ANNUAL REPORT and FINANCIAL STATEMENTS 2005 Financial Highlights

ANNUAL REPORT AND FINANCIAL STATEMENTS 2005 financial highlights Transformation to a managed and franchised business nearing completion. InterContinental Hotels Group now delivers more stable earnings and has a clear growth focus. Continuing operating profit* up 42% from £134m to £190m with operating profit margin up 4 percentage points. Group operating profit £317m, up £20m. Adjusted† earnings per share from continuing business up 44% from 17.3p to 24.9p. Group basic earnings per share up 77% from 53.9p to 95.2p driven by gain on disposal of operations. Final dividend up 7% from 10.00p to 10.70p per share: total 2005 dividend up 7% from 14.30p§ to 15.30p per share. 9.0% RevPAR# growth across the Group’s 3,600 hotels, mostly rate driven with strongest trading in the Americas. 70,000 rooms signed in 2005, up 57% over 2004. Our contract pipeline is the industry’s largest at 108,500 rooms, 20% of existing room count. Room count up 3,300 to 537,500 rooms. £500m special interim dividend to be paid during the second quarter of 2006. * Excludes Britvic and hotel assets sold or held for sale at 31 December 2005; operating profit before other operating income and expenses. † Excludes special items and gain on disposal of assets, net of related tax. § Excludes special interim dividend paid in December 2004. # Room revenue divided by the number of room nights available. 1 OPERATING AND FINANCIAL REVIEW 76 US GAAP INFORMATION 18 DIRECTORS’ REPORT 80 DIRECTORS’ RESPONSIBILITIES IN RELATION 20 CORPORATE GOVERNANCE TO THE GROUP FINANCIAL STATEMENTS 24 AUDIT COMMITTEE REPORT 81 REPORT OF THE INDEPENDENT AUDITOR 25 REMUNERATION REPORT 82 COMPANY FINANCIAL STATEMENTS 34 FINANCIAL STATEMENTS 83 NOTES TO THE COMPANY FINANCIAL Group income statement STATEMENTS Group statement of recognised income and expense 86 DIRECTORS’ RESPONSIBILITIES IN RELATION Group cash flow statement TO THE COMPANY FINANCIAL STATEMENTS Group balance sheet 87 REPORT OF THE INDEPENDENT AUDITOR 38 CORPORATE INFORMATION AND 88 GLOSSARY ACCOUNTING POLICIES 89 SHAREHOLDER PROFILE AND 42 NOTES TO THE FINANCIAL STATEMENTS FORWARD-LOOKING STATEMENTS Front cover photo: Louise Wang, waitress, Plaza Bar, Crowne Plaza, Pudong, Shanghai InterContinental Hotels Group 2005 1 operating and financial review This operating and financial review (OFR) provides a commentary on the performance of InterContinental Hotels Group PLC (the Group or IHG) for the financial year ended 31 December 2005. The financial statements for the year ended 31 December 2005 are the first annual financial statements that the Group has produced in line with International Financial Reporting Standards (IFRS). This OFR therefore compares financial year ended 31 December 2005 with financial year ended 31 December 2004 under IFRS. BUSINESS OVERVIEW FIGURE 1 Market and Competitive Environment Percentage of branded hotel rooms by region 2004 The Group operates in a global market, providing hotel rooms to North America 65% guests. Total room capacity in hotels and similar establishments Europe 25% worldwide is estimated at 18.4 million rooms. This has been growing South America 20% at approximately 3% per annum over the last five years. The hotel Middle East 25% market is geographically concentrated with 12 countries accounting East Asia 25% for two-thirds of worldwide hotel room supply. The Group has a Source: Mintel leadership position (top three by room numbers) in six of these 12 countries – US, UK, Mexico, Canada, Greater China and Australia – US market data shows a steady increase in demand in the hotel more than any other major hotel company. market, broadly in line with Gross Domestic Product, and shows growth of approximately 1-1.5% per annum in real terms since The hotel market is, however, a fragmented market with the four 1967 driven by a number of underlying trends: largest companies controlling only 11% of the global hotel room supply and the 10 largest controlling less than 20%. The Group is • demographics – as the population ages, increased leisure time the largest of these companies (by room numbers) with a 3% drives more travel and hotel visits; market share. The major competitors in this market include other • disposable income rising as the global population becomes older major global hotel companies, smaller hotel companies and and wealthier; independent hotels. • travel volumes increasing as low cost airlines grow rapidly; Within the global market, a relatively low proportion of hotel rooms • globalisation of trade and tourism; are branded (see figure 1), but there has been an increasing trend • the increasing affluence and freedom to travel of the Chinese towards branded rooms and market research company, Mintel, middle class; and estimates that the proportion of branded rooms in Europe has • brand preference amongst consumers is increasing. grown from 15% in 2000 to 25% in 2004. Larger branded companies are therefore gaining market share at the expense of smaller Suppressing this demand are potential negative trends including companies and independent hotels. IHG is well positioned to increased terrorism, environmental considerations and economic benefit from this trend. Hotel owners are increasingly recognising factors such as rising oil prices. Currently, however, there are the benefits of belonging to a branded portfolio, particularly a big no indications that demand is being significantly affected by brand family like IHG that can offer various brands to suit different these factors. opportunities an owner may have available. Furthermore, hotel Supply growth in the industry is cyclical, averaging between zero ownership is increasingly being separated from hotel branding and and 5% per annum historically. The Group’s profit is to a large extent this requires hotel owners to use third-parties like the Group to insulated from supply pressure due to its model of third-party operate or brand their hotels. ownership of hotels under IHG management and franchise contracts. 2 InterContinental Hotels Group 2005 operating and financial review Strategy The Group aims to deliver its growth targets through the strongest The Group owns, operates and franchises hotels globally. operating system in the industry which includes: The strategy is to become the preferred hotel company for • a strong brand portfolio across the major markets, including guests and owners by building the strongest operating system two iconic brands: InterContinental and Holiday Inn; in the industry, focused on the biggest markets and segments where scale really counts. • market coverage – a presence in nearly 100 countries and territories; The Group has four stated strategic priorities: • hotel distribution – 3,606 hotels, 537,533 rooms, 126 million • brand performance – to operate a portfolio of brands attractive guest stays per annum; to both owners and guests that have clear market positions in • IHG global reservation channels delivering over $4.8bn of relation to competitors; revenue in 2005, $1.7bn from the internet. IHG reservation • excellent hotel returns – to generate higher owner returns systems take over 22 million calls per annum; through revenue delivery and improved operating efficiency; • a loyalty programme, Priority Club Rewards, contributing $3.8bn • market scale and knowledge – to accelerate profitable growth in of system room revenue; and the largest markets where the Group currently has scale; and • a strong web presence. holiday-inn.com is the industry’s most • aligned organisation – to create a more efficient organisation visited site, with 75 million total site visits per annum. with strong core capabilities. With a clear target for rooms’ growth and many brands with Executing the four strategic priorities is designed to achieve: significant market premiums offering excellent returns for owners, • organic growth of 50,000 to 60,000 net rooms by the end of 2008; the Group is well placed to execute its strategy and achieve its goals. • out-performance of Total Shareholder Return (TSR) against FIGURE 2 a competitor set; and Global room count by ownership type • improved Return on Capital Employed (ROCE). 600 Growth is expected to come predominantly from managing and franchising rather than owning hotels. The managed and franchised 500 model is attractive because it enables the Group to achieve its 400 goals with limited capital. With a relatively fixed cost base, such growth yields high incremental margins for IHG, and is primarily 300 how the Group has grown to date. For this reason, the Group has Thousands executed a disposal programme of its owned hotels, releasing 200 capital and enabling returns of funds to shareholders. 100 The main characteristic of the managed and franchised business 0 model on which the Group has focused is that it generates surplus 2004 2005 cash, with high ROCE. Currently, 88% of continuing earnings before Owned & leased Managed Franchised interest, tax and regional and central overheads is derived from managed and franchised operations and over 3,500 hotels operating under Group brands are managed or franchised (see figure 2). InterContinental Hotels Group 2005 3 SIGNIFICANT DEVELOPMENTS Britvic Initial Public Offering • the sale of the InterContinental Hotel Paris for €315m. In December 2005, IHG disposed of all of its interests in the Britvic The transaction completed on 1 November 2005 and the hotel Group (Britvic), by way of an initial public offering (IPO) of Britvic left the IHG system; and plc. IHG received approximately £371m in proceeds and additional • the sale of a further

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