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Intercontinental Hotels Group plc (IHG) Q3 2020 Earnings Call Transcript

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Intercontinental Hotels Group plc (NYSE: IHG)
Q3 2020 Earnings Call
Oct 23, 2020, 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the IHG Third Quarter Trading Update Call. My name is Ruby, and I will be your moderator for today's call. [Operator Instructions] I will now hand over to your host, Stuart Ford, Head of Investor Relations to begin. Stuart, please go ahead.

Stuart Ford -- Vice President, Head of Investor Relations

Thanks Ruby, and good morning, everyone. Welcome to IHG's 2020 third quarter trading update conference call. I'm Stuart Ford, Head of Investor Relations at IHG, and I'm joined this morning by Paul Edgecliffe-Johnson, our Chief Financial Officer. As in previous quarters, we won't be holding a separate call for US investors, but we will be making the replay of this call available on our website. And therefore, I need to remind you that in discussions today, the Company may make certain forward-looking statements as defined under US laws. 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.

With that, I will now hand over to Paul.

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

Thanks Stuart, and good morning, everyone. I'll begin with a review of our trading performance before providing you with an update on our cost actions, liquidity and financing.

Starting with our comparable RevPAR which, as a reminder, includes the adverse impact from hotels that are temporarily closed. Global RevPAR fell by 53%, a sequential improvement from the 75% decline we reported in quarter two. July and August continued the pattern of monthly improvement seen since the April low. The RevPAR decline in September was broadly the same as August as the benefit of the summer leisure demand dissipated and a number of markets saw the impact of the reintroduction of social distancing measures and travel restrictions.

Occupancy was down 30 percentage points, but rate was held around 80% of last year's level. Absolute occupancy levels of our hotels improved to 44%, up from 25% in the prior quarter. Our net system size grew 2.9% year-on-year with 11,000 rooms opened. As we continue to focus on the long-term health and quality of our estate, we removed 5,000 rooms.

Development activity continued with 43 groundbreaks and 82 signings, 27% of which were conversions versus 20% last year.

Turning now to our regional performance, RevPAR fell 50% in the Americas. In the US, RevPAR fell by 47% with September improving to a 44% decline. There was sequential improvement in each month although the pace slowed. We have continued to outperform the overall industry, driven by our weighting and market-leading position in the mainstream segment, by our distribution predominantly in non-urban drive-to locations and by our skew toward transient business and leisure demand as opposed to group business.

We continued to see a divergence in performance between our franchise and managed estates. Our franchise hotels, which are largely in the mainstream segment and in non-urban locations, saw RevPAR fall 43%. This contrasts with our managed estate, which is weighted toward luxury and upper upscale hotels in urban markets where demand is weaker and a higher proportion of hotels still remain closed. RevPAR of managed hotels fell 71%.

Occupancy across the region improved to 46% in the third quarter and reached nearly 70% on the Saturday of Labor Day weekend. We opened 6,000 rooms, over 80% of which were for our mainstream brands, taking our net rooms growth to 1.7%. We signed a further 2,500 rooms, taking our Americas pipeline to 109,000 rooms, or over 1,000 hotels. This included nine hotels signed across our Holiday Inn brand family. Momentum continues to build for voco since the brand launched in the region earlier this year with the third conversion signed in recent months and multiple other deals under discussion. Good progress continues with our other new brands. Avid is now open in Mexico and had the first groundbreak in Canada, and they were two further signings to Atwell Suites.

Moving now to our Europe, Middle East, Asia and Africa, where RevPAR was down 70%. There were some good progress made in July and August, but the reintroduction of travel restrictions led to RevPAR weakening back to a 70% decline in September. In the UK, RevPAR was down 68%. London saw RevPAR continue to be down by over 80%, while the rest of the UK was down 58% as a result of some better leisure demand in the summer months. Germany saw RevPAR down 67% as the region continue to be impacted by trade cancellations and travel restrictions. As a reminder, the UK and Continental Europe business represent less than 15% of our global estate. The Middle East saw a decline of 65%, while low levels of both international and domestic travel across Southeast Asia and Australasia led to RevPAR declines in Japan and Australia of 70% and 66% respectively.

Performance in the managed estate continues to be challenging, as it was in our owned, leased and managed lease properties where six hotels or one-third of this portfolio remain closed. In total, at the end of September, 105 hotels or 9% of the region's estate remain temporarily closed. We opened 2,700 rooms, including two very big properties, an InterContinental and a Six Senses Hotels, and removed 1,400 rooms. We signed a further 3,000 rooms into our pipeline, including a Six Senses property in Amaala, Saudi Arabia. Conversions increased to represent a third of the signings in the period.

Turning to Greater China, where the trend of improvement each month since February continued, with RevPAR down 23% in the third quarter overall. The decline was 36% in July, 20% in August and just 11% in September. Across Mainland China, tier 1 cities continued to see a greater level of RevPAR decline, around 32%, given our weighting to international inbound travel. By contrast, RevPAR in tiers 2 to 4, which are more weighted to domestic and leisure demand, declined 12%. Over 20% of our China hotels achieved positive RevPAR growth through the third quarter, which included resort destinations benefiting from vacation demands and family travel over the summer months. This included locations such as Shanghai Wonderland and, in particular, beach resorts such as Sanya where occupancy was up versus last year and average daily rate up even more so.

Net system size in the region increased by 8.1% year-on-year with 2,200 rooms added, including the opening of the first voco property in region. We signed over 8,000 rooms in the quarter, which is an increase on the level of signings in 2019. This included 24 franchise hotels across the Holiday Inn Express, Holiday Inn and Crowne Plaza brands and 13 management contracts.

Moving now to a brief update on our cost actions, liquidity and financing. We remain on track to achieve our target of $150 million of fee business cost savings this year. And as previously described, we have plans in place, which will result in around $75 million of savings being sustainable in the next year and beyond. As also mentioned previously, we expect our gross capex to be around $100 million lower than last year, with reductions across all of our main buckets of spending [Phonetic].

Turning now to cash flow. improved occupancy levels for our owners has meant we are now collecting around 90% of our Americas billings within 90 days of being due, which is up from around 80% when I last updated you in August. Our continued focus on working capital, disciplined cost control and cash preservation resulted in positive free cash flow in the third quarter. This led to our total available liquidity position increasing to $2.1 billion, having been broadly unchanged at $2 billion between April in July. Taking into account the bonds that we have issued and repaid in October, on a pro forma basis, our total available liquidity increased further to $2.9 billion.

The bond issuance we undertook was very well received and has enabled us to optimize our bond maturity profile. We issued a EUR500 million bond and a GBP400 million bond maturing in 2024 and 2028 respectively at a blended debt cost of 3%. This lowers the overall blended cost of our bonds to 3.13%. At the same time, we undertook a tender offer, which was also very successful, resulting in us being able to repay early GBP227 million of our GBP400 million November 2022 bond. This means we now have only GBP173 million left to be repaid in November 2022 and then a staggered bond maturity profile each year from October 2024 onwards.

So, to conclude, first and foremost, I just want to recognize once again the efforts of our colleagues across the whole Company who are working so hard to support one another, our guests, owners and our communities on so many different levels, in particular, the dedication and commitment being shown to ensure every single IHG hotel offers a clean and safe stay, so incredibly important right now and clearly key to building confidence in travel.

In terms of our third quarter performance, it is clear that our weighting to domestic demand and mainstream destinations saw us continue our industry outperformance across the market. We've seen monthly improvements in Group RevPAR since the trough in April, while uncertainty remains regarding the potential to further improvements in the short term. While it will take time for our industry to fully recover, we remain confident that IHG will emerge strongly, and we are focused on leveraging our brand, scale and market positioning and delivering on the relative resilience of our fee-based model.

With that, Ruby, I think we can open up the call for questions. Thanks.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Vicki Stern of Barclays. Your line is now open. Please go ahead.

Vicki Stern -- Barclays -- Analyst

Hi, good morning. I've got three questions, please. Just firstly, on RevPAR, so you talked about the regional performance. Could you flush out a little bit what trends you're seeing within the headline RevPAR coming from business versus leisure? And to what extent, at this stage, do you think it's fair to assume Q4 trends somewhat resemble Q3 to the extent that you can predict anything right now?

And around pricing, just the price drops that you're seeing still mostly about that mix shift to leisure? Or are you actually seeing now any price discounting coming through in the market and any sense on where that's headed? And then, just finally on the drop-through, if you can sort of flush out whether the $15 million guidance for a 1% change in RevPAR is still relevant in light of some softer UK performance, given you've obviously got higher operating leverage in that market, and both whether that's relevant for this year and then into next year as well? Thanks.

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

Thanks Vicki. So, in terms of the mix of business between business and leisure, so we've actually seen that stay pretty constant through the year in terms of the balance between the two. It does, in the summer months, get a little bit more weighted toward leisure and then tends to revert back to a normal mix in the fourth quarter. And we did see that, as you would expect, but nothing really significant to pull out there.

In terms of the Q4 versus Q3, I think there's a commentary that we've made is that uncertainty remains regarding the potential further improvement in the short term. A few sort of aspects to that, that I'll pull out. I guess, if we look at the sequential improvement, there has been improvement by month really since the April low. And if you look across each of the markets, that's been the case really until September where we saw some quite significant improvements, and then we saw some declines as well. So I'll just go through those. If we think about China, well, China has been progressing very nicely, and we saw August being 20% negative after July being 32% [Phonetic] negative and June 49%, and then September coming in at minus 11%.

I would point out though that although it's difficult to be precise in our analytics, when we look at September 2019 for the China industry as a whole, in that month, there was the 70th anniversary of founding of the PRC, and that did depress hotel business in the month. So it's a very weak comparable. I think if you look through that, then I think that the underlying performance in China for September is [Indecipherable] to August performance. And then, if you look out into the fourth quarter, I'm not sure I see a stimulus for continued significant improvement in that.

If we look at the EMEA business, which improved through the summer months, and in August, it was negative 66%. September went to negative 70%. And I think it's getting tough in EMEA with the restrictions that we're obviously all seeing. In the Americas, the August performance was negative 48.6%; in September, negative 46.4% [Phonetic]. The US performance within that, a little stronger again. In September, of course, you do have Labor Day, and that was a stimulus for demand. So again, we may see some further strengthening as we go through the fourth quarter in the US, but I don't think it's going to be at the same level we saw it strengthen in the period from April through September. So, [Indecipherable] necessary that means deterioration. I think the pace of any further increase for the next few months is likely to be a little bit more muted.

Then, the second question around the mix versus price falls on the ADR. Well, we're actually on [Indecipherable] to get the ADR at 80% of last year. And if most of the change that you're seeing there is mix, I think that it's pretty evident to hoteliers, but just dropping price not necessarily stimulates demand. So I think that the revenue management [Phonetic] discipline has been pretty good.

In terms of the sensitivity to a $0.01 fall in RevPAR, then pretty much what we talked about before with the normal RevPAR sensitivity and then the additions because of the discount that we offered to owners earlier in the year, which have now done their full term and were very well received, and then the additional sensitivity because of the operating leverage in the owned and leased hotels is very similar to what we saw before. We might see a slight notch-up in the owned and leased in the fourth quarter, depending on how the UK trades. We have a portfolio of leased hotels in the UK. But I don't think you're going to see anything material, perhaps a few million dollars, not per point to RevPAR but a few million dollars of additional loss there in aggregate. I hope that [Speech Overlap].

Vicki Stern -- Barclays -- Analyst

That's very helpful. Thank you.

Operator

Thank you, Vicki. Our next question is from Jamie Rollo of Morgan Stanley. Your line is now open. Please go ahead.

Jamie Rollo -- Morgan Stanley -- Analyst

Thanks. Good morning, everyone. First question is just on the outlook for unit growth. The old target, I guess, of 5% to 6% is gone. But in the new world, just if you could maybe update us on that because the signings were down quite sharply in Q3. You've got the SVC loss in Q4. Appreciate minimal revenue impact there. But maybe sort of looking forward, where do you see the sort of boundaries of net unit growth in the new world, please?

Secondly, I think you're still expecting a little bit of cash burn for the full year, which will sit in Q4. I'm just wondering what causes that. Is that System Fund? Is that working capital? It seems a little bit conservative.

And then finally, just a minor one, but just on credit card fee, I know those go to your owners, not IHG. But could you maybe quantify that? And is that something that you could push more to help clear this out? Thank you.

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

Thanks Jamie, and good morning. So in terms of unit growth, we are pleased with the continued signings that we're seeing. That stepped up a little in the third quarter and with the groundbreaks and the openings. So we have a lot of our hotels already under construction, and that does underpin the growth that we're going to see over the next few years. So obviously, it's a very large pipeline. And those that are under construction, they will get opened. Those that are financed. Then owners are pushing ahead. The unknown is the availability of bank financing for only the signed contracts or on the verge of signing contracts and are not able to get bank financing, and that may have some sort of an implication. It's very hard to assess that right now, frankly.

What we know is that our brands are preferred, and lenders like to lend to the strongest brands and the brands with the strongest cash and cash returns. Certainly, what we're seeing is continued strong outperformance from our brands in the mainstream, which does tend then to garner the greatest proportion of the lenders that are available in the market. And what we've said historically is that our aim is to have market-leading net system size growth. And yes, back in the days of 2018-2019, that was around the 5% to 6% level. If it does diminish somewhat in the coming years, then we'll be targeting that performance. And if it goes [Phonetic] back up again, [Indecipherable] due course, we'll be targeting that performance. But it's not an absolute, it's more a relative measure that we want to be evaluated against and we evaluate ourselves against.

In terms of SVC, yes, I think SVC will go out in the fourth quarter, which will have a one-time impact. So -- but we'll manage through that. And as you say, very low profit impact.

In terms of cash burn, so we're pleased with the cash performance year-to-date. I put a lot of focus on that. And in the third quarter, we did generate a little more than $100 million of free cash flow. The full year as a whole, I think what we'll end up with is the operating business ending up broadly cash flow neutral, and the System Funds are starting to impactfully [Phonetic] inject about $100 million into the existing funds, which we'll get back over time. So that's only temporary, effectively loan from our [Indecipherable] funds. But that will take the business overall to around $100 million cash flow negative. Some of that went out in the first quarter. Some of that will go out in the fourth quarter. Fourth quarter always sees a little bit more key money go out to pay some taxes, interest charges, etc. So those sorts of factors, all combining, will take us to that year-end endpoint.

And in terms of the credit fees, we have a very successful credit card program in place, and we'll continue to monitor and assess what the right approach is there.

Jamie Rollo -- Morgan Stanley -- Analyst

Could you please quantify the credit card revenues and quantify the percent of the pipeline that's both under construction and funded?

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

Yes. In terms of the credit card fees, it's a complicated area, I guess, I'd say in that we have a very large program. We don't take, at the moment, any income from the credit card on to our P&L, which is a different approach to help [Indecipherable] etc. So in terms of revenues for us, there aren't any.

And in terms of the pipeline under construction, there's 40% under construction, which really hasn't changed since we last talked about that.

Jamie Rollo -- Morgan Stanley -- Analyst

I appreciate the Company doesn't take the credit card revenues, but just to quantify the revenues to the System Fund, that will be helpful, if you're able to.

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

Okay. So system fund, we're probably talking around $100 million.

Jamie Rollo -- Morgan Stanley -- Analyst

Okay. Thanks a lot.

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

Thanks Jamie.

Operator

Thank you, Jamie. We have a question from Jarrod Castle of UBS. Your line is now open. Please go ahead.

Jarrod Castle -- UBS -- Analyst

Thank you, and good morning, Paul. Three as well. Can you give a little bit more color for some of the exits? Is this just normal course of business? Or are there any things which are specific to the crisis? I guess you've gotten pretty much most of your states open. I think you said 3% at the moment is not open. Is that by choice by the owners? Or is it due to government restrictions? If you could give any color on that? And then, there's been some comments from OTAs and the likes in terms of distribution and downsizing, etc. Can you just give any color in terms of how your distribution channels are working and where the customer is getting to you from? Thanks.

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

Yeah. Hi, Jarrod, good morning. Thanks for the questions. So in terms of the exists, there's actually nothing as we interrogate the numbers that's unusual compared to prior years. We took out 4,600 rooms in the third quarter, which compares to 4,000 in the third quarter of 2019. The September year-to-date run rate is around 2%, which is in line with what we've done in recent years. But that obviously excludes SVC, which starts [Phonetic] in the fourth quarter, which will not set up, but that's a rather unusual situation, and we have no other portfolios that are anywhere near that size. And in the next biggest owner has, let's say, about 10 hotels. So there is nothing else that we would expect that could have that sort of an implication on us.

In terms of the states, yes, as you say, it's 97% open. And where hotels are closed, they tend to be the big urban hotels, urban possibly unionized hotels, where the level of demand doesn't make it sensible for the owner to open it. And we remain in close communication with all of our owners as to how we help them run their business most effectively. And that would include looking into the business that's available in the markets are helping them understand does it make sense for them to open or not. There are some where there are still restrictions in various markets, all those restrictions on the inbound business, so in parts of EMEA. And maybe there are some hotels which are more reliant on international inbound will say it doesn't make sense to open a hotel right now. But that's very much in the minority.

And then, in terms of OTAs, well saw OTA contribution fall earlier in the year. And then it -- but it's climbed back toward its normal level. But we have seen a lot of people who will book directly with the hotel. The booking window is very short at the moment. You're seeing the vast majority of bookings coming in within two days of the stay. And so, you have more walk-ins than we would normally if they were [Phonetic] on a road trip or whether business or leisure, just coming into the hotel expecting that they will be able to find a room. In busier times, people would always want to pre-book. And you tend to see more OTA business that's coming through on the leisure side than the business side. And I'm sure that will continue. But nothing that really changes on the underlying trend there.

Jarrod Castle -- UBS -- Analyst

Okay. Thanks very much, Paul.

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

Thanks Jarrod.

Operator

Our next question is from Monique Pollard of Citi. Your line is now open. Please go ahead.

Monique Pollard -- Citi -- Analyst

Good morning, Paul, and three questions from me as well, if I can. And the first one was just specifically on the working capital benefit. Obviously, you saw, like you said, over $100 million cash inflow in the third quarter. Just wondering, specifically how much working capital benefit you saw given you went from 80% to 90% of Americas owners paying within 90 days and what we should expect basically for the working capital for the full year.

The second question was just on signings, in particular, in the Americas. If I look at the pace of that, the pipeline signings in the third quarter, its lowest level we've seen in quite a few years. So just trying to understand what we should expect on the pace of Americas signings from here over the next few quarters.

And then finally, a question just on Greater China performance. Obviously, as you say, September had a bit of a benefit from a weaker comp. But when I think about October, there probably was some benefit from the Golden Week. So just wondering if you can give us any update on the trading you saw there, particularly given you mentioned in your comments that the resort locations have seen a boost to RevPAR because of vacations over the summer.

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

Thanks Monique. Yeah, absolutely. So it terms of working capital, we saw a working capital outflow in the first half of the year. We have been managing the working capital very carefully. And as you'll remember, earlier in the year, we put in some discounts for owners and we were -- we tried to help them as much as possible with their cash flows. And I think that the approach that we've taken has resonated with them. They've appreciated that we've treated them as well as we possibly can. And that, I think, is why we are being paid the vast majority of fees pretty much on time. So this is -- as you say, it stepped up from us receiving 80% of the fees that we build within 90 days to now 90%, which we're pleased with. And so, if you think the first -- I think in the third quarter, the amount that we built to our own [Indecipherable] we paid -- that we were paid by our owners was basically in line. So we're pleased with the working capital. There will probably be still an outflow for the year, but it's under tight control.

In terms of signings in the Americas, I think that a lot of the owners, who would normally perhaps have signed a deal with us so far this year, have been working on their existing hotels and optimizing the cash flow there, and they've to pay a little bit more attention onto their existing business, and others who are just waiting to see what the lending environment is going to be, but a lot of interest. So our hotel owners [Indecipherable] communities want to build hotels, but obviously, building the hotels does require financing, and they want to understand whether they're going to be able to get that financing. So I think once there's greater clarity on that, then we'll see more of the signings coming through.

In terms of Greater China, yes, as you say, a strong performance. And if you look at the sequence of improvement that we've seen, it's been really strong, and our China business outperforming. September, as we said, we have the weak comp. October, you have Golden Week, which is a big stimulus for demand. I think if you look at the September business and chip out the weak comp, although it's hard to be precise, as I said, my guess is the underlying there is closer to the August performance. And as we look forward over the next few months, my guess is, it's probably somewhere in line with our August performance, so -- which sort of resonates back to the point I made earlier as to I think there is uncertainty as to how much short-term further improvement there is from what we -- the exit rate, I guess, you could say, for the third quarter results.

Monique Pollard -- Citi -- Analyst

Understood. Very helpful. Thank you.

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

Thanks Monique.

Operator

Our next question is from Jaafar Mestari of Exane BNP. Your line is now open. Please go ahead.

Jaafar Mestari -- Exane BNP Paribas -- Analyst

Three quick questions for me, please. So firstly, just on the regions you've talked in detail about what the September underlying trends could be for China and Americas. EMEA, on the other hand, has deteriorated in September. Is there anything to call out there? Or is this the underlying? And the second question, just on the cost savings. So the $75 million that are becoming more permanent, how should we look at it? Is this going to improve on? Or is this simply going to back the existing EBIT sensitivity? And lastly, just on cash burn, you've given some overall guidance. Could you maybe just breakdown what you call the operating business between, I guess, operations themselves? Are they generating cash? And then separately, have you quantified things like cash tax payments, interest payments that fall into Q4? Then, I'm going to take you back in cash burn territory in Q4, please.

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

Thanks Jaafar. Yes, so you're absolutely correct in pointing out that for September, the RevPAR was at negative 69.9% compared with the 66.3% that we saw in July. And that July performance was quite a significant step-up from the -- that August performance versus the July performance, which was negative 74.7%. And I think you'd appreciate there was a lot of leisure demand in August. So everyone wanted to get away, right? I think [Technical Issues] the past few months. So, that did stimulate the demand. I think [Indecipherable] coming back on to more of a normal run rate in September. I think that's the explanation of that rather than anything else that I can call out. EMEA is a collection of quite a few markets, so it's always harder to get them to be precise [Technical Issues].

In terms of the cost savings, well, I guess there's a few things to point out. One is that a few years ago, we did go through quite a group reorganization, so we took a lot of cost out of the business then. And we [Technical Issues] for us. We moved [Phonetic] our market model, and so it took a lot more resources in the business. We're close to market, and that's really helped our teams be very responsive for our owners. And we also put some investment behind our new brand initiatives and ensuring that we have that market-leading net system size growth that we've talked about. And having got the organization fit for the future, I think it has always helped -- it's continuing to help. So it's helped before and it's helping now. The sale of the -- the $150 million savings we made this year, we will see $75 million of that next year. We're trying to get a balance between the cost savings and continue to invest in the business. So the investment that we've put behind the new brands will continue in 2021 because they are a big part of our future growth. So we're not stripping the business back to the bone, but we have been obviously [Technical Issues] and that cost would be depleted [Phonetic].

In terms of the cash, yes, in the fourth quarter, we will have interest payments. We will have some tax payments. We'll have some other payments. The operating business, I guess, is -- and I referred to that, I think of that as opposed to our System Funds. So the System Funds will conclude something in the order of $100 million of assets [Phonetic]. We'll get back in due course. [Indecipherable] And that's really the result of -- by the time the pandemic hit, there were quite a lot of commitments made in the System Fund world. We have [Indecipherable] to sponsor the US open, for example, which we're a sponsor of, and yes, buy media, etc., etc. It was impossible to pull back the cash deployment fast enough in 2020. 2021, as I've mentioned before, I expect the System Fund to be broadly cash flow neutral. So strong control there. Thanks Jaafar.

Operator

Thank you, Jaafar. Our next question is from Leo Carrington of Credit Suisse. Your line is now open. Please go ahead.

Leo Carrington -- Credit Suisse -- Analyst

Thank you, and morning, Paul. And so very quickly, a follow-up on the cash flow question. It looks -- I guess, reading between the lines, it looks like you broke even on a cash basis in July and then generated cash in August and September. Can you break out whether that was primarily due to the stronger RevPAR, 7 percentage points stronger RevPAR in August, September or more of the kind of operational improvements, working capital that you've mentioned already?

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

Hi, Leo. A combination, actually. Yes, as you say, some stronger trading which did help a little bit. And we got a small tax refund in the quarter that came through. And then it's partly the timing of payments of interest on our bonds and tight working capital control, so -- plus our owners continuing to pay us, as I talked about. So a number of factors, all contributed to the strong cash flow performance that we saw in the quarter.

Leo Carrington -- Credit Suisse -- Analyst

Okay, thank you. And then, just last question from me. A follow-up question on the closures in your system. Do you have a sense of owners' health and ability to hold out until demand returns? And whether this is sort of -- whether it differs significantly by region, do you think? And to what extent does that continuity of specific owners matter to you in this worst case foreclosure situation? Do you have a kind of the preferability to be the franchise brand for a new owner?

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

Thanks Leo. So I guess, the first thing on that is that we are in partnership with our owners. And so, it's hugely important to us that our owners [Indecipherable]. And many of them we have been in partnership with for decades. So we do everything we can to bring business into their hotels. That's the most important thing that we can do. Now, we can help them think about their manning models and how to reduce costs. We can help them with the information they might need for refinancing, etc. But the greatest benefit we can do is deploy our systems and our outperformance to drive the greatest possible level of revenue to their hotel.

That said, as you note, if very unfortunately an owner does run into financial difficulty, then our contract will normally continue. The lender will want to keep the franchise contract honored while they find a new owner for the hotel. We're not seeing an elevated level of exits from the system. It's in line with what we've seen. And you always see some hotels that leave the system. And generally, it is that we've asked the hotel to leave for quality reasons. They've come to the end of their contract and they just don't have the hotel that is right to move forward, not when work with the owner on a new hotel. So we do everything we can with the owners to help reduce the costs. And also many of these owners are SMEs, and we've been working with governments all around the world to get as much support as we can. And in the US, in the last PPP program, a very large proportion of our owners in the US were able to take advantage of that. And if there's a new stimulus package agreed, then our owners will be able to take advantage of that. So we ever -- we lobby on their behalf to get as much support for an industry that is critical for the world economy and provides huge employment. And I think governments recognize the importance that there is and the number of jobs with [Indecipherable] and they are listening to the lobbying. And still a way to go in some cases, but some positive responses so far.

Leo Carrington -- Credit Suisse -- Analyst

Thank you.

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

Thank you.

Operator

Our next question is from Tim Barrett of Numis. Your line is now open. Please go ahead.

Tim Barrett -- Numis -- Analyst

Hi, Paul. It's Tim. I have to areas, just more color, please, other people [Technical Issues]. One is just a very big picture question. I think if I understood you rightly, you currently [Technical Issues] in US next couple of quarters. And just looking at how flat occupancy is through the weekly Smith Travel data, I just wondered what was backing that up? Whether you think it will be transient demand on the business or leisure side? And then, second question, looking at the pipeline, about 5,000 rooms are still exiting quarterly, which seems remarkably consistent, and does that tell us that the pipeline is still fresh? Or is there a period where you review it and look to take out some of the rooms that might not open in fullness of time? Thanks very much.

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

Thanks Tim. Good morning. Yeah, so I think the sentiment that I'm trying to convey is that there is uncertainty. I think if you look at the exit rate from the third quarter, I -- there is a possibility that we do continue to see the same sequential improvement [Phonetic]. And the US has improved month by month, and September was pretty strong. September, of course, had that Memorial Day business. And in the US, people are continuing travel. So, yes, we're seeing good levels of transient leisure. We're seeing good levels of business transient. What we're not seeing is group business coming back. That's a small part of our business. But many of the other guests are still there and are still traveling. But there's just an element of uncertainty. So I can't be certain as to exactly how the fourth quarter is going to look. I have to guess now, there probably would be a small sequential improvement to flat to what we saw at the end of the third quarter.

In terms of the pipeline, we do, as you note, always try a bit fresh, and we take some hotel concepts out when we decide that it's just not going to get built because then that frees up that location for us to sign with another owner. So it's not to our advantage to keep hotels that are not actually going to get built. I think we're only six or seven months into this new situation. If owners turn around and say [Indecipherable] that they're going to focus on their existing business or they can't get the financing, then we'll take appropriate actions. But it's certainly nothing for now, but it's certainly something we would keep under review in the future.

Tim Barrett -- Numis -- Analyst

Okay, got it. Thank you very much.

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

Thanks Tim.

Operator

Our next question is from Alex Brignall of Redburn. Your line is now open. Please go ahead.

Alex Brignall -- Redburn -- Analyst

Good morning. Thanks for taking the questions. I've got a couple. So, on signings, you've given some good commentary on how your own signings are progressing. In the STR data, there has been a very material increase in deferrals and cancellations of hotel projects in August and September. I appreciate that was market data. But it seems like officers [Phonetic] are sitting on their hands for a while, some people are getting out of projects. Could you just talk about, obviously, what you're seeing in these kind of most recent months, but also whether you're seeing that among competitors or kind of some of the other participants? And then secondly, it sounds like for 2021, you're guiding to sort of materially lower profitability than what consensus currently expects, somewhat sort of low-400 or something around that level, which kind of implies 12 or so percent revenue -- RevPAR less than consensus is expecting and is broadly consistent with sort of flattening in the RevPAR trajectory. Could you just help to explain what might get us to that level kind of from a starting point of 200 [Phonetic] in 2020? Thank you very much.

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

Thanks Alex. So in terms of STR data, I think what you'll see is, our owners want to have the most preferred brands. The most preferred brands in the mid-scale certainly are ours. So, Holiday Inn Express is the number one brand in that segment. Obviously, Holiday Inn Express is the largest brand in the world -- largest hotel brand in the world and is performing very strongly. And some of our other brands, Candlewood Suites is on the best performing brands in the industry this year. That's a very low level of RevPAR. So a number of our brands are already performing very strongly and owners are very anxious to build new versions of those when they can. But it does, as I referenced before, come down to get financing. Lenders do want to lend to those higher quality brands. So we are doing better than the industry there. I think you will see a bit of a shakeout. So the weaker brands will struggle, and this is what we saw in each of the prior downturns. The strongest brands came through this, increasing their market share. I have very little doubt that that will be the same this time around. I think you'll also see more conversions coming through. So more of our growth will come through than, historically, in the case from hotels converting from weaker brands into our brands when quality is good enough.

In terms of outlook, I think I really only guided to fourth quarter and said that there is an element of uncertainty. I think that as we look forward, we said a fully industry recovery will take time, but we feel confident from the steps we've taken to protect and support our owners. So I think it's very much dependent on the macro. It's not possible for me to precisely guide you on the fourth quarter. So I certainly can't do that for 2021. And there's a very wide range of expectations out there. It will depend on the therapeutics. It will depend on the availability of a vaccine. And it will depend on when people just decide to start traveling again. So irrespective -- so we continue to monitor all of those. But I'm -- if my comments have been taken by you as an indication of 2021, we regret, and they weren't intended to be.

Alex Brignall -- Redburn -- Analyst

Very good. Thank you very much.

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

Thanks Alex.

Operator

Our next question is from Richard Clarke of AB Bernstein. Your line is now open. Please go ahead.

Richard Clarke -- Bernstein -- Analyst

Hi, good morning. Three questions if I may. Just the first one, I know you made a few comments about the System Fund, but just wanted to just dig into -- are you getting closer to breakeven on the System Funds? And are you still happy to keep the losses you're making in the System Funds outside of the underlying earnings? You're still describing those as a timing difference. And second question, when I look at your pipeline, the three vocos you've got in the US and the three Six Senses you've got in China are very small. They are about 50 rooms. Normally, you've kind of described your minimum room size is around 75. So is there some sort of widening of the opportunity you're looking at there? And does that affect the contribution margin you get from those hotels? And maybe you can put anything on that. And then third question, apologies if it's a bit boring, but just tax. Obviously, we've got the US election coming up next week. Biden wants to put the US corporation tax rate up. Anything you could do to offset that if that does happen? And it's been put to me that there could be some advantage of you restructuring to not have other countries being consolidated into the US, given the fact that you wants to put up foreign earnings income, anything you would look at in terms of restructuring the Americas portfolio to maybe consolidate non-US income into the UK.

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

Thanks Richard. So in terms of System Funds, the balance there is always making sure that we're investing to make our owner's hotels absolutely as successful as they can to drive revenue for them, but also being mindful of cash cost. So at a time when the owners are [Technical Issues] us driving revenues for them. We want to do the right thing. So we have allowed that to run to a cash deficit for 2020. So for 2021, my expectation is that we'll bring that back and manage that to neutral, and then over time, the cash that we've deployed, that will come back. But realistically, we wouldn't be trying to do that until the industry was sort of back in full swing so that we can continue to support our owners as well as possible.

In terms of the pipeline, and vocos and Six Senses, the size of hotels, it really comes down to revenues. We [Indecipherable] a very small hotel with a low room rate because then the cost to support it and the revenues outlook [Phonetic] just don't justify it. Six Senses, the average room rates can be very, very high. These are very high luxury, very sought after properties, and we have room rates here above $1,000. So a 30-room Six Senses can work. Certainly a 50-room Six Senses can work and generate very good fees. The vocos we've signed in the Americas [Phonetic] have been in fantastic locations. And actually, they're first-class assets with high ADRs and they'll generate good fees for us. And where that is the case, then, yes, we can have them with a smaller key count than would normally be the case. No real difference to what the average voco would be, though. We happen to have managed to secure some real marquee locations to begin with.

In terms of tax, always complex area. The tax reform brought in a few years ago did reduce the corporate tax rates. Quite complicated because there are some reductions to the headline rate but also some restrictions is what you can take in terms of interest deductions, etc. And so we have to wait and see what might happen in the election, whether there is a new administration or what their fiscal policy is and how that manifests. I think it's probably early -- too early to talk about any sort of restructuring that might occur. But it's one that certainly we keep under review.

Richard Clarke -- Bernstein -- Analyst

Great. Wonderful. Thanks so much.

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

Thanks Richard.

Operator

We do have one question remaining. [Operator Instructions] Our question is from Ivor Jones of Peel Hunt. Your line is now open. Please go ahead.

Ivor Jones -- Peel Hunt -- Analyst

Good morning. I was thinking about the improved state of the balance sheet since the half. Could you talk about the factors that will feed into the Board's discussion about paying a final dividend? And along with the CCFF in the UK, what else is there as sort of government support or quasi government support through COVID that you might choose to repay? And then the second thing was, should we expect more material impairments at the year-end? And would they -- more importantly, would they be enough such that depreciation charges would -- or amortization charges would fall in 2021 to optically improve the reported level of profit? Or will they be trivial in total? Thank you.

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

Thanks Ivor. So in terms of the balance sheet, yes, I guess, you could say the balance sheet has improved given the cash generation. I think by the end of the year, we will go back to the non-System Funds side of the business being about cash-neutral and System Funds having [Indecipherable] by $120 million. I think that the Board would consider the net debt-to-EBITDA of the business, we'll continue the cash generation, etc. These would be the factors that, as always, are taken into account when considering such matters as a dividend.

In terms of government support, we have not taken advantage of the furlough payments in our operating business. Some of our owners have rightly been able to access to that in the UK, but we didn't take that money in the UK. We did access the CCFF, as we've previously talked about, and that will run through till next March, and then we'll make a decision as to whether we want to do that again. And in terms of the impairments, we look very closely at all our assets at the half year. And we did have pretty good visibility on trading, etc. So we marked them down appropriately. We wouldn't necessarily expect any further impairments at the full year. Never say never. But I think we were pretty conservative at the half year in terms of the markdowns we took then.

Ivor Jones -- Peel Hunt -- Analyst

Great. Thank you very much.

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

Thanks Ivor.

Operator

We have no further questions, so I will hand back to your host.

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

Very good. Well, thank you, everybody. Thank you for listening and thank you for your continued support, and very good to talk to everybody. And for those of you I didn't speak to in the meantime, our full year results will be in February. So, look forward to talking with you all then. Thanks, and everybody have a great day. Bye for now.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Stuart Ford -- Vice President, Head of Investor Relations

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

Vicki Stern -- Barclays -- Analyst

Jamie Rollo -- Morgan Stanley -- Analyst

Jarrod Castle -- UBS -- Analyst

Monique Pollard -- Citi -- Analyst

Jaafar Mestari -- Exane BNP Paribas -- Analyst

Leo Carrington -- Credit Suisse -- Analyst

Tim Barrett -- Numis -- Analyst

Alex Brignall -- Redburn -- Analyst

Richard Clarke -- Bernstein -- Analyst

Ivor Jones -- Peel Hunt -- Analyst

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