DENHAM, England—Revenue across InterContinental Hotels Group’s system remains on a steady upward trajectory, but IHG executives worry that performance in oil-producing destinations will damper its healthy numbers.
Speaking during a 23 February fourth-quarter and full-year 2015 earnings call, Paul Edgecliffe-Johnson, IHG’s CFO, said the British hotel company was “overweight in oil-producing destinations, where our share is 14% (of the market) as opposed to the industry average of 11%.”
Edgecliffe-Johnson said he expected to see pressure from low oil prices continue to negatively affect the portfolio at least through the next two quarters, although overall, he and CEO Richard Solomons were upbeat.
A news released that announced the results included the planned return of £1.5 billion ($2.1 billion) to shareholders, to be paid in Q2 2016, and a 10% increase in its dividend to 85 cents per share.
Both executives said this continued IHG’s strategy of returning cash.
“Over the last 11 years, we’ve employed all manner of ways of doing this, some of which do not exist anymore,” Edgecliffe-Johnson said.
Solomons said the company would continue with its strategy of concentrating on increasing fee-based revenues, which has already—along with capital gained from the completion of IHG’s asset-disposal program—generated excellent cash flows.
“We have pretty much completed our asset-disposal program. We are now predominantly a fee-based company,” Solomons said, who added return on capital employed has risen from 9% in 2004 to 57% in 2015.
“IHG has a highly cash generative business model,” Solomons said.
Missed opportunities?
Analysts asked if Solomons regretted not being a buyer in 2015’s mergers and acquisitions activity in the industry.
Solomons replied that he felt IHG had kicked off this recent activity when it bought Kimpton Hotels & Resorts in December 2014, but added IHG’s onus would be on not acquiring merely for the sake of being larger.
“As I said, there are 10 key markets where we want to be, and any M&A will be focused on companies that allow us to do that,” Solomons said, who added that he was happy at Kimpton’s growth in terms of signings.
Edgecliffe-Johnson said the company had lots of funding options if an acquisition was to present itself.
“If, for example, an acquisition would be between £1 billion to $1.5 billion ($1.4 billion to $2.1 billion), that still would only take us to half of our net debt to (earnings before interest, tax, depreciation and amortization) target ratio,” Edgeclfiffe-Johnson said.
Removals and growth
Solomons said IHG growth would continue based on opening pipeline in the top 10 markets around the globe.
Other gains would derive from the continued removal of rooms from the company’s footprint, the encouragement shown by the Chinese government to open domestic leisure destinations—which Solomons said IHG was well positioned to capitalize on—and the 50% reduction in maintenance capital expenditure stemming from its asset-removal program.
“IHG removed 22,000 rooms in the last year, and the total for the last six years is nearly 150,000 removed,” Edgecliffe-Johnson said. “But we also have 15% of (the) industry pipeline, and 2015 was our third consecutive year of signing more than 300 properties.”
Those 22,000 expunged rooms for 2015 is equal to the number signed in Greater China in the last two years, Edgecliffe-Johnson said.
“In Greater China, underlying revenue increased 8%,” he said. “Sixty-five hotels were signed in 2015, and 30 (were) opened.”
In China’s top-tier cities in 2015, revenue per available room increased 6%, while in lower-tier cities growth was only 0.5%, according to Edgecliffe-Johnson. Hong Kong and Macau, however, saw 2015 RevPAR decrease 10.1%, which saw overall China RevPAR increase only by 0.3% for the full year and decline 0.9% for the fourth quarter.
Conversely, Edgecliffe-Johnson said the overall IHG fee growth of approximately 19.4% over the last two years has been led by China, where that metric grew by approximately 17.3%.
In Europe, Solomons said the company’s “performance markets continued to do well, (with an) underlying profit growth of 23% and 9,000 rooms signed.”
He added that the Middle East was negatively affected in the last quarter by low oil prices.
Q4 and 2015 results
In the numbers, global comparable RevPAR was up 4.4% in the full year and 2.4% for the fourth quarter, which both were led by an average daily rate jump of 3.1%, according to the executives.
They added that for the year, net room growth was 4.8%, or 3.2% if the buy of Kimpton is not taken into account. More than 44,000 rooms were opened in the year, which was an 8% increase over 2014. Total gross revenue from hotels was $24 billion, up 5% over 2014.
As of press time, IHG’s stock was down 10.5% year to date. The Baird/STR Hotel Stock Index was down 4.2% for the same time.
Read the latest Q4 and year-end earnings coverage from other hotel companies here.