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

Hello, and welcome to the IWG plc conference call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present your speakers Mark Dixon, Chief Executive Officer; and Glyn Hughes, Chief Financial Officer. Please begin your meeting.

Hello, good morning, everyone. So you've all had a chance, hopefully, to see this morning's update. Really just to put a little bit more color around that. This is a story that regards only the speed of recovery. We've never been in a better position for the medium and longer term with more and more companies switching to hybrid working. But in the shorter term, that is 2021, whilst we're seeing some very strong positive developments in some markets, particularly in the United States and now the beginnings of a recovery in the U.K., we are being affected in a number of other countries by continued lockdowns, extended lockdowns, but overall we're seeing just a continued level of disruption and uncertainty. And it's this uncertainty that slows decision-making. So inquiry levels have recovered in many places to close to or actually exceeding pre-COVID levels. So we don't have an inquiry problem. It is really surrounding decision-making whilst this level of uncertainty persists. So we're taking a more cautious view on the trajectory of improvement this year. And remember, 3 things make a difference: our occupancy rate of improvement, how price moves and how services come back. Now in terms of occupancy in both April, May and June, we saw pretty much a 1% improvement in each of those months, but it wasn't the level we thought it would be, even though it was good, it wasn't as good as we thought it would be. So -- and what you can see when we look at the different rates of improvement, we've got some markets improving at 2% or even 3% per month. And then we've got others that are flat and a very small number that are looking slightly backwards. So in terms of occupancy, the average improvement has been good each month, but just not to the level that we expected. In terms of price, price is following well, but these price improvements were very tightly in line with occupancy. So the better the occupancy improvement, the better the price improvement. But we have, again, seen good progress from the middle of April through May and into June on price. Price is the impact really to revenues that takes the longest to bring back into the order book, but it is improving month-on-month. With services. These -- again, this is probably another significant impact in that the recovery here is slower than expected. So it continues to improve, but just not at the same level that we had expected a few months back. And this is just disruption and uncertainty causing this. Just like to emphasize that we're much more confident on 2022. So we've got everything lined up for a strong recovery into next year. We've got unprecedented continuing wins on enterprise-wide accounts. This has continued through May and into June with more and more companies moving over to hybrid work. And you can see this widely reported in newspapers as well as more and more companies move this way. And we are a net winner as these companies move as we have the most -- the biggest network and we have the best operating platform for companies to move in this direction. This, plus healthy levels of inquiries overall and very strong levels in some markets that have more completely opened up, plus all of that on a lower cost base, means that we're confident given enough time and it really is a timing issue that we're talking to you about today, we're lined up for a good 2022. So we're confident in that number. Very briefly on MFAs. Discussions continue. There were no effects on those discussions and the MFAs we are in discussion on are in markets that are unaffected by what's going on today. And also, we have a healthy level of growth, which seems a little counterintuitive. But there is increasing demand for what we do. Network is what wins the day and we continue to add to it with excellent levels of growth, both in franchise and in management contracts. So low capital requirements or no capital requirements, and we should end this year with a reasonable growth rate compared to the market we're in at the moment. So overall, just to say one more time. This is a timing issue. It's a slower recovery than the trajectory that we'd built in and that we had seen. We're comfortable on 2022 and -- that we expect to see a reasonable level of network growth also coming in, in the second half of the year. With that, I'll close and open up for questions.

[Operator Instructions] The first question is from Andy Grobler from Crédit Suisse.

A couple -- just a couple at this stage for me. Given the expected losses this year, what does that mean for the balance sheet and the expectation of M&A from the equity rates and so forth last year? And then, secondly, can you just help us with -- from a cost perspective, what your expectations are for this year just to kind of build a bit of a bridge from last year to 2021, please?

Glyn, do you want to deal with that? First part?

Yes. So in terms of -- yes. In terms of balance sheet, Andy, we have adequate funding within the business. We envisage closing 2021 at a net debt level of between GBP 350 million to GBP 400 million, so we have no concerns in that respect. And as occupancy picks up in the business, we get favorable cash inflows from obviously working capital as customers place deposits with us. So all okay there.

I think on M&A, I mean, we're doing quite a bit. It's not really M&A in the -- it's sort of very cheap M&A in that we're taking over failing operators. So it has some cost, but these are the costs of gaining synergies and quite a -- we should see, this year, a good uptick in terms of management deals. These are largely management deals where we take over failing competitors, of which there are quite a number. So up until, we're not seeing the right opportunities yet in terms of distress where doing more significant M&A would make sense. But if we saw the right opportunity, Andy, where we could make the right returns with the right risk profile, we have the firepower to do it. So it certainly doesn't -- we're not curtailed in any way. And we're looking forward to the other side. We're not focused on today in terms of where everything is. We know and we can see that having the network, the coverage and the operating system that allows companies to flex and use and offer it to their employees wherever they want to use it is a thing -- is going to be really a major move in the future for many, many companies and we're well placed to benefit from that. And to do that, we're going to need more coverage to convert more of that. So we have this in mind as we're doing it. And we're doing it basically managing this for many property owners who can also see that if they just keep to their old model of leasing space, it's going to be an uphill struggle. And so we've got a significant number of new management contracts just managing space that are not takeovers from building owners who can see that there's a new thing coming. In terms of costs, finally, Andy, look, the -- I'm not quite sure, Glyn, how to answer this, but the -- the costs are -- must be lower, but I haven't -- I may have to come back to you on that.

Yes. Look, high level, Andy. The cost savings guidance that we've given in previous announcements, we're on track to deliver those, both the property-related and the nonproperty-related costs. So that broadly takes us in line with previous communication. I think the one piece to say is there are certain elements of the business that we're going to continue to invest in ahead of the curve particularly around franchising, personnel, et cetera, in certain markets. But the cost guidance that had previously been communicated at the outset of the year is -- still applies.

And Mark -- thank you for that, Mark. Just coming back to your previous answer around M&A, just trying to bring all that together because when you were issuing convertibles and raising equity last year, you talked about this once-in-a-lifetime opportunity to acquire and not -- there hasn't been all that much activity on one side. And two, in terms of capabilities when that does come through, I think cash expectations are now materially lower, hundreds of millions lower than they would have been at the time. Just putting all of that together, do you really -- I mean, do you really have the firepower to go and do a big deal? Or is that now not really on the...

Look, A, we really have the firepower; B, there's not enough distress. There is distress, but it's not -- people limp along. So that firepower is there for true distress. And that's -- that -- it's coming out of the woodwork, but it's all small. So you're going to get a growth rate this year. You'll see it as it starts to emerge as these sort of takeovers come in, and you'll see that whilst we have the firepower, we're growing using almost no capital, which is the most attractive type of growth, you would agree. If the right deals come along, we have a lot of liquidity. And remember, the business is improving month-on-month. It's not a -- this is -- we're not updating today to say the business is going backwards. We're updating to say the business isn't moving forward at the same trajectory as we had expected, that's it, but it's definitely moving forward. So with moving forward, as Glyn said, rising occupancy, rising price gives you more cash flow and more positive -- more negative working capital coming in.

The next question is from [ Sami Manimi ] from [indiscernible]. The next question is from [ Edward Donoghue ] from One Investments.

A couple from my side. Just going back to the area -- to the geographies where everything is looking more robust and tracking back to as planned, to get an idea on the service take-up and the pricing that you're seeing there versus pre-COVID, just to give an idea of sort of benchmarking when you say things were actually on track. Just give us an idea of what's actually going on in those regions, it would be helpful to start with.

I think, look, to deal with price, what I've said previously and I reiterate today, and Glyn will back up, is that it takes about a year for the business to recover and that's largely down to price. So occupancy is first indicator, services, then price. It takes with price it takes -- price takes a long time to go down. It's taken a year to reduce and it will take a year to recover. Now what we've seen in the past months, if we look at the month of May and the second half of April is strong price recovery and we're talking around about 8%, 9%. But that 8%, 9% is in new sales that were done in that month. And so however many sales you're doing in the month, it then takes time for that to -- you have to do that every month for a year to get a 9% price increase. Now just to be clear, it's not a price increase. This is just reducing discounting. So you're getting back to your target price. But we're making good progress on this where we have improvements in occupancy. And the two, as I said in my comments earlier, very closely linked. So that's an average increase on price. That's where we've got slow and fast trajectory. If we get -- if we move faster on occupancy, we move faster on price. We don't need to offer as much discount.

If you go to those areas where you've got the better trajectory, is that tracking the correlation between occupancy, pricing and service acknowledging the lagging effect on those as you were planning? And if you go back to previous cycles, I mean I know this one is very, very different because of the circumstances, but are you seeing a similar behavior pattern?

Well, look, we've -- you can't go back to any previous cycles, except for SARS, where -- and the SARS effect was minor compared to the effects of this pandemic. But we're seeing exactly as I'm saying here, where you get the -- the shining example here is the United States, where you've got pretty much the whole of the U.S. improving, but the states that exited first will be right at the top end of improvement month-on-month and the states exiting second, third will be slower, but everything is improving. And with that, less discounts, so better price and services coming back. The U.S. is less affected by seasonality in the summer. Americans take less holidays and it's not like Europe closing down so on. And the -- again, one of the reasons for our caution is that we know that in parts of Europe, companies will delay making decisions until after the summer. And so we're taking a cautious view now just to manage expectations going through the rest of this year. But it's evidenced everywhere. We can see this in many, many markets, the just different rates of recovery. And they are all similar in terms of how they come out. We've got quite a uniform business in that way.

Okay. And then 2 other questions, if you don't mind. Just as the recoveries is gathering momentum broadly. What are you seeing with regard to landlord behavior and the dialogue from that side? And then the other one with the last question would be just on your dedicated city center urban sites, what again is the behavior patterns and the take-up and returns that you're seeing there versus some of the original planning?

Well, look, the biggest change is in the sort of downtown areas because as people start to come back into them, they were the worst affected. So clearly, they will improve, relatively speaking, the most. The -- and we're seeing that improvement. I mean -- but it is a question of, I think it's also related to commuting and the people -- where the commute is the longest, those are the slowest to recover. So -- but we're seeing improvements. I mean, in places that were very, very difficult, such as New York, we're seeing quite strong improvements in New York. And you have to just look at the reasons why during the whole of COVID we continued to sell in New York and London and so on. We didn't stop selling. We were selling to a new type of customer and these were customers that were companies that had a break in their lease and were downsizing, and I've pointed this out over the past year. And so these were companies saying, we just don't need to be -- have so much space in the city, we'll get smaller space and sort of take space on a flex basis where and when we need it. That is continuing. And we get -- there is a definite trend for more and more companies to adopt a much more flexible approach to their space and have more people working, either from home or from close to home and have smaller sort of central offices. And we win on that, and we can see that happening in the city markets, where you get more and more companies that are looking for smaller space and more flexibility. So I think from a trend point of view -- and we're adding more centers in these city centers, just to be clear, which brings me on to the second point on landlords. Landlords, even though you will hear from brokers -- all the real estate brokers will say they're the busiest they've ever been, et cetera, et cetera, et cetera, it's partly true and that's just -- but it's because you've got a year's pent-up activity all happening at once. But the reality is these are companies getting out of leases and taking smaller space in the main. Some companies, obviously, are not, but many, many are downsizing in the cities. So this is giving forward-looking landlords understand there's a problem coming and are talking to us and we are opening centers with them to provide the space that future companies want, which is managed, it's flexible, it allows smaller space, has great central amenities. That's what companies are going to be looking for more and more in the future is what we do. And so a good -- more than we've done in any other year coming through now in terms of us working with landlords to create that space. And -- but overall, in spite of whatever you may read, there is going to be a definite change in office occupation. It's certainly not going back to where it was. And it's -- but this bodes very well for us. Again, as I mentioned in my comments, more significant wins, we'll update on the half year results, more significant wins from enterprise-wide customers where you can see them changing. And all research points in this direction. Our wins point in this direction of the way companies use space is -- has changed and will not change back in our opinion.

The next question is from Steve Woolf from Numis Securities.

Just a few from me. In terms of the rate of recovery, you've flagged that Europe is definitely a laggard in that U.S. is better. So it sounds like Asia is also lagging, but of course, part of that has been better in terms of the rate of recovery. Just generally, I appreciate Japan is possibly an exception to that. So I was wondering if you could give a bit more detail on Asia. Secondly, if cost savings are on track, I just wondered could you remind me of the impact of the annualization of those cost savings in 2021. And then in -- well, 2 more as follow-ups. The renewals wave, you mentioned that new deals are going through at a better rate than the floor of about 8% to 9%. Is that also holding true for renewals that you're going through? And then, finally, just a question regarding that level of net debt at sort of GBP 300 million to GBP 400 million. Could you just remind us -- or remind me, rather, on the covenants you've got against some of that debt as well, please?

Okay. Dealing on the first, renewals have reached pre-COVID levels. So that's -- I mean, this is a very strong underlying sign. And that's one of the reasons that occupancy is picking up, it's not just sales. It's that less people are moving out. So that's a strong indicator. Then if I turn to the next question, I think you had, which is price. That price is not the renewal price. That is the new sales improvement in price that I was talking about with renewal.

The renewal part -- the renewal offer going through at what you were saying at the pre-COVID price? Okay.

Yes. Then the overall price improvement you're looking at about 8%, 9% on average, but this is just sort of 1, 1.5 months data. But that, again, is a strong sign. And that's reduction in discounts, not an increase of price. In terms of the -- Glyn, the annualizing, not quite sure about the question, but leave to you, Glyn.

Yes, that's fine. So I think, high level, the previous messaging we've given on anticipated cost savings still hold for 2021 because some of these cost savings were delivered in 2020. For 2021, we've got savings, some closures, which are kind of property and nonproperty of about GBP 130 million. And then we've got an extra GBP 50 million to GBP 60 million in-year savings from procurement, people and other rent deals that we anticipate coming to the fore. So you're looking for that in-year 2021 of around just under GBP 200 million.

Okay. Perfect. And then the covenants, also I appreciate that you've got the convertible in there, as well as just general covenants.

Sorry, Steve, I missed that.

Sorry, the -- on the net debt position and the covenants again, I appreciate you've got the convertible in there, obviously, as well.

Yes. So the net debt full year -- closing 2021, we're anticipating net debt in the GBP 350 million to GBP 400 million range. We've also taken the opportunity to revise the covenants with our banking partners over the last few months as well to give us more operational flexibility. So we have no concerns in that respect.

Okay. And the covenants themselves, you're prepared to disclose what they are, 2%, 2.5% at times?

Those -- well, firstly, those are commercially sensitive. And secondly, they are, let's say, more flexible than they have been in the past, bearing in mind the recovery phase that we're in. So we're not in a position to disclose the actual targets.

Okay. No problem. And then just one follow-up. In terms of that recovery, I think some of your competitors have perhaps been a little more positive regarding the pace of recovery. Yes, have you found that...

Steve, which one?

A very noisy competitor, shall we say, and obviously, there was comments from Workspace yesterday in terms of London, albeit it was London specifically.

Well, I think, look, if you look at Workspace, Graham is talking about a recovery over the next couple of years. It takes time. We're saying it is going to take about 12 months. Graham Clemett saying more like 24 months. And we've got a -- we're much more dynamically set than a company like Workspace, and we have a lot more diversity. And we've got enterprise accounts and so on, which are giving new layers of income that a company like Workspace don't have. If we look at WeWork -- look, the acid test will be the actual numbers. I mean, yes, they're talking positive, but the actual numbers all went completely negative. And if they will be benefiting from a U.S. recovery, just like we are, but they are so far underwater, that it's hard to see how they -- the sort of level of improvement they're talking about. If they're able to achieve it, we, as a company, would be very happy because it will mean we will achieve it as well and there would have been no need from this update today. But it's -- we're in this for the long term. We want to make sure that we are not having expectations that we feel would be difficult to achieve and so on. So -- but the acid test will be the numbers, Steve, and it's going to take a miracle to -- for them to achieve theirs, I think.

The next question is from Daniel Cowan from HSBC.

Dan Cowan here from HSBC. I've got 2 questions. One is, can you give us an idea -- I don't know actually if you've got enough data on this, but what's the take-up been of the enterprise deals that you've signed so far? Have you got any idea of the rate at which they're being used so far? I appreciate that's take time to onboard these big accounts. But have you got any sense of the...

Yes. Look, I mean what we are sort of modeling is -- and again, it's only what I've said previously is that our short-term occupancy, that's use of drop-in day office products will move next year to -- from 1% to 5%, maybe it will be more. And just to give a backdrop on this from our friends at WeWork, they're claiming that they're going to have 10% of their revenue coming from drop-in. But they're not signing up any enterprise accounts, they're all individuals. So we are seeing the take-up improves sort of month-on-month, week-on-week, more people onboard, more people tried and more people come in, the company gets more used to using it. So the 2 impacts will be day office and meeting rooms. We will be spending a little money to upgrade our meeting rooms in some places this year because we're seeing more meeting room usage from these companies as well, as you would expect. As they reduce their own space, they need to use someone else's space then. So we're comfortable in this. And as I said, we've signed up more. My underlying concern remains is do we have enough space in the right places? That's my underlying concern has not gone away.