IHG faces ‘delicate balancing act’ of costs, resources
 
IHG faces ‘delicate balancing act’ of costs, resources
11 AUGUST 2020 9:47 AM

InterContinental Hotels Group said it has been proactive in helping owners and seeking growth opportunities, as it reports a softening of RevPAR declines and optimism concerning business travel.

DENHAM, England—Executives at InterContinental Hotels Group said they are already seeing signs of growth and opportunity and that its guest satisfaction scores have increased with every month of the crisis to outperform the competition.

Job losses, though, are likely, with the company considering a 10% reduction of corporate staff.

Speaking on a conference call announcing first-half 2020 earnings resultsIHG CEO Keith Barr said he does not expect business demand to fall off the cliff.

“It’s hard to Zoom yourself on a holiday, difficult to Teams your way to a conference. I do not think this is the end of business travel. Also, there is a lot of business travel that is not discretionary,” he said. “No one has a material view on this, but I am confident. After 9/11, many people said they’d never get on planes again.”

Barr said the focus will be on building on domestic and mainstream business until international travel demand returns.

“There is not much seasonality in our business, but it all comes down to the confidence of travelers and the restrictions placed on them,” he said.

It’s encouraging to see travel come back in China where it can, he said.

IHG has given owners help via temporary discounts on various system fees, temporary relaxation of brand standards and discounts for prompt payments, he said.

Those discounts have ended now, but help for owners remains in place.

On the operations end of costs, IHG reported a full-year reduction of gross capital expenditure of $100 million.

The company has $2 billion in liquidity, and its revolving credit facility of $1.35 billion has had its maturity extended to September 2023.

With IHG being based in the United Kingdom, the company also took advantage of U.K. government aid of £600 million ($787 million).

CFO Paul Edgecliffe-Johnson said bonds payments are not due until 2022 and then again in 2025.

“We have made decisive actions to preserve cash throughout the crisis … and maintain the $2 billion liquidity we announced in May,” Barr said. He added that dividends have been suspended and $150 million in cost reductions imposed, half of which are sustainable into 2021.

“There has been a rebalancing of our resources, while allowing us to continue investing, but it is a delicate balancing act,” he said.

System growth
Barr said despite the impact of COVID-19 on IHG has been substantial.

Global revenue per available room declined by 52% in the first half and 75% in the second quarter, he said, but despite a challenging environment, IHG delivered an operating profit of $74 million.

“We have seen the small but steady improvements in occupancy and RevPAR through the second quarter continue into July,” he said, adding that a RevPAR decline of 58% is expected in July, with occupancy rising to around 45%.

Total revenue for the first half fell 45% to $1.25 billion from $2.28 billion last year, and revenue from reportable segments declined 52% to $488 million from $1.01 billion a year ago.

Hotels in three of the company’s most important markets reported RevPAR declines year over year, but in Greater China, performance improved from the first quarter to the second.

Edgecliffe-Johnson said in the Americas, July RevPAR is expected to be down 54%.

In the Europe, Middle East and Africa region, RevPAR fell 58.9% in H1 and 87.6% in Q2. Despite government restrictions, 84% of its hotels are open in that market.

Barr said 95% of IHG’s hotels are open, following the closure of approximately 1,000 hotels at the end of April due to the pandemic.

In the Americas, 90% of IHG’s hotels have remained open throughout the crisis, he said.

Edgecliffe-Johnson said 26,000 rooms in 181 hotels were signed in the first half of 2020, for a new total pipeline of 288,000 rooms in 1,932 hotels.

Conversions remain at the heart of the growth, and Barr said systems growth would increasingly present itself, with Six Senses, Hotel Indigo and Voco among brands most suited.

“Conversions of hotels remain a compelling opportunity,” Barr said. “We remain focused on our future growth and travel returns. Construction has restarted at 80% of those hotels halted due to COVID-19.”

Barr said in 5,000 rooms were removed from the portfolio in the first half of the year.

Philosophy
Mergers and acquisitions might be the other avenue explored, Barr said.

“Not every player will come through unscathed. There will be property portfolios quite challenged to perform with their existing brand and management, both local operators and even global brands,” he said.

“(M&A) will happen, but it will not happen tomorrow, as there is enough government help out there to keep companies afloat.”

He added that IHG takes a “philosophical approach on M&A” to find brands that make the company stronger.

Barr also commented on the recent news of U.S.-based real estate investment trust Services Properties Trust looking to remove its 103 assets from the IHG portfolio.

“(It comprises) less than half a percent in group earnings, so we shall see what happens if we do part ways, but there is still a considerable period of time before that happens,” he said.

As of press time, IHG stock was trading at $52.80 a share, down 23% year to date. The New York Stock Exchange Composite was down 7.7% for the same period.

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