International Workplace Group plc (IWG) Earnings Call Transcript & Summary

Hello and welcome to the IWG plc half year results analyst and investor presentation. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your hosts, Mark Dixon, CEO; and Eric Hageman, CFO, to begin today's call. Thank you.

Well, thank you, operator, and good morning, everyone. Thank you for joining this call as we present our 2020 interim results virtually for the first time. I'm joined on the call today by Eric Hageman, our CFO, and we'll both be taking questions at the end of the presentation. This has been truly an unprecedented trading period. We've experienced and managed our way through numerous previous crises, but nothing like we have seen during this COVID-19 pandemic. However, some good news to start. Despite the pandemic, we've reported positive revenue growth for H1, quite remarkable in the circumstances and, of course, greatly helped by a record Q1 performance. Total revenue was up 3.5%. Open center revenue, up 10.2% to GBP 1.3 billion. And pre-'19 revenue, like -- pretty much like-for-like, increased by 0.2%. Achieving any sort of revenue growth is a very good result in the circumstances. Indeed, the result could have been better if it were not for the impact of COVID-19 on our variable service revenues, which are not contracted and represent about 10% of group revenue. Excluding the one-off COVID-19-related adjusting items, which are detailed in today's interim statement, and Eric will talk about later in the call, the pre-'19 EBITDA was up 17.1% to GBP 212.6 million, and we generated cash of GBP 125.4 million. We are in a very strong financial position. Net debt of just GBP 15.9 million as of 30th of June and today is almost 0. With our cash resources and facility headroom, we have GBP 830 million of available liquidity. A good place to be, given the opportunities we believe will result from the COVID-19 pandemic. Notwithstanding our strong cash position, we're running the business with a laser focus on cash generation now and into 2021. This is done daily. No stone is left unturned, and this is now the company's lead KPI. As we've said on previous occasions, we ended 2019 strongly, and we brought that momentum into Q1, making it the best start to the year we have experienced so far, with open center revenue up almost 18% and pre-'19 revenue, which is a true like-for-like measure, growing at 7.6% and occupancy itself increased 6.6 percentage points to 78.8%. This demonstrates what this business can do and will do again. The emergence of the COVID-19 pandemic started to impact our business in March, particularly in Asia. And as the number of lockdowns and COVID-associated business disruptions increased around the world, effects on our business intensified. Overall, the second quarter was a very challenged period and resulted in a 4.4% decline in group revenue, and open center revenue group growth was reduced to 2.5% for Q2, respectively. We now anticipate these challenging conditions remaining in the third quarter. We have, as a consequence, further intensified our cost-saving program. And today, we announced a comprehensive range of actions to reduce costs, improve cash flow and liquidity. To update you, we've achieved GBP 180 million of savings so far. This number will grow substantially and rapidly in the coming months. We've also announced a one-off COVID-19-related charge of GBP 155.8 million, split between cost saving in H1 and a provision for network rationalization during H2. Later, Eric will call out the individual actions that led to this charge. Although the very clear V-shaped recovery we saw in China and other Asian markets, although we saw it there, it's not been universal, and it's this that's made Q3 a more challenging period than we previously anticipated. We're definitely seeing green shoots for improvement into Q4, and we can see those green shoots today. Inquiries are trending up. Customer retention is improving week by week. And we experienced enormous interest from more companies looking to work in a more dispersed way, our key offering. We have focused on cash, which has been the #1 theme for the group. And despite the pandemic, we've generated positive cash flow each month, which is a testament to the huge efforts of our team. And at the same time, we supported tens of thousands of companies bridge short-term financial difficulties, and Eric, again, will outline some of the things we've done here. That focus on the equity placing in May puts us in an even stronger position financially to look at the growing number of opportunities to accelerate growth, which we will do in a cautious way, bearing in mind the current global scenario. Even though we anticipate these growth opportunities, franchising remains the key growth driver at the moment, and we've seen continued momentum in -- of our strategy in this area. In addition, we started to add to the franchising a small number of new centers. So we have been doing acquisitions, takeovers and rescues. But so far, that hasn't required any cash, and almost all of them have not had any IFRS 16 liabilities. There's no rent liability either. So they're very good deals. We expect to add more of those in H2, and we will fill gaps and broaden the network as we do it. So both franchising and we've got the beginnings of some consolidation. But we're taking a cautious stance in doing the very straightforward stuff, not the more difficult, which we'll leave to a little bit later on in the year. Our laser focus on cost has been an important part of the comprehensive actions we've taken to mitigate the impact of the crisis on our revenue. We announced during the capital raise, savings of GBP 150 million achieved so far. We've now reached GBP 180 million in cash savings, and we're looking for much more than this as we believe things may get more challenging before they get better. Just for reference, Board remuneration remains at 50%. All capital expenditures are vigorously questioned and network rationalization, whilst the last resort, will feature more prominently in the months to come. Clearly, the dividend share buybacks remain suspended for the moment. We continue to accelerate and invest in innovation, both in IT and procurement, which really is helping the savings. And -- but this hurts us a little on cash flow because we are investing in it. These investments will further enhance our ability to reduce costs and grow top line in new growth areas, in particular, home work. All projects are rapidly implemented to maximize the short-term benefits by doing all of this. Even when our revenue is challenged, we believe that we will be able to achieve a better and better result through cost savings going into 2021 and then enhance further as the revenue comes back in. There are well-documented structural growth drivers in our industry, and I won't read out the list as we've talked about these many times before. But these drivers where we'll get -- already getting more powerful pre-COVID. What the pandemic has done has been to do a better job than any marketing campaign we've ever done to really generate massive interest and demand for our services, in particular, in the home work, remote work and decentralized areas. The growth of remote working and working closer to home is -- will be huge in the future. Pretty much all companies are looking at this. It is universal. The only thing that slows it down, in fact, is they already had existing commitments, and it's -- but they will make the change if they can now. Obviously, growing companies go immediately into this type of working. Companies with existing infrastructure need to get out of some of that before they can move. It's definitely what their employees want and increasingly so now. They want to work close to home, not all at home, but close to home. And it's what companies want. It improves efficiency. It can improve productivity. And it's 1/3 of the price, so it's a very strong cost driver as well. So watch this spot. The way people work are changing. When we are ready and able to support this, momentum is picking up week by week, and this is an area we are quite excited about even in the middle of this terrible storm as we stand at the moment. We've got a clear view of this new world post the pandemic. Just for absolute clarity, there will still be a need for offices, it's just that those offices are going to be used differently. There's going to be much more use of flexible space and drop-in space. It's going to be more distributed, more people working closer to home. The thing people will least want to give up post what they've experienced during the crisis is the ability to not commute. And it's really commuting that's driving many of the decisions. The reason people don't want to come into city centers is more the commute than the office when they get there. So one bright spot we've got in addition to home work is the strength of our sales in suburban areas. So this is evidenced by real pickups in suburban and provincial towns around the country, each country. And we -- so we -- the good part of our growth strategy with franchising is a lot of the places we're opening are in exactly the places people want to be in the future. So we think this is going to be one of the lasting legacies from this pandemic, and it will fundamentally change the way people think about work and office, and we should be able to benefit this -- from this in years to come. So we're quite looking forward to this new future. Briefly, our network is really helping us. The scale and coverage are really critical. You just don't want to be concentrated into big metropolitan cities at the moment. Those are the difficult places, and they're going to continue to be difficult places for a few months to come. The discipline of our forward order book also helps. You can see 90% of our forward order book was contracted at the beginning of the pandemic. That's what's helping the revenues remain stable. So we're very focused on this. We have been for years, and we're, of course, focused on it looking forward. This plus coverage, you can see here more than 1,100 cities, lots of centers. It's that spread that gives us a lot of stability, which some of our peers do not have. Dealing very briefly with how people are working, just to look at the spread. This is a look here at the High Wickham area, so West of London. This is just around High Wickham. You can see lots of choices for people to work, and they are voting with their feet and going into these centers. You can see the same thing, Paris or Dallas, lots of these. We've focused over the years of making sure that we're covering the suburbs not just the city center. Few enterprise wins. Now huge amount of interest at the moment, as I described earlier. But you can see network customers here using the network, hub-and-spoke coverage over multiple geographies or national networks. And these are just a few. There's a lot more coming through in this area and unprecedented interest. So this is a very encouraging sign as we move towards the end of the year. Just dealing with growth. As we said at the time of placing with regards to growth of -- everything we said there with regard to growth, nothing has changed. The opportunities are all still there. In fact, the number of rescue and M&A opportunities since the placing that are in our sort of pipeline has doubled in that period of time. Where we're focused on are the first 2, some organic and rescue. These are not -- these are -- the ability to grow without taking any rent liability or IFRS 16 liability with small cost, small CapEx, these are the ones we've been doing in the interim. The rest -- the larger acquisitions, we're just working there on timing. It's very important to get that timing right. During the whole period, though, continued progress with franchising. That is a steady drumbeat that's occurring. We're not doing the large MFAs, of course, although some of those discussions have restarted in the past couple of weeks. It's more the franchising in the provinces, first deals agreed in many countries and quite enthusiastic about this area as well. So we will grow. We're just going to be very careful at how we do it this year. And with that, I'll hand over to Eric. Thank you very much.

Thank you, Mark, and good morning to you all. And let us first have a look at the key points to make on the income statement. On the back of a very strong first quarter, our best-ever start to the year, and a challenging second quarter given COVID-19, we increased revenues by 3.5% to just over GBP 1.3 billion. Open center revenue was up an impressive GBP 121.5 million, an increase of 10.2% compared to the same period last year, with all 4 regions contributing positively and with a particularly strong performance in EMEA, Asia Pacific and the U.K. As previously mentioned, the best earnings performance indicator of our business is the pre-'19 EBITDA. In the first half of this year, we generated GBP 212.6 million of EBITDA from the pre-'19 state, up 17% compared to H1 2019. Adjusted operating profit was very much in line with our expectations. And it is important to note that this number includes GBP 69 million investments we made in growth, meaning the new centers in 2019 and '20 and one-off network rationalization costs to the tune of GBP 27.7 million for a total H1 2020 earnings drag of GBP 96.7 million. That is GBP 50.5 million higher than in the same period last year. As Mark already mentioned in his opening statement, we have taken a charge of GBP 155.8 million relating to directly attributable gains and expenses resulting from COVID-19. These charges are considered to be adjusting items as they are both significant in nature and value to the results of the group. The adjusting items are as follows: network rationalization to the tune of GBP 134.5 million, which includes GBP 7.8 million for charges incurred in the first half of the year and GBP 126.7 million provision for network rationalization in the second half. We also took a GBP 9.4 million provision for expected credit losses, given that some of the customers may struggle to navigate through these challenging times as one would expect in a recession. We also had GBP 5.8 million of transaction costs in respect of master franchise agreements that have not yet completed. A small goodwill impairment of GBP 4.9 million was also taken as we felt now was the time to bite the bullet on some of these firms. And lastly, other one-off items of GBP 1.2 million, which includes, for example, the charges for corporate restructuring, including severance. In total, GBP 155.8 million of adjusting items, which you see reflected in the adjusted operating profit and EBITDA for the period. If we now look at our cash flow statement on Page 14. Notwithstanding the impact of the pandemic, we were able to generate cash before net investment and growth CapEx of GBP 125.4 million. Here, we can clearly see the positive impact of the comprehensive actions we have taken to reduce cost, improve cash flow and liquidity on our numbers. Particularly pleasing is the strong working capital inflow as we continue to actively manage this. As mentioned in the trading statement this morning, we generate cash every month, even during the midst of the pandemic. In combination with the GBP 313.9 million of cash we raised in May, we have close to GBP 0 net debt at the end of June and today. Equally important is to say that more than 2 months after the race, we still have close to GBP 0 net debt. This means we generate -- we continue to generate cash as these numbers also include the more than GBP 30 million we have spent on helping our customers during this crisis, the cash we spent to finish centers that are opening and paying final cost of centers that we opened some months ago. This is why we have flat cash because we are generating cash that we are then investing. Let me summarize with the following comments. We have a very good balance sheet. We are in an excellent financial position, and we are producing cash month after month. You can also be rest assured that we continue to focus on cost savings and that we are doing everything possible to maximize cash flows in the coming months. Let me now hand back to Mark for our outlook and concluding remarks. Mark?

Thank you, Eric. We remain in challenging times. COVID-19 to date looks like it will be more prolonged than we were originally anticipating, and clearly, it's changing on a week-by-week basis. We now expect a challenging Q3, and hence, the actions we have announced today. These, along with the green shoots we are now seeing in the core business, lead us to believe that we'll see improvements coming through in Q4 and into 2021. What gives us some confidence in that? First and foremost, cost savings. We updated at the capital raise of about GBP 150 million of savings. Two months later, we're GBP 30 million ahead of that with much more to come. And the entire business is laser-focused on gaining efficiencies and without affecting customer service, reducing cost. Inquiries are increasing. In fact, interest in what we're doing is -- was described to me the other day as electric. It's -- we've never seen anything like it in terms of especially larger companies coming in with requirements. We are converting into sales, record sales in all of our membership products and our home products and our superflex products, all at record levels. It's a small part of the business that -- it will clearly become a bigger part, but it's still just 8% of revenues today. Customer retention, which is a KPI that we've been looking at closely for obvious reasons, is picking up. And there's lots of opportunities really all over for us to provide more services to customers going into the future. We were seeing many structural growth drivers pre-COVID-19, but it's clear that this has moved up a gear and accelerated. And the changes to the way the world was working are now going to become permanent with interest reaching entirely new levels, and as I said earlier, this bodes very well for '21. Finally, the current environment is presenting significant opportunities for us to accelerate growth and the development of the group. I repeat, everything we said at the equity raise remains valid, but it just may take a little longer. After a great start this year, the onset of COVID-19 and the swift actions we have taken and continue to take has turned 2020 into something, well, I think this is quite an understatement, of a transitional year. But we are now absolutely focused on 2021, doing the right things now so that we enter '21 as a more resilient, stronger, more profitable, more cash-generative business. Thank you all very much. And with that, we will hand it back to the operator, open the call to questions.

[Operator Instructions] The first question comes from the line of Michael Donnelly from Investec.

Can you hear me?

Yes.

One question, probably for Eric. If I look at the mature book, with occupancy up and revenues overall, pretty much flat, it looks as if pricing has come down by about 5%. Is that 5% the number that you recognize?

Eric, I can't hear you.

Do you want me to take it, Mark?

It was directed to you. I can take it if you like.

Yes. But I think in general term, people are interested in what you see on pricing.

Yes. I think you -- that number is a number we recognize. Clearly, it's more difficult. This is not an easy period to get price rises. So you've got a decline in price. We have to be more competitive to gain more conversion. So some of the cost savings will be used up with lower prices. But overall, occupancy will rise.

The next question comes from the line of Andy Grobler from Crédit Suisse.

Three from me, if I may, for now. Just on the network rationalization costs and the provisions that you've taken, how much of that will be a cash cost in the second half versus noncash cost? Secondly, on savings, you've given the target for the full year -- or the current target, how much of that was taken in the first half of the year and how much will be in the second half as a result? And then thirdly, just on enterprise, you talked about strong rising demand and inquiries and so forth. Again, could you provide any data on that in terms of how big enterprise is? What kind of growth you've seen and so forth, please?

Okay. Just on question one, network rationalization. It's about 60-40 -- 50-50 to 60-40 cash. It could be as high as 60%. It's probably going to be near 50% cash to just writing off assets. It's -- the number moves because simply, we -- more things are added and more things are taken away. So we're agreeing deals that get -- centers we would have closed off the list. But it's -- so it's a moving number. But it's going to be that sort of range, cash to noncash. I think the savings come, by definition, mostly in the second half, and it's going to be sort of 1/3, 2/3, I would think. That's a complete guess. I don't think we've looked at that number, Eric, have we?

No, not to that...

It's just the way to savings. Most of the savings are more permanent savings now, and they will come into second half and into 2021. And again, we're very focused on cash generation now and 2021 in particular. So I think we can get a good outcome there. In terms of the data on enterprise, there's a lot of data here. But -- so look, what's clear is that enterprise is growing and will grow further. And I mean -- but it's different demand sometimes. We've got 2 requirements for multiple tens of thousands of people that we're working on today. And it goes from that extreme to just huge numbers of smaller groups of people coming into the centers, particularly in the provinces today. What we can see -- we're starting to see new company start-ups. With rising levels of unemployment, you start to see more start-ups. So over the past couple of weeks, there's been a marked trend that we can see in some countries of that coming through. Overall, inquiry levels have not reached the same levels of last year in aggregate, but they are coming up week by week. Although a second wave, or whatever it may be, may dent that in the short term, it's quite related to that and to how people feel. But certainly, from an enterprise, larger company point of view, it's pretty much up there on the list, top of the list now for many, many companies around the world. And they are engaging with us. We're the market leader. We have the best coverage. We have a lot of engagement here. So we're watching with interest, can we convert some of these really big contracts onto the network.

And Mark on that because it's a topic you talked about for a number of years and obviously more in recent times. But just trying to work out, and it's a question that comes up quite frequently, is where are you -- where is your starting point in terms of enterprise clients versus SMEs?

It's still -- it's about 50% of the business. I mean, really, it comes down to the definition of enterprise, what is an enterprise client for us. An enterprise client is someone that's using us in many locations. It's not a company that's just using us in a single location. It's not a small company. It's not an individual. We break our customer base into 3 groups: enterprise, very large company companies that are just companies using us, but they're companies, and individuals. And it's the enterprise segment that is the one that's growing. It's sort of taking more share of the whole. And we expect one of the results of -- the COVID will be even more interest. So it's -- from something that was not talked about, people didn't get to real estate, it's high on the list right now. And it's going to remain there, we think, for the rest of this year. And companies will continue to change strategies on how they support their people.

The next question comes from the line of Daniel Cane from Toscafund.

A couple of questions from me. On the GBP 5.8 million charge you've taken for deferred deals, would that have included fees for the sale of the U.S. business?

Yes. It's -- that is what it is predominantly. I think it was a well-kept secret that, yes, COVID had an impact on that. That's the reason why you can take it as a one-off charge. You have to be able to demonstrate that you're in touching distance from doing that. So the money is not wasted. I think that's the important part. All the work that we did on the accountancy and tax side is still there, and we can still benefit from whenever that transaction becomes in sight again, whether that's this year or next year. And I think we talked about how important master franchises are for us in addition to the other things we've talked about, and that continues to be the case.

So that region is included in the comment, master franchise discussions ongoing?

Absolutely.

Okay. Second question is on the provision, the GBP 127 million provision. It's a common practice to provide an idea of the annual benefit when you're making these sorts of provisions to adjust for the size of the business. And I'd say the normal rule of thumb is to get an annual profit benefit in the following year of about 1.5x the provision. So if that were the case, that would give you a benefit of the order of GBP 190 million. How does that feel? Is that in the ballpark?

I may do that one, Eric. I would say that might be a little aggressive in the circumstances. I think on a good day, you would not be wrong. I think certainly, from a cash position, you would be more than correct for cash plus asset write-offs. It's possible, but everything would have to be going well, and we're sort of -- we're quite cautious on that outlook. But certainly, you would expect to have a 1x return from that investment in 2021. You could do better, but one would be reasonable. Eric, would you agree with that?

Yes, absolutely. I think at this moment in time, a bit of prudence is smart. And if I sort of think about the direction of travel of that operating profit line that this impacts, I think that's a good number to work with. If you sort of take a number north of GBP 100 million in the year-on-year comparison, I think it comes close to 1x. We obviously want to do better. We will work very hard for it. But at this moment in time, from this vantage point, that is, I think, a good assumption to work with the people.

The next question comes from the line of Andrew Shepherd-Barron from Peel Hunt. It appears we're getting no answer from Andrew's line. So the next question comes from the line of Calum Battersby from Berenberg.

Can you hear me?

Yes.

Great. Just checking. Three questions, if I may. You made a couple of references to customer retention, I guess, that you're tracking. Just hoping if you could give slightly more color there, i.e., what customer retention is in a normal month or year and what it has been in recent periods? Secondly, there were some articles, and I believe it was the end of May, saying that you had taken over an office that WeWork had vacated in Hong Kong. Just wondering if with WeWork or other competitors, that would be something that you think you might be doing on that. And if so, kind of what the size of this opportunity could be over the coming 6, 12, 18 months? And then thirdly, one probably for Eric. In terms of the GBP 9.5 million provision for expected credit losses, just hope you give slightly more color on how you came to that figure. If the kind of expectation there is that we get recovery from Q4 onwards? Or if you think kind of bad debt to pick up if this kind of -- the crisis continues on for a longer period of time?

Okay. Look, on customer retention, we can't give you the -- or I could give you the numbers, but that would be too much information. If you looked at the graph, you'd see that customer retention has improved each -- we're looking at it weekly, and it's improved each week over the last 4 weeks. So it had a shock at the beginning, customer retention went down and then it's now recovering week on week. So as I say, it's a key data point. It would be way too much data for us to start sharing. But that is showing some positive trends. And the second, I'm taking -- yes, absolutely taking over failed operations, those months, we had numerous conversations underway and some takeovers have already happened. They're just too small to announce. But again, we're taking a cautious view even on those, even if they're free, but we are doing some where they fill in gaps in the network. The first WeWork one we did in Hong Kong, it's done very well. Both we are very happy with it, our partners are also very happy with it. And so they can work well, if timing is right, the place is right. So -- but the pipeline has grown substantially in that area. Credit losses, Eric, I'll leave to you.

Yes, thanks. So very prudent approach, of course, very much in line with our thinking of how the recovery will take place. So very much reflecting that challenging Q3 and then improvements in Q4 that we have talked about. For me, this is one of the surprising things. If I think about sort of March, April when we first started to take the actions, and this was one that, obviously, everyone was worried about. And the positive surprise that we've seen, and it doesn't really matter which geography you look at, how businesses across the globe, almost irrelevant of their size, how people have been paying us. Of course, they are paying later because that happens in an economic recession. But they're not paying much later, and they're being pretty much everything, which is why if you look at the size of the balance sheet that we have or the monthly balance that we have, that GBP 9.5 million sounds like a small number, but it is another example of how resilient the business model is. So we don't expect that to go up in the remainder of the year. As I said, it's -- that's a cautious and prudent approach. And yes, it's -- we're quite happy with that. What our business shows is that we don't need to do more in this -- on this topic.

So Calum, and I'll just come back to your second question, just thinking about it a bit more. Look, a feature here, what we have to do as a business is -- and we're doing it with franchising in that we grow the business without huge requirements for capital investment. We do not grow our IFRS 16 liability or have volatility in the numbers we did, that's what franchising does. But the deals that we're doing are much more -- we're doing a lot more management deals and variable deals that have the same characteristics as a franchise. That's why we're doing them without question now. And this is -- they don't require capital investment. They do not have a rent liability that causes the IFRS liability. And we're putting a lot more focus. We think that going into '21, landlords generally globally are going to have a problem. Fixed space is going to become unpopular. Companies are going to change, but what they're going to change to needs our software, our platform and our expertise. So we think we can work on getting a lot more of these franchise-like deals in order to grow the network that have -- get us to what I count as the promised land. The promised land is grow without having a drag. Eric talked about it in his words, we took a drag of something like GBP 50 million in the first half from opening new centers, plus the cash cost, plus the IFRS 16 liability goes up and so on. So we need to -- we've got to find a way around that. Franchising does it. And I'm quite optimistic that we'll see more of these deals, and it gives us far more sort of attractive and beneficial growth than we have been doing in the recent past.

Yes. That's very helpful. Sorry, I've got a follow-up to that. Does that imply, say, more deals in the future will be signed as a variable rent with landlords? Is that something you would be aiming for, something that you see as kind of beneficial to the earnings?

That -- 30% of them already are, but that's pretty much all we do at the moment and probably for the rest of this year anyway. So -- and if we can -- I think my guess is that the property market is going to be unbelievably weak in '21, really weak. And that is a market where people have to then start being innovative. And working with us is an innovation that gives them cash flow. They have to invest a bit to get there, but it's going to become more attractive. And certainly, that's what we are working towards. And then we can increase the coverage by getting a lot more partnerships than we -- 30% is about in that genre now, let's build that number and build franchise. And that's sort of slowed down this drag that we've had on investing in new centers and all the things I described earlier. And there's a big pipeline building now. We're just being very cautious on what we pick up.

The next question comes from the line of Steve Woolf from Numis Securities.

Just a couple for me. In terms of the cost savings themselves, can you just sort of outline, of that GBP 180 million, where we're at, at the moment? How much of that is going to be benefiting in 2020? And secondly, in terms of the breakdown of some of those cost savings, is it possible to sort of give a bit more of a detail on where some of that is? Rental savings, internal efficiencies, just some sort of split , if that's possible? And then finally, on the closures, you mentioned in the statement that 32 are specifically COVID-19 related. Just a bit more color on exactly what that means relative to maybe a normal closure? Is it centers that you can't actually get to or have breached something with landlords?

I'm dealing with the last one first. It's just those centers would not have closed had it not been for COVID-19. It's not that they were closed because of COVID-19, it's the effect of COVID-19 meant that we closed them because we couldn't see a future in them, whereas under normal circumstances, we would have seen a future in them. So that's what makes them -- that's the test that we have to prove, okay? If we then look at the savings, the GBP 180 million is -- GBP 180 million of savings in 2021, some are in '22. But most of it is second half of '20 and '21, that's where most of the savings hit. Some of them actually are long-lasting savings that then continue. But I think...

Shall I give the split?

Yes, if you've got the split, that would be helpful.

Yes. So what I'll do is I'll repeat what we said in May. So if you think about the GBP 150 million -- because it's all prorated pretty much. And of the GBP 150 million we had in May, there was -- GPB 100 million was related to -- and the landlord discussions we have, i.e., rent abatements, about GBP 30 million were supplier contracts or procurement savings, and then the remainder, i.e., GBP 20 million is people related. So contractors are no longer with us, natural attrition, not hiring, et cetera, et cetera. That's pretty much what it is. So the bulk of the GBP 180 million is related to the COGS of goods sold because of -- cost of goods sold because of the landlord discussions.

And it will be about the same percentage going forward. I mean it's -- sort of that mix sounds about right, looking at what we've achieved. Again, our focus really is on '21 and sort of building the cash flow between now and '21. It's about real cash savings and permanent savings. A deferment is helpful, but it is not a saving. It is a deferment that helps the cash here. So we're really looking -- we're very focused on permanent savings. And as we said on the placing, about half of the savings were, at that time, deferment to longer-term savings. Pretty much all the savings now are longer-term savings because it's not about deferments anymore.

Okay. And then just going back to that. The 2020 and then the 2021 split of those cost savings, I'm just trying to work out what annualizes into next year as a potential going forward saving? But I appreciate the deferment part.

Yes. I mean I would deal with it and then a couple of points then, Eric, you may want to add to that. Look, as Daniel said earlier -- Daniel Cane mentioned earlier, the rationalization this year produces a big cash contribution next year because that's all cash. That's one building block. The cash flow that we have today. We will -- if we're not spending it, then it becomes a positive cash flow next year. So with less growth that costs money, you start to get more positive real cash flow from that. Then -- you've got then the savings on top of that, supply chain, more efficiency, less people and overhead contracting, a bit more investment into IT, product development. You can sort of build it up into our internal target for cash in 2021. Now Eric, I'm not sure what color you want to put on that, if any. But do you -- anything you want to add to that?

Yes. I think from my side, of course, we're very laser-focused on cash, certainly where we were a couple of months ago. I think now we're sort of shifting gears into also where that will then lead for profitability because that's what you guys are interested in. The way I think about it is just assume whatever number you're thinking of for 2020 in my operating profit, and Mark just gave you a good sense of what you then need to add on top. So you said half of the GBP 150 million in May was permanent, so that GBP 75 million. We've added another GBP 30 million already of which the vast majority is permanent. So that adds another GBP 30 million, that's GBP 105 million. And then we still have 5 months to go, right, where really we are laser-focused on getting permanent savings. So whatever comes on top of that, that GBP 105 million is the extra EBIT in '21 compared to where we are. Yes, clearly, that is north of where consensus sits at the moment, it depends on what your starting point for 2020 EBITDA is, of course. But that's the way we think about it when we talk about putting the building blocks in place for a great performance in 2021. Yes, there is the cash angle, but there's also this EBIT angle.

The next question comes from the line of Andy Grobler from Crédit Suisse.

Sorry, I might be asking the same question Steve just did, but just for clarity, because you said in the answer to that, that the savings came on top of any of the rationalization benefits. And then as you did the bridge, it didn't. So just to clarify, we shouldn't be taking that run rate of savings of, say, GBP 100 million and then the payback from the network rationalization as well? Those 2 things are combined and it's just one of those, not both? And then secondly, and again, just following up from -- actually from the first question about the 5% price decrease. How much of that is down to some of your variable income, the coffee and car parking and so forth, decreasing and how much is kind of like-for-like workstation pricing?

I think, look -- Eric, stop me if I'm -- it's -- you should be adding one to the other because we haven't yet done the network rationalization. So -- but you should mitigate, don't let your numbers run away with you because we will have to be more competitive on price. It's going to be a recessionary period. We're going to have to be far more on the front foot with price going into the coming months and into next year. So -- but you get yourself into a very good position and there's certainly a lot of upside in cash flow from what we do.

Yes. Maybe just to build on that. One way, Andy, to think about it is you have the cost savings from all sorts of areas, think about the centers that we still have but where we haven't negotiated the better contract, that permanent saving, obviously, adds to the [indiscernible]. The center that previously, just to make the point, was loss-making. I've rationalized it, so it would no longer exist in my portfolio, obviously, I'd have the benefit of that as well. So in the sort of simplest way of thinking about it, if I have one center and I save money on it, that means I have more profit going forward. If I close the one that actually was a drag on my earnings, that will help me. But it depends on what we end up with at the full year, of course, and that is, I guess, the unknown factor. But it is -- as Mark said, that is the combination of those 2.

I think, look, I'll answer your last question in a moment. But just to echo what Eric is saying, we're taking a super cautious view of everything. So therefore, nothing can be guaranteed. We have to absolutely just get every cost out of the business, and that is a given, that has to be done. We, say, have to continue to innovate, especially in the home work and the drop-in product lines, it's about 8% of the business. Gets -- with a bit of focus there, we can get very good revenue growth in that area. And -- but there will be an effect on price and so on. So it's -- the thing that we can do that is in our control is absolute focus on the cost and product development, do those 2 things and clearly maximize sales. We could have -- we're focused on a '21 outcome that is perhaps better than expected and much better than expected. That's where we'd like to end up from what we're doing. And the much better than expected comes because basically, the revenue line moves up quicker than we thought. If you look -- coming back to your final question, Andy, these -- the ancillary service revenues, we've lost about 8% of those -- of our revenues just through that. Those are heavily affected. So that's the sort of spot services. And it is things like coffee because people aren't there, meeting rooms, people aren't using them. I say that some people are using them, but not as many as before. That's just more or less straight to the bottom line. So as that comes back in the months to come, as people start to come back to the city center offices, that will naturally help revenues recover.

And Mark, sorry, just on that because that in and of itself is a -- that's a big drag on revenue per occupied workstation or revenue per square foot of space. Are you also seeing like-for-like revenue, so on contract renewals or new deals that are in that region of 5% lower as well?

No. It's not renewals. No. They're pretty flat. It's not that. We're not -- that's not reducing. It's just new sales. That's where -- the people that want to stay are quite happy to stay and where we normally get good price rise is there. We're just pretty flat on price rise. It's a slightly -- it will be slightly up, but it's not down.

The next question comes from the line of Sam Dindol from Stifel.

Three questions for me, please. Firstly, I think you mentioned you invested GBP 30 million to helping customers. Can you give any color on these initiatives and tell us if that's still ongoing? Second's on closures, can you give any color in terms of the 4% in the second half provision? Is there any sort of particular locality or region that is more impacted? Just -- that'd be quite interesting. And finally, on MFAs. Looking into next year, given you've previously disclosed it as a multiple of past sales, would you be tempted to wait until sort of revenues have gone back to a more normalized level post COVID before doing an MSA? Or just how you think about that would be great.

Okay. I'll deal with those in reverse. On the MFA, some places, I mean, we have got -- we are in discussions on a couple of MFAs today. And those places, the revenues already have got back to normal. So those -- you're quite right. It would be probably not smart to be entering into discussions if there's too much volatility in the numbers. But I'd say a couple of those places we're working, they're small. They're small but interesting. That will help. I think the network rationalization, that's pretty much across the board. Yes, pretty much across the board. There's no particular geographic concentration.

Very much prorated, too. If you think about EMEA, Asia Pacific, U.K. and Americas, if you think about the proportion, as you saw on the pie chart earlier where we are, that's pretty much where they are happening.

Yes. And then the GBP 30 million is basically -- this is simply deferment and other to help the ones. This is very difficult in our business because people are opportunistic. So we have to split people that are in genuine financial difficulties to people that are just being opportunistic, and that's where this GBP 30 million is coming from. They are deferments and other that basically allow the customer to survive over this period. In terms, Sam, will there be more? Again, as Eric mentioned earlier, look, this is a moving piece. It's hard for any of us on this call to know what the coming weeks and months will bring. But this was typically in certain countries and it's in particular where governments start to intervene and where there's uncertain outcomes in terms of whether or not people should be paying other people. It's where you get that sort of breakdown where you see more of it. So I do not -- from where we are today, Eric, we do not see much more, if any more. But I just don't want to be on record to say never on this one because anything could happen in the coming months.

Yes, I think that's right. I think where we stand now, we don't expect it. If things change, things will change.

There are currently no questions in the queue. [Operator Instructions] And we've just had another question come through. This comes from the line of [ Edward Donahue from One Investments ].

Just going back to the point you made about metropolitan centers and the lack of activity. What are you seeing on pricing for yourselves in those areas when you were talking about the 5% price decline? What do you -- and the offset of that being what are you seeing with regard to pricing trends in the suburban areas?

Yes. I mean, look, as you would expect, there's less or no decline in suburban areas. The decline is concentrated in those metropolitan areas. We have little competition in the suburbs, more competition in the city centers. So...

Okay. Then the...

Yes. And demand is coming back even in the city centers. We can see it because there's a lot of companies -- I mean, a lot of companies downsizing. So if they can get out of the lease, they will, but they need to keep something. So we're seeing downsizing. It's not a total one-way street. There's a lot of companies doing projects. There's -- certainly, the market is moving shorter. No one's going to take long-term space at the moment. So it's not totally dead. I mean we are seeing movement and that movement is increasing, but it is done. It's more competitive, just to be very clear.

And if you don't mind, what level of your square footage or meterage is what you would classify as suburban versus the more competitive metropolitan centers?

Probably about 2/3, I would think. That's straight off the top of my head. It's maybe 2/3 or a little bit less than that, maybe 60% because it's just by quantum. I mean if you -- we -- in the U.K., we've got well over 300 locations and in Central London, there's 50, as an example. But then you've got Manchester and Birmingham with Central Birmingham maybe 8, Central Manchester another 8. So it gives you a sort of -- yes, I would say, yes, 2/3, 60% to 2/3 would be suburban. But from a revenue perspective, it's not 2/3 of the revenue. Because the metropolitan districts will -- they have a higher revenue. The base costs are higher, the revenue is high.

There are no further questions in the queue, so I'll hand back over to your hosts for any closing remarks.

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