0.06 0.08 100 2,481,005 4,248,148 4,609,712 8,392,813 1,953,592 7,457,794 5,402,215 37,385,619 26,086,281 196,606,129 294,623,308 0.84 1.44 1.56 2.86 0.66 2.53 1.83 12.69 8.85 66.74 100 Shareholder profile as at 31 December 2007 by geographical location Country/Jurisdiction England and Wales Scotland Rest of Europe USA (including ADRs) Japan Rest of World Total Percentage of issued share capital1 65.12 3.72 6.66 21.23 0.48 2.79 100 1 The geographical distribution presented is based on an analysis of shareholdings of 150,000 or above where geographical ownership is known. These holdings account for 76.97% of total issued share capital. U S E F U L I N F O R M A T I O N U S E F U L I N F O R M A T I O N Glossary and Shareholder profiles 97 Investor information Registrar Following a change in its ownership, approved by the Financial Services Authority in 2007, the Company’s Registrar is now called Equiniti. Shareholders have access to the full range of services previously provided. For information on these services, and for enquiries concerning individual shareholdings, please contact the Company’s Registrar, Equiniti (details shown on page 100). Electronic communication The Company has given email notification, to those shareholders who have requested it, of the availability of this Annual Report and Financial Statements, the Annual Review and Summary Financial Statement, and the Notice of Annual General Meeting, on the Company’s website at www.ihg.com/investors under financial library. Shareholders may appoint electronically a proxy to vote on their behalf on any poll that may be held at the forthcoming Annual General Meeting. Shareholders who hold their shares through CREST may appoint proxies through the CREST electronic proxy appointment service, by using the procedures described in the CREST manual. Dividend Reinvestment Plan The Company offers a Dividend Reinvestment Plan (DRIP). This provides the opportunity for shareholders to use their cash dividends to buy more IHG shares. For further information about the DRIP, please contact our Registrar, Equiniti (details shown on page 100). Special dividend and share consolidation 2007 On 15 June 2007, the Company paid a special dividend of 200p per ordinary share to shareholders on the Register at the close of business on 1 June 2007. The special dividend was accompanied by a consolidation of the Company’s share capital, effective from 4 June 2007, whereby shareholders received 47 new ordinary shares of 13 29⁄47p each for every 56 existing ordinary shares of 11 3⁄7p each held on 1 June 2007. Changes to the base cost of IHG shares Details of all the changes to the base cost of IHG shares held since April 2003 up to September 2007, for UK Capital Gains Tax purposes, may be found on the Company’s website at www.ihg.com/cgt These cover changes associated with: • • • • • the separation of Six Continents PLC in April 2003; the share consolidation associated with the special dividend paid in December 2004; the capital reorganisation of the Group completed in June 2005; the share consolidation associated with the special dividend paid in June 2006; and the share consolidation associated with the special dividend paid in June 2007. Share price information Share price 2006 and 2007: InterContinental Hotels Group PLC v FTSE 100 ) e c n e p ( 1,500 1,400 1,300 1,200 1,100 1,000 900 800 Jan 06 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 07 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec InterContinental Hotels Group PLC – Share price FTSE 100 – Index Source: Datastream Further details of IHG’s share price may be found on the Company’s website at www.ihg.com/investors under share price. 98 IHG Annual Report and Financial Statements 2007 Interim results The Company does not intend to publish future interim results in hard copy. The interim results will be available online at www.ihg.com/investors under financial library. Corporate Responsibility Report IHG has published its first online Corporate Responsibility Report covering progress on a range of environmental, social and community issues. This is available on our corporate website and can be downloaded directly at www.ihg.com/responsibility American Depositary Receipts (ADRs) The Company’s shares are listed on the New York Stock Exchange in the form of American Depositary Shares, evidenced by ADRs and traded under the symbol ‘IHG’. Each ADR represents one ordinary share. All enquiries regarding ADR holder accounts and payment of dividends should be directed to JPMorgan, the authorised depositary bank (details shown on page 100). Form 20-F The Company is subject to the reporting requirements of the Securities and Exchange Commission (SEC) in the US and files with the SEC an Annual Report on Form 20-F. The Form 20-F can be found on the Company’s website www.ihg.com/investors under shareholder services/adr or by visiting the SEC’s website at www.sec.gov/edgar.shtml Financial calendar Payment of special interim dividend of 200p per share Payment of interim dividend of 5.7p per share Financial year end Preliminary announcement of annual results Final dividend of 14.9p per share Announcement of first quarter results Annual General Meeting Final dividend of 14.9p per share Announcement of interim results Interim dividend Announcement of third quarter results Financial year end Preliminary announcement of annual results Ex-dividend date Record date Payment date Payment date 2007 15 June 5 October 31 December 2008 19 February 26 March 28 March 7 May 30 May 6 June 12 August October 11 November 31 December 2009 February For further investor information visit www.ihg.com/investors U S E F U L I N F O R M A T I O N U S E F U L I N F O R M A T I O N Investor information and Financial calendar 99 Contacts Registered office 67 Alma Road Windsor Berkshire SL4 3HD Telephone +44 (0)1753 410 100 Fax +44 (0)1753 410 101 For general information about the Group’s business please contact the Corporate Affairs department and for all other enquiries please contact the Company Secretary – both at the above address. Registrar Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone 0871 384 2132*† (UK callers) +44 121 415 7034 (non-UK callers) www.shareview.co.uk * For those with hearing difficulties a text phone is available on 0871 384 2255† for UK callers with compatible equipment. † Telephone calls to these numbers are currently charged at 8p per minute if using a BT landline. Other telephone service providers may charge different rates. ADR depositary JPMorgan JPMorgan Service Center PO Box 3408 South Hackensack NJ 07606-3408 USA Telephone 1 800 990 1135 (US callers – toll free) +1 201 680 6630 (non-US callers) Email jpmorganadr@mellon.com www.adr.com Stockbrokers JPMorgan Cazenove Limited Merrill Lynch International Auditors Ernst & Young LLP Investment bankers Citi Solicitors Linklaters 100 IHG Annual Report and Financial Statements 2007 Forward-looking statements Both the Annual Report and Financial Statements 2007 and the Annual Review and Summary Financial Statement 2007 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 PLC with respect thereto. Such statements include, but are not limited to, statements made in the Message from the Chairman and Chief Executive. 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: the risks involved with the Group’s reliance on the reputation of its brands and protection of its intellectual property rights; the risks relating to identifying, securing and retaining management and franchise agreements; the effect of political and economic developments; the ability to recruit and retain key personnel; events that adversely impact domestic or international travel, including terrorist incidents; the risks involved in the Group’s reliance upon its proprietary reservation system and increased competition in reservation infrastructure; the risks involved with the Group’s reliance on technologies and systems; the risks of the hotel industry supply and demand cycle; the possible lack of selected development opportunities; the risks related to corporate responsibility; the risk of litigation; the risks associated with the Group’s ability to maintain adequate insurance; the Group’s ability to borrow and satisfy debt covenants; compliance with data privacy regulations; and the risks associated with funding the defined benefits under its pension plans. The main factors that could affect the business and financial results are described in the Business Review of the Annual Report and Financial Statements 2007 and also in any Annual Report of InterContinental Hotels Group PLC on Form 20-F for 2007 and for any subsequent year. Design and production Corporate Edge www.corporateedge.com Photography VisualMedia Print Royle Print This Report is printed on Revive 50:50 silk, which is made up of 25% post-consumer waste, 25% pre-consumer waste and 50% virgin fibre. Both mill and printer are certified with environmental management system ISO 14001 and the Forest Stewardship Council. Royle Print is also a ‘Carbon Neutral Company’. U S E F U L I N F O R M A T I O N U S E F U L I N F O R M A T I O N Contacts and Forward-looking statements 101 InterContinental Hotels Group PLC 67 Alma Road, Windsor, Berkshire SL4 3HD Telephone +44 (0) 1753 410 100 Fax +44 (0) 1753 410 101 make a booking at www.ihg.com