InterContinental Hotels trod a careful line between optimism and realism last week announcing its third quarter results.
Chief financial officer Richard Solomons told analysts that the trading environment remained tough with "considerable pressure on room rates" across all IHG markets with little prospect of easing up any time soon.
However, while he was obviously avoiding some of the more bullish tones of his contemporaries at chains such as Starwood and Marriott, he was also careful to talk up IHG's achievements in the year so far despite the storm clouds still hovering over the global hotel industry.
He was keen to reiterate the group's three key priorities for the business which were set out when the financial crisis started to get a grip last year.
"The first was to make better use of our scale and to drive efficiency," he said. Regional and central costs were down by $39m, keeping the group on track to make sustainable savings of $40m for the full year and total savings of $80m. Solomons confirmed InterContinental was still expected to deliver sustainable savings of at least $65m-$70m in 2010 vs 2008 at constant currency.
The focus on costs and the cash generative nature of our business model through the cycle have been driving factors in IHG's ability to continue reducing net debt, added Solomons.
The second priority was to support the performance of the IHG hotels by using the power and scale of the system to drive revenue while at the same time helping hotels to manage their costs. "As a result of our continued focus in this area, the amount of revenue booked through our reservation channel or through our priority club rewards members direct to hotels, was up 4% on the same period last year to 68%," said Solomons.
The third priority was building the size and quality of the hotel system. He said financing for hotel development remained constrained in most regions bar China where the benefits of economic stimulus packages were starting to filter through to hotel real estate. "In Q3 we signed 17 new deals in China versus 10 in the first half of the year," he said, adding: "The strength of our brand and power of our fiscal delivery will continue to attract owners to IHG and despite being well below 2008 levels we're still continuing to sign around one deal a day."
IHG's pipeline stands at a little under 220,000 hotels worldwide with 80,000 of those under construction. The group opened 15,500 new rooms in the quarter and is on track to have opened 50,000 by the end of the year. But Solomons emphasised that IHG would continue to strive for better quality hotels – closing more than 4,000 rooms during the quarter and looking to have removed 70,000 during this year and next.
A major plank of IHG's plans is the roll out of relaunched Holiday Inn hotels. Solomons said this was making good progress with more than 40% of hotels now relaunched. The group is looking for between 3% and 7% revpar outperformance on refurbished hotels and, said Solomons, results were already looking promising with 5% revpar outperformance compared to the control group.
Overall revpar was down -15.2% at constant currency during the quarter against a revenue drop of -19% to $401m and a -19% operating profit drop to $124m.
On a region-by-region basis, revpar decline -15.5% in the Americas on the back of a revenue decline of -19% to $206m; EMEA saw a revpar decline of -15.2% in the third quarter, which IHG said was primarily driven by rate. The UK and France saw the smallest declines revpar down -11.2% and 10.2% respectively. Revenues in the region dropped -22% to $101m; AsiaPacfic saw a revpar decline of 13.4% driven by rate as occupancy improved by 1.3%. Revenue for the region dropped -10% to $62m.
Solomons reported that franchised operations continued to show a greater resilience to the recession than managed outlets with a -14.7 revpar decline partly offset by a 5% increase in new rooms.
Owned hotel revenue fell by 20% but Solomons reported that careful costs management meant that just half of this had dropped through to the profit line. He said IHG was not supporting owners from a financial perspective, but was working hard to drive revenues and help ease costs – such as easing brand standards where there wouldn't be any discernible effect on the end user.
Managed hotel revenues fell by a similar amount he said with bright spots in AsiaPacific where profits increased primarily due to cost reductions.
However, overall IHG saw a 56% fall in profitability of its managed business as it continued to be hit by payments under guarantees to fund shortfalls to agreed owner priority returns. He pointed to the Hospitality Properties Trust, the owner of 131 IHG hotels in North America, particularly hit by weak trading. "We have about $85m left on that guarantee and we will work through that in the course of 2010 and 2011. A lot depends on revpar recovery. It's a bit early to be more specific but the impact of the guarantee is built into our sensitivities," he concluded.
HA Perspective: The most impressive aspect of IHG's presentation was that it is continuing to sign a deal a day. IHG has benefited from its midscale focus compared to some of its large cap rivals such as Marriott and Starwood which are more geared to upscale. But it must also reflect the fact it has managed to cut costs without impairing its growth prospects.
It is somewhat puzzling then to find so much emphasis on cost cutting in the presentation. Corporate America (and to a lesser extent corporate Europe) is increasingly being asked how it can maintain its bottom line given that so much of it over the past year or so has been derived from cost cuts. Topline growth is the new emphasis. IHG has a good story here and it should focus on it.