InterContinental Hotels Group is benefitting from its vast international scale and increased direct spend, which has helped more revenue go to owners via its asset-light model.
DENHAM, England—If anyone is looking for negative signs in the current hotel industry cycle, they will not find it at InterContinental Hotels Group. CEO Richard Solomons said Tuesday that IHG’s latest earnings report was very much a case of “steady as you go.”
Speaking during a half-year and second-quarter 2016 earnings conference call with analysts, Solomons underlined what he said was good performance, with reported operating profit rising 10% to $344 million over the same period in 2015. Revenue rose in the first half of the year by 5% to $838 million.
Solomons said he was operating a business with “brands that mean something to our guests.” He told analysts that bullish H1 2016 numbers allowed him to warrant a “9% increase in interim dividends in dollar terms.”
During the Q&A session, analysts asked about IHG’s loyalty gains, individual region performances, Brexit ramifications and the ongoing expansion of Kimpton Hotels & Restaurants, which IHG’s bought in 2014.
IHG’s launch for its new Your Rate by IHG Rewards Club has caused a 2% growth in direct bookings and a 2% decline in online travel agency bookings since it began in March, according to Solomons.
Solomons said that the growth in direct bookings should not be seen as a battle with OTAs but about “optimizing our channel mix.”
He added that increased direct revenue had not resulted in higher fees to owners.
“It’s more value for money,” Solomons said.
Performance around the globe
Middle East revenue per available room was down 8% in the first half of 2016, driven down by a combination of changes in government spending and the shift in the dates of Ramadan. A reduction in oil price and an increase in supply affected demand for IHG’s properties in the United Arab Emirates.
IHG CFO Paul Edgecliffe-Johnson said that demand remains strong in China’s top-tier cities.
“We have stronger occupancy for our Holiday Inn Express brand in China than we do in the U.S., and the move to franchises (in China) will be a growth engine for us,” Edgecliffe-Johnson said.
While there are pressures and challenges in both Europe and Greater China, RevPAR in those regions increased in the first half by 2% and 2.4%, respectively.
Solomons said it was too early to predict if there will be any effects from Brexit to IHG’s U.K. business. He couldn’t say whether Brexit led to increased travel to London, but the United Kingdom capital had a “very strong July.”
He said IHG is a business with a long-term approach, and that means challenges like Brexit must be approached from a long-term point of view.
“In terms of currency, the vast majority of our income is reported in dollars or is dollar-linked. … (and) we report about half of our corporate overheads in pound sterling, so actually there is a small benefit from a weaker pound,” Solomons said.
Edgecliffe-Johnson said he expects some of IHG’s French assets to suffer, but since they account for only approximately 1% of revenue, any effect would be very limited.
Edgecliffe-Johnson also said if business fundamentals of early June would have carried on through the second half of 2016, global “operational profits would have been $6 million more.”
Growth at Kimpton
Solomons said it will take a while for new Kimpton signings to replace the revenues and earnings before interest and tax that came from the San Francisco assets that exited the brand shortly after IHG bought Kimpton. Those properties were responsible for $6 million in fees.
But IHG executives said they are still excited about the opportunities Kimpton holds.
“We have been growing Kimpton successfully since we bought it, with more signings than it has ever had. It is well on track,” Solomons said.
He acknowledged that losing the San Francisco assets was a setback, but the first two European properties announced for the brand—in Amsterdam and Paris—have “tapped into what owners and guests wanted around the world.”
At press time, IHG’s share price had risen by 3.1% for the day on the London Stock Exchange to £31.06 per share, and year to date, IHG’s stock is down 2.4%. On the New York Stock Exchange, IHG’s share price rose by 3.6% to $41.75 per share, and the company’s stock is down 9.9% year to date. The Baird/STR Hotel Stock Index was trading at $3,320.18 Tuesday morning, and year to date the index is up 7.0%.
Strength in numbers
IHG saw 3.6% net room growth year over year, with 17,000 rooms added and 12,000 removed. The Americas accounted for nearly 13,000 of those keys in 95 hotels, IHG’s fastest pace in five years. Approximately 10,000 of room removals were in the Americas.
The first-half numbers showed that in the Americas “comparable RevPAR increased 2.4%. … (With the) overall figure impacted by our concentration in oil-producing markets, where RevPAR was down 6.3% in Q2; the remainder of the estate grew 3.7%.”
IHG’s business continued to provide strong levels of free cash flow, Edgecliffe-Johnson said, up 151% year over year to $336 million for the first half of 2016. Capital expenditure for the half year was covered 2.1 times by cash.
Solomons said in the news release accompanying the results that IHG had “a good first half, delivering a 10% increase in underlying operating profit and an 11% increase in underlying (earnings per share), underpinning our decision to increase the interim dividend by 9%.”