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Intercontinental Hotels Group plc (NYSE:IHG)
Q1 2020 Earnings Call
May 7, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the InterContinental Hotels Group's First Quarter Trading Update to the 31st of March, 2020. My name is Becky and I will be coordinating your call today. [Operator Instructions]

I will now hand over to your host, Stuart Ford to begin. Stuart, please go ahead.

Stuart Ford -- Head of Investor Relations

Good morning, everyone and welcome to IHGs 2020 first quarter trading update conference call. And apologies to anyone receiving a delay of getting on the line, there was congestion on the phone lines. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Keith Barr, Chief Executive Officer; and Paul Edgecliffe-Johnson, our Chief Financial Officer.

I need to remind listeners on the call that in the discussions today, the Company may make certain forward-looking statements as defined under US law. Please refer to this morning's announcement and the Company's SEC filings for factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. Finally, as we will be holding our Annual General Meeting later this morning, Paul and Keith will have to dial off around 10:00 AM. I may therefore ask that you prioritize any questions you may have. So that we can get around everyone during our Q&A session.

I will now hand the call over to Keith.

Keith Barr -- Chief Executive Officer

Thanks, Stuart, and good morning, everyone. The impact of COVID-19 on the global economy continues to deepen, and as communities, businesses, and governments respond to this crisis, our travel and hospitality industry has been faced with the biggest challenge we've ever seen. As a Company, we continue to act quickly and thoughtfully to ensure that we're providing as much support as possible to all our stakeholders, while protecting the long-term health of our business. I'm so proud of the manner of our response and thankful to our colleagues and owners around the world. They've really stepped up and selflessly responded at the front line working tirelessly to give our guests and hotel teams the support they need during this very difficult circumstances.

Since the outset in Wuhan, our people have shown what True Hospitality means at IHG, such as making meals for crews, building temporary hospitals there and reopening hotels with just one day's notice for support workers flown in. And that sentiment continues today, from providing accommodation to thousands of healthcare and support workers globally, to donating beds to local hospitals in Madrid, sheltering the homeless in the UK and Australia, and reopening our hotel kitchens to prepare and distribute meals to the elderly food bank organizations or colleagues from our own industry who find themselves out of work.

Our purpose of True Hospitality for everyone is at the heart of our business, and we are focused on making thoughtful choices at the right time in the right way. I'll talk more about our broad response in a moment including the importance of our close-working relationship with owners and the mutual efforts, we are making to keep hotels open. But first let me hand over to Paul, to take you through our first quarter financial performance.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Thanks, Keith, and good morning, everyone. I'll start first with the RevPAR. You will have seen that this time around, we have provided monthly RevPAR data in our release and I will focus my remarks on the month of March, as well as what we have seen subsequently in April. Our global RevPAR declined 25% in the first quarter and 55% in March. By late March, demand for hotel had fallen to lowest levels ever seen, with governments around the world began to impose social distancing measures and travel restrictions. These restrictions remain in place in most of our key markets and we estimate that April RevPAR decline will be around 80%.

Turning now to our regional performance. Across the first quarter, RevPAR fell 19% in the Americas and just under 20% in the US. In March, US RevPAR fell 49%, outperforming the overall industry and our weighted segment. This has been driven by a number of factors. First, our weighting in the upper midscale segment, which accounts for around 65% by hotels. This segment has proved to be more resilient as it was through previous downturn. Through the financial crisis in 2008 and '09, upper midscale RevPAR fell around 15% [Phonetic], compared to luxury and upper upscale, which fell between 18% and 25%. We are seeing similar trends in March when upper midscale RevPAR outperformed both of these segments combined by around 16 percentage points.

We also have the strongest brand in this segment with Holiday Inn Express outperforming the upper midscale by nearly 3 percentage points in March. Combined with our weighting to the more resilient segments, around 85% of our rooms are in non-urban markets, which also tend to hold up asset in tough economic conditions. RevPAR in our non-urban market declined 45% in March against an over 60% decline for hotels in urban markets. In addition, our hotels are less reliant from international inbound travel, because around 95% of our demand typically being domestically driven.

And finally, we are less exposed to large group meetings and events which tends to be the first to fall away and the last to recover in a recessionary environment. Informed by the trends we are seeing now, our experience of previous downturn and the insights we are getting from China, our expectation is that during these times of weaker demand, and as the industry starts to recover, we should be relatively well placed. Domestic demand is likely to recover first as international travel remains restricted. Transient business is likely to drive the recovery as lingering social distancing measures limit group business. And suburban markets will be driven by the domestic economy, which will recover before urban.

The fact that our hotels are well placed to capture available demand, it can be seen in the low percentage of our hotels that are closed just 10%. We're working closely with our franchisees and owners to support them in keeping their hotels open by relaxing brand standards, pausing renovation work and offering fee reliefs and increased payment flexibility. We've also been strong advocates for our owners to lobbying for greater supports from government funding schemes and we're working hard to drive business into their hotels through securing government contract business, finishing up in the Americas with our most recent trading, we expect April RevPAR to have fallen by around 80% with occupancy levels at our open comparable hotels showing sometimes improvement through the month and currently in the mid-20s.

Moving on now to our Europe, Middle East, Asia and Africa region. RevPAR for the first quarter fell 26% with declines in each of our markets reflecting the spread of COVID-19 which impacted the region from the second half of February. In the UK, RevPAR was down 22%, including a 55% decline in March. RevPAR in Continental Europe was down 28% this quarter with March down over 70%, within this, Germany was down just over 70% following the cancellation of major trade fairs. Elsewhere in the Middle East, RevPAR fell 60% in March, largely due to the partial locked down in a number of countries. In Australia, restrictions on both domestic and international flights led to a RevPAR decline of 50% in March, and in Japan, RevPAR fell 70% driven by reduced tourist and corporate demand from China.

As of the end of April, we had around 560 hotels closed or approximately 60% across the EMEA region, largely reflecting the timing of government mandate closures, occupancy levels are running in the low-20s for comparable open hotels. We expect RevPAR in April to decline around 90% in EMEA.

Finally, moving to Greater China. RevPAR across the region was down 65% in the quarter. This reflects the COVID-19 outbreak, which impacted the region from late January with RevPAR down 89% in February for a modest improvement to an 81% decline in March. These trends of improvement has continued into April where we expect RevPAR to be down around 75%. As restrictions have been lifted, we've seen hotels reopen. And at the end of April, only 10 hotels have closed compared to nearly 180 at the peak in February. Occupancy levels in comparable open hotels are also starting to rebuild, currently being in the mid-20% range, compared to the trough of around 5% in February, with demand being led by domestic, corporate and transient travel. As we look to the recovery in China, we are again [Technical Issues] to capture demand. Our focus on building an in China, for China business will benefit us with around 90% of demand into our hotels being domestic.

Moving now to net system size. During the quarter, we opened 6,000 rooms, the majority of which opened in the first two months of the year, although there were still 1,100 rooms that opened in the month of March. We removed 8,000 rooms. 2,000s of which relate to a previously announced portfolio of hotels in Germany, but which we have received significant liquidated damages. The combination of additions and removals took our net system size to 882,000 rooms, up 4.6% since this time last year. We signed 14,000 rooms in the quarter or which 4,000 rooms were signed in March taking our total pipeline to 288,000 rooms. This included 12 avid hotels and five Atwell Suites in the US, two further hotels for Six Senses in EMEAA and 22 franchise signings in Greater China.

Since the quarter end, development activity is continuing, albeit at a slower pace. In the US, 10 hotels broke ground in April. And in Greater China, construction crews are back on site. Workers resumed on around 95% of hotels looking to open this year. We also continue to sign strategically important landmark hotels including the InterContinental Hotel in Rome and the Regent Shanghai. As we scenario plan for the balance of the year, by the rest of the industry, we have limited visibility. Given the level of cancellation activity we have seen for the second quarter and just applying common sense, it's clear that conditions will continue to remain challenging over the coming months. This March is also evident from the weaker RevPAR data published by industry organizations and their analysis of what the rest of 2020 could look like in terms of industry RevPAR.

To prepare for this, we have taken rapid and decisive action to reduce costs, preserve cash and both the liquidity. We've implemented temporary scaled payroll reductions across the entire organization, along with cuts to travel and other discretionary spend, and remain on track to reduce our fee business cost by up to $150 million as previously guided on 20th of March. We've made similar reductions to discretionary costs across the System Funds including reductions to marketing spend in order to help mitigate the impact of lower testing fees from hotels while ensuring the best return for our owners on our remaining activities.

We have also taken action in our owned-lease and managed-lease hotels. We will implement further cost reductions as necessary in each and every part of our business to manage the group appropriately through the evolving trading environment. We are taking steps to protect our cash flow, which includes reducing our gross capital expenditure by around $100 million in last year's level and ensuring that we are proactively managing our working capital. We are already seeing the benefits of reduced cash outflows. We received good levels of payments from owners through April, who appreciated our owner offer with managing their cash flow. All in all, this meant the business with net cash flow positive in April. Albeit, we recognized that owners are entering a more challenging cash flow environment, so a deterioration is possible in the coming months.

In addition, as noted in our March update, we have also withdrawn the Board's recommendation to pay the final dividend to be announced with our results in February and we will defer consideration of further dividends until visibility has improved. As you know, we have always run the business on a conservative basis. We are well capitalized, with the majority of our debt being in bonds, which have a staggered maturity profile, with the first maturity of GBP400 million during late 2022 and no others to five years.

In recent days, we have extended our $1.275 billion syndicated revolving credit facility by 18 months after September 2023. And as announced 10 days ago, we have agreed with our lending syndicate, the waiver of our existing covenants for the next three tests. This means that our standard net debt to EBITDA and interest coverage covenants will not be tested 31st December, 2021 instead, there is $400 million minimum liquidity covenant tested every six months. We also issued GBP600 million or around $750 million of commercial paper from the Bank of England's COVID corporate financing facility.

As at the end of April, $850 million of our revolving credit facility is undrawn and we have $1.2 billion of cash on deposits, that takes our total available liquidity to around $2 billion, which we estimate in a theoretical zero occupancy, environment would provide at least 18 months of headroom. This takes into account the cost base across the fee business, our owned-lease and managed-lease hotels and the System Funds. This assessment is also before any further cost and cash action. It is worth noting at this point with our previously stated sensitivity of a 1% movement in RevPAR results in approximately a $13 million movement in EBIT still hold.

However, we expect the sensitivity to be around $1 million higher through 2020, due to taking into account hotel closures in our owned-lease to managed-lease estate. This sensitivity is before the cost savings, which we have announced. We are also expecting a reduction in our technology fee income, where we have offered a temporary discounts to owners as part of our response to COVID-19 as well as in other revenues such as trading fees which are impacted by hotel closures and social distancing measures. In total our best current expectations, this will reduce income by $20 million to $30 million in 2020.

To summarize, the cost reduction, cash flow and liquidity measures that we are taking will enable us to meet the immediate challenges facing the business, combined with our weighting to more resilient domestic mainstream travel demand, this positions us well to emerge stronger and deliver on our long-term growth ambitions.

With that I will hand the call back to Keith.

Keith Barr -- Chief Executive Officer

Thanks, Paul. So we can see quite clearly the impact this crisis is having on our trading. We can't control that. But we can do everything in our power to help mitigate the effect it has on our business, and our owners businesses and also shift some of our focus on to the broader role we play in relief efforts around the world. I want to spend a few moments just talking through how we are doing that in three different ways.

Firstly, caring for our communities, we're working with governments around the world to help provide hotel accommodation to those who need it the most, including thousands of frontline workers leading the relief efforts as well as some of the most vulnerable in society, such as the homeless. We currently have around 290 hotels across our business that had been repurposed including, InterContinental Sydney, where the team reopened within 24 hours notice to accommodate travelers sent directly to them after returning to the country. We've also continued to work with our humanitarian aid partners to fund disaster relief efforts, such as helping food banks and charities in more than 70 countries, get vital supply to those most in need during this crisis.

Our own colleagues continue to inspire us to volunteering their time, cooking and delivering meals and donating vital supplies to hospitals. The InterContinental Bali, for instance have been selling mask made from linen for the local community, while support for CARE International is helping provide PPE equipment in developing markets. We've also seen our IHG Rewards Club loyalty members generously donate millions of loyalty points in recent weeks to support our True Hospitality for good community partners such as the International Federation of Red Cross and Red Crescent Societies.

The second area is how we support our guests, hotel colleagues and owners. For our guests, health and safety are paramount and we want them to feel confident in booking an IHG Hotel, knowing that we are consistently deliver a safe, healthy and clean stay. Our IHG Way Of Clean Program is already a key part of how we operate, and we are extending this to become a global brand standard. We continue to follow the advice from the World Health Organization and the Center for Disease Control and Prevention to ensure that we have the most up-to-date safety and security procedures in place for our guests and colleagues.

We understand the not everyone wants to travel right now, so we have waived cancellation fees and created Book Now Pay Later options for the rest of 2020. We're also protecting the loyalty points and status for IHG Rewards club members by extending membership status and deferring the expiration date of points. For our owners, it's important to recognize many of them run small businesses and so they are currently facing real challenges, either temporarily closing their doors or running at the lowest level of occupancy, they've ever seen.

We are standing beside them to help get through this, hosting webinars on how to flex operations as they open and reduce costs, or how to secure government financial support that may be available to them. Furthermore, we've given our owners an opportunity to pause all renovation work and offering fee relief options passing through all cost reductions we are achieving on their behalf and providing increased payment flexibility, so they can reduce their cash pressures and manage through this time.

If they're in the unfortunate position of having to furlough hotel staff, or worse still, let people go, we're also supporting these people with dedicated website or temporary vacancies with hiring companies like Amazon and Walmart. Alongside this, whether at the White House or at number 10 [Phonetic], we are working on behalf of all of our owners with the highest levels of governments in key markets globally to secure invaluable stimulus packages for the hospitality industry that will further protect our owners and jobs.

And third area is that we have to manage sensitively through what is a very challenging time at the corporate level. Outside of Greater China, we are effectively operating the entire business remotely today, having swiftly put in place all necessary organisational process changes and strengthening of our IT systems. It's vital, though, that we recognize the pressure of remote working and stay focused on ensuring our colleagues feel properly supported during this time and able to adjust to such a unique environment both professionally and personally. We're encouraging our colleagues to take part in leadership Q&As and have invested in a range of digital resources designed to offer personal development and help create as much of a work/life balance as is possible. All of our time and resource is being focused on responding to this crisis in the here and now, and ensuring that we proactively plan for what a recovery will look like market by market, and to some degree, hotel by hotel.

If we look across our portfolio of almost 5,900 hotels right now, it is no doubt a tough picture. Around 1,000 hotels are closed and occupancy levels and open properties are low. But it's important to underline the strength of our business model. And why it positions us well to withstand this pressure. Firstly, we are an asset-light business, with most of our revenues are tied to hotel revenues, not profits. Secondly, we're skewed toward transient and leisure demand, as opposed to large group bookings, which are more impacted by social distancing measures and reduced travel budgets. Thirdly, our broad geographical distribution is weighted toward domestic demand, mostly in non-urban markets, both of which are expected to lead the recovery in our industry if international travel restrictions persist. And the fourth point is that, we have a market-leading position within the Upper Midscale segment, which has historically outperformed during downturns.

As Paul spoke about earlier, we are still seeing hotel openings and signings in this challenging environment. In April, we signed the Regent Shanghai Pudong, which will become the first opening for the brand since its acquisition. In the same month, the InterContinental Hong Kong also started its biggest renovation in 30 years, as we prepare to reopen it under the Regent brand in 2022.

So, in summary: our top priorities remain the health and safety of our stakeholders; ensuring we stay true to our purpose, culture and values; and to protect the long-term future of our business. We anticipate continued disruption in travel for the months ahead, and forward visibility remains very limited. We are focused on taking the necessary actions to reduce costs, preserve cash and further strengthen our liquidity position. Our strategy remains intact. We will continue to build on the relative resilience of our business model.

With that, Paul and I are happy to take your questions.

Before I hand back to the operator, I know there are a lot of callers on the line. So if we could ask you to prioritize your questions so we can get through as many callers as possible in the time that we have.

Operator, if you could please open the line to questions?

Questions and Answers:

Operator

Thank you very much. We have our first question registered from Richard Clarke. Richard, please go ahead. Your line is now open.

Richard Clarke -- Sanford C. Bernstein Limited -- Analyst

Good morning. If you indulge me with three questions, please. For the first one, I just want to unpick your comment on -- about your cash flow positive in April, and it looks like, in your liquidity statement, you would be eating through over $100 million of cash at zero occupancy, but you can't be making $100 million of revenue at the moment. So is there anything funny in April to get you to cash flow positive?

And second question, just wondering the scope of that technology fee discount. How much is that? And how much we should read into your willingness to sort of support owners over the longer term with further fee reductions, deferrals, etc?

And then lastly, just an update on Concerto. It looks like some of the tech will now be more demanded in terms of sort of choosing a room and mobile phone door entry. Any update on how quickly you can roll that out as we come out of the crisis? Thanks.

Keith Barr -- Chief Executive Officer

Sure. Thanks, Richard. And I would ask everyone's indulgence a bit because Paul and I are not together. And so, I will try to MC the questions and answer some and then pass to Paul as well, too, and hopefully, that will go well. So, I'll let Paul take the cash flow and the tech fee conversation. I'll talk to you a bit about technology.

We fundamentally believe that technology will be more important going forward than it even was today, Richard. And we'll continue to make the investments for it. We have completed some of the initial testing of the alpha and beta for Concerto. The rollout schedule is going to be contingent upon our ability to get people to travel and restrictions. And so, it's difficult for us to map out exactly what the deployment schedule will look like on a global basis due to the nature of markets varying from country-to-country and the availability to get people to travel because we do have to touch every single hotel again, and with training. And so, we also think about our training delivery method on that, too. But it is a top priority for us to deploy Concerto and continue to invest in other technologies to create competitive advantage, which I think is one of the advantages that we have at IHG as being one of the leading players.

So, Paul, do you want to take cash flow and the technology fee?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Thanks, Keith. So in terms of the April cash flow, look we were pleased to be cash flow positive in the month. Obviously, when you think about cash flow, it is a bit lumpy. Cash burn includes capex with good interest, it includes taxes, etc. So it's just going to be the same month by month. Obviously, also the cash inflows in April don't relate to trading in April. So they relate to earlier months, to March and February, when obviously business was stronger. We've done a lot on working capital, which is also helped in April. It continues to be a major focus of ours to maximize our cash flows. So, we will continue to work on that.

In terms of the tech discounts, and your comment as whether there's anything to read into it. Well, we are working with our owners to achieve the best outcome for them. That's our philosophy. And the tech fee doesn't vary really with RevPAR, and most of our fees obviously, too. So we have reduced that for a temporary period by small amount to share in the pain that they're seeing. But it is a temporary reduction. It was well received by the owners, and it shows the spirit in which we are approaching this crisis.

Richard Clarke -- Sanford C. Bernstein Limited -- Analyst

Okay. Thanks very much.

Stuart Ford -- Head of Investor Relations

And Becky back to you to have the next question, please.

Operator

Our next question comes from Vicki Stern from Barclays. Please [Speech Overlap]. Hello. Sorry. Go ahead.

Victoria Stern -- Barclays Bank PLC -- Analyst

Hi. Yeah. Just firstly, just coming back on the owners. Can you just give a few comments about how you perceive the health of your owner community in general perhaps any geographic differences to touch on as well? And do you think over and above what you've already announced that there might be any need to take any additional measures and sort of what measures could that be?

And the second one just around the additional cost savings you said that you are looking at. What sorts of areas might those include? And just a reminder, actually on the $150 million, if that includes taking any advantage of the furlough schemes?

And finally, just any sense you can provide on what you think the breakeven occupancy level typically might be for one of your hotels just to give a sense as to when things might reopen that are closed currently? Thanks.

Keith Barr -- Chief Executive Officer

Great. Thanks, Vicki. I'll pick up the owners health in a bit of a breakeven and then let Paul talk about the cost savings, and the $150 million. So, I think the health of our owners is generally good. If you think about the vast majority of our portfolio is in Mainstream, they are small businesses. And we've been able to lobby governments in different markets for support for colleagues and also support for their businesses. So, the CARES Act, in particular, has provided a great bridge for the small businesses in the US to be able to get that loan, have those loans turned to granted and they utilize those proceeds to keep people employed, too. And so, clearly, they are under incredible pressure. But breakeven, we estimate for the Mainstream segment is around 30% occupancy, and we're running sort of around the mid-20s right now, too. And so, with government support, with the cost reductions that we're putting through, and working with them, we think the general health of our owners is good.

Clearly, there will be some owners that will run into significant issues during this, that is just inevitable and we will continue to work with them and partner with them overall. So I think that's the philosophy we've taken in there is to be a good partner. And I think that's been paying dividends. The conversations that we've all been having with the owners association and the big owning groups has been they're in a pretty good place for the next few months and they expect as restrictions ease up over time that occupancies move up to some degree and get them back into a more comfortable -- more comfortable, I wouldn't say, it's a comfortable position, but a more comfortable position they are today. And then when you go to Asia, you think we're dealing with a lot of -- in China, we're doing a lot of state-owned enterprises, big property development companies, which are well capitalized and supported. We deal with a lot of sovereign wealth and high net worth individuals who are quite well capitalized, too. So, in general, I'd say, the owner health is under pressure. But it is in reasonably good place, but we will expect to see some challenges along the way.

Paul, do you want to talk about the cost savings and the $150 million?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Yeah, absolutely. So, we spoke, I guess, a while ago now about the $150 million that we will be taking out the cost base on the P&L this year. As you know, probably about two-thirds of our normal cost base is people costs. So, we have made reductions to salaries across the organization, scaled, obviously, the most senior level, a higher level, are significantly higher than the more junior levels of the organization. We've also taken out our bonus. We have reduced our investments behind some of our new brand activity that -- you'll remember, we created the capacity for through our major cost reduction happened a few years ago and then put that behind building out the avid brand, Atwell brand, Regent brand, voco brand, etc. In the current environment, we have pulled back on that. We look at travel and discretionary costs. So in total, that has given us a significant reduction to our A&G expense. Equally in our System Funds, we've reduced significantly our marketing spend, etc., and with similar reductions to employee costs. We have not taken advantage of the UK furlough scheme. No.

In relation to your comment -- to your question about the breakeven level for hotels, when they might want to reopen? For a lot of our Mainstream brand, it's somewhere in the high-20 to 30%. For a hotel like the Candlewood, you can run on a skeleton staff of two. And actually, if you look at Candlewood, then they've maintain quite high level of occupancy. They're well used. Holiday Inn Expresses, again, you can run with a low staff level. So, it does work to keep most of them are open. If you look in the US, 90% of our hotels across the region are reopened and we are in a net reopening environment. So -- and we are seeing more hotels open up and there is more that are talking to us about reopening. There's a protocol they have to go through to reopen. But we are seeing those steadily come back. Here in China, we had 180 closed at the trough, and now we're back to only 10, which a few big urban hotels. But it's a good trend we want the hotels to stay open to be continue to be part of the infrastructure cities, to be part of the community. And the owners want their hotels open as soon as they can.

Keith Barr -- Chief Executive Officer

Thanks, Vicki, for that. And I'll ask Becky to take the next question.

Operator

Thank you. Our next question comes from Jamie Rollo from Morgan Stanley. Jamie, please go ahead. Your line is open.

Jamie Rollo -- Morgan Stanley -- Analyst

Hello. Good morning, everyone. Three again, please. On the fees -- back to the fee question, I think you said $20 million to $30 million on the prepared comments. Is that just on the technology or is that on some of the other discount? So, could you talk a bit about all the discounts being offered? And is that just a Q2 impact or should we expect that for the rest of the year? And does that change that $14 million RevPAR sensitivity?

Secondly on the System Fund, are you expecting that to breakeven this year? And could you talk a bit about the sort of fixed variable cost split?

And then finally, what's your expectation on sort of unit growth over the next few years, particularly on conversions from independent hotels? Thank you.

Keith Barr -- Chief Executive Officer

Thanks, Jamie. Paul, do you want to pick up on fees and System Fund, and I'll talk a bit about growth?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Absolutely.

Keith Barr -- Chief Executive Officer

Why don't you start off on the fees and I'll end on growth?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Okay, great. Will do. So in terms of the fees in the prepared remarks that we're trying to give you the best guidance that we can, obviously, in an uncertain environment. My best expectation right now is that, the fees from technology costs, from training and a few other miscellaneous fees across 2020 will reduce by probably $20 million to $30 million, depending on just how long we keep the discounts in place for. So it's not just the second quarter, that's across the period of the year, across all those fees. And, look, we'll give you some more updates through the year if we see that changing to any material extent.

In terms of the System Fund, we will get it as close to breakeven from a cash perspective and we can this year. My guess is it will probably be cash flow negative, maybe somewhere between $50 million and $100 million across the year. But there are some costs that we would not want to cut as we need to continue to drive business to our hotels to the extent we can in a lower demand environment.

And in terms of your question about fixed versus variable costs. Well, we've always talked about the majority of our costs in a normal environment are, of course, people. So two-thirds of our costs are that we've brought that down somewhat already, as I've spoken about, now probably 50-50 people costs, non-people costs, but we continue to look at all costs in the business.

And Keith, I'll pass it back to you to talk about growth.

Keith Barr -- Chief Executive Officer

Thanks, Paul. Jamie, I think you think about in the environment that we're in now, there could -- there are headwinds and tailwinds to growth. And so, what are the headwinds today and in the short-term? Clearly, we have building sites being closed down, construction being stopped, social distancing. So that's going to slow the development pipeline and construction pipeline for this year without question. The nature and the extent to which will really depend upon how countries open up and how businesses open up, too. So, clearly, we're not going to be growing at the same levels we had previously planned to. But we are still signing hotels. We signed 104 hotels in the first quarter. We opened 44 hotels. We're still signing hotels into April and having groundbreaks in April, too. So, the growth is still going to occur and the pipeline will still materialize but over a different period of time.

The other headwind, clearly, will be the availability of capital. We saw after the financial crisis, while this isn't a liquidity issue today, the lending in this sector will be constrained for a period of time. It will come back and it will come back to the biggest and best companies like it did after the financial crisis, and that's where IHG is well positioned. So, excuse me, those are some of the headwinds that we are definitely facing.

So, what are the tailwinds, though? I think it's going to be a -- this, I think, will increase the movement of hotel supply into the biggest, best branded hotel companies. Customers are going to want to stay in branded hotel companies. I think this is going to put headwinds on to home sharing as well. I think this means that the power and the strength of the enterprises are going to deliver superior returns, lower cost of distribution. So I think that trend that we saw happened over the last decade, will continue to accelerate. And the other opportunity it presents will be conversions. I think you'll see weaker brands and/or independents convert over into the big branded players. And with the opportunity we have with voco and with Kimpton and Hotel Indigo, great conversion plays. And candidly, I mean, the deal that we did in Shanghai is -- for the Regent, is a conversion of a luxury -- leading luxury hotel brand, and they want to come be part of our IHG. So I think that will be something to help us. But it's really hard to have any visibility on what growth is going to look like in the next 12 months until we have more sense for how the -- how countries reopen and how construction reopens.

Jamie Rollo -- Morgan Stanley -- Analyst

Thanks for that. Just for that fee release comment, Paul, does that include the discounts you're giving to owners who are paying early that 10% discount? What sort of additional dollar impact are we're talking about that, particularly if that carries on through the rest of the year?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

So if it's just for the second quarter, which is what we've done today, it's actually has a pretty small impact. But we will continue to monitor what we need to do with the owners. As you know, we're in partnership with them. And if it's the right thing to do, we will consider continuing with that discount through a longer period. So, there's nothing more I can say on that right now. But thanks, Jamie. But it is not included in the $13 million. So if we did decide longer term, then that would increase.

Jamie Rollo -- Morgan Stanley -- Analyst

Thank you very much.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

And Becky, we ask you for the next question. Thanks.

Operator

Thank you. Our next question comes from Jaafar Mestari from Exane BNP Paribas. Jaafar, please go ahead. Your line is open.

Jaafar Mestari -- Exane BNP Paribas -- Analyst

Hi, good morning. Two questions, please. Firstly, going back to the liquidity and cash burn math. So when you estimate that $2 billion of liquidity leaves you at least 18 months of headroom, what's the monthly cash burn? How does it work? Is it just $2 billion divided by 18? Or do you assume any one-off outflows, working capital in the first weeks? You've just talked about the System Fund. Do you assume a base level of liquidity that you would not use? So for example, is the monthly cash burn $2 billion minus your $400 million liquidity covenant, then divided by 18? That's the first question, please.

And then secondly on the System Fund, and I'm just curious if you have some track record that you could share because the reporting was obviously not the same in '09 and how agile, have you been in the last recession in terms of removing costs? You obviously mentioned you don't want to remove everything, but could you -- reduce the cost of the system funds almost one for one, in line with RevPAR and now it's out of those $50 million to $100 million that you want to keep there.

Keith Barr -- Chief Executive Officer

Thanks, Jaafar. Paul, do you want to talk through those three points.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Yes, Keith. So in terms of the liquidity and the cash burn, I mean, broadly yes. I mean it is the $32 billion [Phonetic] and that will give us 18 months. And there is a small element of known occupancy linked income and cash that we get from our credit card relationship, but it's not a significant number. And that comes in, irrespective of the occupancy in the hotels. It does, think about any base level of liquidity that would be required, simply saying this is how much we have. And if we were getting nothing other than a small level of -- and, of credit cards, that income, and that's how long that would last for.

In terms of the System Fund, I wouldn't actually relate that to what happened in '08, '09 as a real read-across, so, and back then, yes, of course we did reduce, but you're looking at a different environment now. And but what I can say is that, we're acting very quickly and we have managed to scale back the expenditure and System Fund very significantly. It's something that we do want to continue to sustain, because it's the right thing to do, and will drive business and certainly if we were looking into a tough environment in 2021, for example, I wouldn't expect that the System Fund would be cash consumptive.

I think probably in 2020, may be the right thing to keep it and little bit cash consumptive, such that, we can keep some of that investment spending there. Thanks very much for that Jaafar, and I'll hand it back to [Speech Overlap].

Jaafar Mestari -- Exane BNP Paribas -- Analyst

If I just can follow-up -- is it OK to follow-up just very quickly on that one?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Okay. Sure. Go ahead.

Jaafar Mestari -- Exane BNP Paribas -- Analyst

On the fee business, apologies for that. But are you saying that it's basically $110 million of cash burn per month. So if I look at it differently, are you saying it's now $1.3 billion on an annual basis? It looks extremely high, and if I take just fee revenue $2 billion, fee that [Phonetic] $800 million. So it looks like if you did nothing sort of cost base is $1.2 billion. And could you just help me understand that math and is it really a $110 million per month?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

And so if you looked at some, if you look at the business and assumed that we're getting no income at all, and obviously, the business has System Fund expenditure. You've got owned and leased dormant costs. So the cost of running our owned and leased hotels with zero income coming in, then you got your interest charges, your tax charges in prior years, etc., etc. So, but that's on the basis of how we're looking at it.

In a normal environment. So today is normal, so if you're looking at a level of business that we're currently saying, clearly, it's very significantly longer than the 18 months. Maybe even up to approaching double that, but if you look at a zero occupancy environment then, our best estimate is 18 months.

Jaafar Mestari -- Exane BNP Paribas -- Analyst

Thank you.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Thanks, Jaafar. And Becky, if you could take the next question please.

Operator

Absolutely. Our next question comes from Monique Pollard [Phonetic] from Citi. Monique, please go ahead, your line is open.

Monique Pollard -- Citigroup -- Analyst

Good morning, everyone. Let me just -- just three questions from me, if I can. And the first one, just looking at the cash flow and when I'm looking for 1Q, I'm getting from the numbers you've given a cash burn of $230 million-ish in the first quarter, just wanted to check if that's correct. And within that -- is this the level of working capital movement was? And then in terms, secondly fee payments, could you comment on what we've seen in April in terms of deferrals? And I guess, as you say the April payments really more related to February and March. So maybe better to get an understanding for you in terms of the proportion of fees that you think might be deferred through May and June. And then finally just on room opening, so can you surmise to the 1,100 rooms opened in March, I guess at this point in time is that our best estimate in terms of run rate to the rest at least of the first half of 2020?

Keith Barr -- Chief Executive Officer

Thanks, Monique, why don't I take room openings, Paul and then you talk about cash burn and the fee payment issue.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Right.

Keith Barr -- Chief Executive Officer

So I think in terms of room openings, you can't take any month as a run rate, because effectively, if you look at historical performance, we tend to accelerate as the year goes on. And so I wouldn't take March as an indicative number to extrapolate out toward the remainder of the year. Again, we're seeing construction activity begin robustly in Greater China where we have a significant pipeline. We are seeing, other markets have begin to return. And so again as markets open up, we expect construction to start up again, and then seeing us continue to accelerate growth in the latter portion of the year, but it is really difficult to give any really forward visibility until we have more sense for again construction being open up around the world and progress like. So clearly we're not going to be growing at the same pace in this year, as we would have otherwise grown in owned basis and the pipeline will be shifting into future years. But again, we are quite confident again, with the -- that we'll continue to sign and open hotels. Paul, you want to talk about cash burn and the fee payment?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Thanks, Monique. So I mean year-to-date, our cash is broadly neutral to the end of 2019. So if you take out some of the movements around the RPF [Phonetic] and the CPF [Phonetic] asset. So, no real cash burn year-to-date, and in terms of fee payments and what are we seeing around deferrals, what we saw a lot of owners in April, who did pay the -- that's the final time that was a mid-month. I'd take advantage of the discounts that we offered for the -- on-time payment and they were very much appreciated and what we're doing to help them. Some of course have spoken to us about deferral and we will also have to ask, so that's the continuation of what we've seen historically.

And it is early in this -- in this environment. So we'll come back, if things change at the half year and we'll talk about that. And we were in business together with owners for 20 years on the contract. So if they are having troubles with that fees then we will consider deferrals as necessary. So we have to keep it under review. Thanks, Monique.

Monique Pollard -- Citigroup -- Analyst

Great. And can I just ask one quick follow-up? And what do you start in July, then, if you to think about the deferrals, you could see, such -- and what should we be expecting for the working capital movement to the first half?

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Well, it's very hard to speculate in this environment, I say, our owners do want to remain current on their fees, and the vast majority of them to date are doing so and some are significant minority that are talking to us about payment plans, etc. And so I don't expect any significant impact in working capital from that. And on the other things that we can do around managing our working capital, going the other way around supplier payments, etc. So that will come back through the year and continue to update on it. Clearly, it's a matter of [Speech Overlap]. Thanks very much, Monique.

Monique Pollard -- Citigroup -- Analyst

Thank you.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

And Becky, we could take the next question, please.

Operator

Our next question comes from Alex Brignall from Redburn. Alex, please go ahead, your line is open.

Alex Brignall -- Redburn -- Analyst

Good morning, guys. Thanks very much for taking the questions. It's great. The first one is on the comment you made about passing cost savings on to owners, I don't know if you could expand on that or whether that's captured within the previous commentary that you had been making out your own financials.

The second is on and leisure and business. I guess the difference in this crisis, that was previous one, does that -- maybe a consensus view, that business travel was most potentially, permanently impacted. I guess if you could just talk about what that means for construction in the future how that kind of trend downwards and then back upwards and how that affects, and what your owners are saying on that, would be great. And then the third one is on distribution, the OTAs have talked a lot about taking a lot of share in downturns, because people thought looking around more, also when hotels are less full, they obviously we'll take any one to sell a room. So more or less looking to negotiate with them, when you're entering -- and when you're completely, you have been for many years, so how you expect that might progress. Thank you so much.

Keith Barr -- Chief Executive Officer

Thank you very much. Paul, why don't you pick up the cost savings fees and I'll pick up, business, leisure and distribution.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Absolutely. So it doesn't cost them bridging or we can to reduce the costs for owners. So whether that's around reducing the cost that we require of them in the hotel around some brand standards, whether it's allowing them delays and renovation for those programs that we run for them on an outfield basis, things like revenue management are higher which at the moment there, not meeting, so we've been managing to reduce the cost down to them on that. On the System Fund expenditure as we've reduced that down, we've also reduced down debt costs on that. We're doing, as I say everything we can on these either pass-through costs or system-funded costs to reduce their costs. And we think that's just the right thing to do. And Keith, back to you.

Keith Barr -- Chief Executive Officer

Thanks, Paul. I said this earlier. I said -- my crystal ball is a bit clarity in terms of what does the future really mean for travel, because I know I think we all would agree is going to change, it means after 9/11, it changed a bit after the financial crisis. I don't fundamentally believe is at the end of the Business Travel. I think whether you're using the Zoom or Teams that's going to replace a lot of conference calls now, because people are enjoying using that technology. I know that we struggled to get people to use Teams. Now we have 800 people, is using it in the first few weeks, who are working from home.

So I think there will be some impact on travel, but I don't think it's going to fundamentally change the industry going forward, because conferences, groups and meetings and events will come back over time. Business Travel will return and will be there and leisure travel will continue to grow as it has. And so I'm not one of these naysayers who say that the business travel is done, but I just fundamentally don't believe that. And I think that our owners really believe that fund, that travel will continue to grow as economies grow around the world. And information for these investments, it's a long game, people are investing for 20, 30, 40, 50 years in hotels. And seeing the returns, little bit over that period of time to.

So most of our owners are seeing through this disruption and recognizing that it's a long-term, it's a great asset class to be involved in. And we'll continue to invest in it, but travel will change and evolve the way that we interact with customers and hotels will evolve, and we're trying to stay on top of that and by implementing new policies and procedures and understanding how our hotels might be designed differently in the future, and it will force us to innovate and become, how that we continually deliver better returns for our owners to. So I think, that's the way great business has performed and they're challenge by.

This is how do they innovate, how do they get through this and to continue to deliver a great business result. In terms of distribution, I think that the industry is in a much different place today, than it was in the financial crisis, that it was in 9/11. In terms of its relationship with distribution and its control of this distribution channels. And so the agreements we have today are much more complex and have gave us much more control on what we choose to do and how we segment hotels. And so and owners are going to be very, very cost conscious about the cost of distribution to and so we will continue to work with our owners. But I wouldn't expect to see a radical change in the distribution relationship between the OTAs and the hotel companies going forward with them gaining massive amounts of share, because I think people going to want to book with hotels, want to book with hotel companies and the big branded players will continue to work on that too. So, thanks, Alex. I think we've got time for one last question, then, Paul and I need to leave to the AGM. Becky, back to you.

Operator

Perfect. We have one question left from Tim Barrett from Numis. Tim, please go ahead, your line is open.

Tim Barrett -- Numis -- Analyst

Hi, good morning, everyone. Two quick things, if you got time. One is the theme of owner economics again, lot of investors still interested in that, particularly around leverage and how leveraged your owners are, and clearly your comment, I guess about breakeven related to operating rather than below the line. And then China, a quick question on the recovery there and the high-20s occupancy, is that a little bit below industry and has it been straight line. Anything you can generalize on that. Thanks.

Keith Barr -- Chief Executive Officer

Paul, why don't you talk about owner economics and I'll end on China.

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Okay. So owner economics, most of our hotels, certainly in the US or finance through regional banks. And if you think about the period coming out of the financial crisis and the leverage that was available, that was on pretty strict credit, so much lower low, loan-to-value ratios than existed in the build up of the financial crisis, it's been pretty sensibly managed which is one of the things that I've talked about many times, has been a helpful constraint on supply over the year, and ensure that funds have only gone through the strongest brand like ourselves. So around the world, it made a little difference in some places in China, that's less of a reliance on bank finance. And but our owners are pretty conservative bunch overall and although they will clearly be looking at their economics in a period where they have seen such a level of reduction where I feel that they've got strong relationships with our banks and their banks will be supported.

Keith Barr -- Chief Executive Officer

In regards to China, in the recovery, it kind of varies by segment and by geography. And so again, with 5% at the trough are now in the mid-20s. If you're seeing the tier 1 cities where we have more big box hotels which have more groups than meetings and conferences, those hotels are running lower occupancies and you're seeing in tier 3, tier 4 and some of the more in the Holiday Inn Express where there's less reliance upon being conferences, meetings and events are running higher occupancies. And so we would expect again China to follow the similar pattern. It will be domestic recovery, it will recover sort of mainstream first and then gradually move up and it's slowly moving in the right direction, but it a very slow movement.

The only, the bright spots, obviously I was going to I mention this. I talk to the team and they saw a definite uptick over the Labor Day holiday and our Six Senses Hotel in China was almost sold out. And the same thing happened in Vietnam as well with Six Senses Hotels there. So we will see that uptick of leisure in this gradual movement, but it really is dependent upon how countries control the virus in the movement of people. And so in places like Australia, New Zealand, we expect to begin to see a recovery coming, because again the virus has been very well contained. China has been very well contained and businesses are reopening and so forth, too.

So that's -- the trajectory of recovery will -- dependent upon how the virus is being managed in that geography and then what restrictions that the governments are putting on to businesses overall. But again, we're quite confident that we are well positioned this Company to get through this, to support our owners and to support our customers, and we'll come out of the back end of this being stronger than we entered into this.

So thanks, everyone. Really appreciate you joining us today. A bit more of it in more detailed set of results than we normally do at Q1, but situation dictated that. We need to head off to our AGM, so I hope you all are healthy and your loved one. Thanks. And I look forward to catching up with you in the future. Thank you, operator. That's the call. Stuart, do you need to wrap up anything?

Stuart Ford -- Head of Investor Relations

No more. No wrap up. Great. Thanks, everyone.

Keith Barr -- Chief Executive Officer

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Stuart Ford -- Head of Investor Relations

Keith Barr -- Chief Executive Officer

Paul Edgecliffe-Johnson -- Chief Financial Officer and Group Head of Strategy

Richard Clarke -- Sanford C. Bernstein Limited -- Analyst

Victoria Stern -- Barclays Bank PLC -- Analyst

Jamie Rollo -- Morgan Stanley -- Analyst

Jaafar Mestari -- Exane BNP Paribas -- Analyst

Monique Pollard -- Citigroup -- Analyst

Alex Brignall -- Redburn -- Analyst

Tim Barrett -- Numis -- Analyst

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