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

Thank you all for standing by. Welcome to the IWG Full Year Results 2022. [Operator Instructions] Please be advised the call is being recorded. I would now like to hand the call over to your Chief Executive Officer, Mr. Mark Dixon. Thank you.

Hello. Good morning, everyone. Thank you for joining this morning. Hybrid is here. What do we mean by that? It's a move to a new way of working that's been accelerated by the pandemic and has led to increasing demand for companies such as ours who provide all the tools that companies need to move towards this new way of working. That's translated into increasing demand for our services during '21. And it's also led to an increase in demand from the supply side, from the property industry and from franchise partners to work with us to convert their buildings into this new service platform, which is flexible working and hybrid working. So we're benefiting now and we believe will benefit into the future as the market leader in the provision and support of these types of services. It's important to note that our company is 4x the size of our nearest competitor. And we're going to talk to you today about accelerated growth that will further improve this position. A key note, as we move more to hybrid working -- to capital-light growth will be that the portfolio by the end of this year will be close to 50% partnered and franchise. And we think this is a very important milestone. As part of the capital-light strategy, we continue to complete small unit sales and small MFAs. And we've done that throughout 2021, and we've done some more at the beginning of 2022. As the company-owned units improved their performance, we would expect more of these to happen. So it's a small pipeline. It's not going to be transformational, but it is starting to grow again. Turning to the performance. A strong end to the year from [ Nordea ] that was March 2021. This was at -- March, if you remember, was at the height of government-mandated bans on offices. But since March, from April onwards, we've seen steady month-on-month improvements really throughout the year. We've continued to trim the real overhead, not the percentage, by improving and streamlining the model. We've taken out about GBP 52 million over the course of the year. The performance trends that we saw in the second half of '21 have continued into '22. We've had a great start to '22 with the benefit of beginning the year with a strong forward order book, both for the first quarter and also for the year. And this is -- we're starting to see the effects of a move in the mix with more of the customer base being made up of corporates and multisite users. And these, for us, are very sticky users. They churn less and they give us a much more solid forward order book. Our strategic review has largely -- has been largely completed, along with our ESG strategy, and I'm going to talk more to this later. So overall, a very busy and productive year with a business that's in great shape for '22 and beyond. Let's turn to the financial highlights. Look, clearly, a very difficult year in terms of profits. But the key thing to note here and to focus on and we've set these in the boxes to the right, is the performance in the second half. Here, you can see quite a dramatic improvement in revenues and most of the EBITDA for '21 being produced in the second half of the year. And again, if you look at the shape of the recovery, which I'll talk to in a moment, you can see that we improved and have a good end to the year, which gives us a great starting point for '22. So if we look in a bit more detail and put a little more color around the recovery. You can see here on the left of the graph, you can see Q1 of '20. And you can see the drop into the first quarter of '21, strong improvement consistently through '21, and that's continued into this year in occupancy. In new sales price, you can see, again, steady improvement. The translation of the new sales price, the higher sales price into the order book takes longer. So we've only seen the benefits to improved book price coming through in January and March of this year. So we've seen and we see going forward in the book, a steady improvement in the achieved price in the book. But the trends were there last year, the translation occurs later. And then finally, services. This is the most liquid part of our business. And you can see service revenues. These are the most affected by the pandemic. These coming back strongly in Q4 and into Q1 of this year. And you can see on all 3 of these, the objective is to -- we need to get back to and will get back to the -- what we were achieving prepandemic on the left-hand bar on each of these. Translating that into cash contribution at center level, as you would expect, that, you can see again, a steady conversion. I think what's important is that at the same time, we've been lowering our underlying overhead so the contribution conversion into EBITDA is becoming stronger. So this is very much what we talked about during '20 and '21. This is what we set out to do. I believe now you can see it coming through in the numbers. So I'll turn now to the growth in the network, and this is critical to our plan today and our plan going forward. We believe, again, and our customers are asking for ubiquitous coverage. They want us to be everywhere where people are. And so a lot of focus has been put in. A lot of investment has been made into reshaping the growth platform over the last 18 months. And the result of that is a much more rapid rate of growth. The key is that, that growth is capital-light. And you can see just in '21, we had a 25% increase in the number of deals that were partnered and franchised that make up the overall book. We expect to get close to 50%, so about half and half by the end of this year, and that trend will continue. Overall, long term, we expect the company-owned would make up no more than 10% or 15% of the overall. So this significantly derisks the network. Clearly, if we're partnering, we make lower returns but we're not investing. Those returns remain with our partners and other investors. Looking forward, the mix is about 85% partnered and franchised if we look at the growth into '21. So we're very pleased with this. It's taken a lot of -- it's taken time to establish the methods. We've got a lot of men and women on the ground now that are building this network, and we're confident that the growth rate will significantly change going forward. We're also opening company-owned centers, but even the company-owned centers have become much more capital-light. You can see here the amount of investment per square foot dramatically changed a little in '20, but a lot in '21. So we're very pleased with this. We will still continue to invest in company-owned centers, but the terms are different and the returns on the capital invested are completely different as well. We're performing better on these cohorts. So they are better investments that cost less. We are continuing to do them, but they are a small percentage of the overall growth. Glyn, with that, I'll hand over to you.

Thank you, Mark. As Mark has indicated, the business has made good progress and we continue to see an uplift in financial metrics since the end of the first quarter last year. We've delivered 9 months of consecutive revenue and profit growth. The business has delivered in excess of GBP 300 million of annualized cost savings that we outlined last year, and we've seen a very strong performance from investments in new centers, particularly those centers that opened in 2020 and 2021. As Mark outlined, we've seen a dramatic upturn in profit conversion in the second half of the year, and we've delivered a strong second half EBITDA performance. As we enter 2022, we have good momentum and a strong order book behind us. Looking at the bridge for revenue performance in 2021. Excluding the impact of FX, the revenue fall for the full year was only GBP 113 million or 5% on the prior year. As we outlined last year, during the first half, we obviously saw occupancy levels below where they have been prior to COVID, and this led to a full year revenue drop in excess of GBP 200 million. However, since the end of the first quarter, we've seen a steady month-on-month pickup in occupancy. Pricing throughout the year has also steadily increased, driving a GBP 100 million revenue benefit on the previous year. We've delivered additional sales of GBP 112 million from new centers. And in line with previous communications, you know that we've closed centers primarily as a result of COVID, which combined with the impact of new openings, has led to a GBP 14 million reduction through portfolio enhancements. As we have referenced, the business has delivered over GBP 300 million worth of annualized cost savings. The majority of these were attributable to the significant success we had in renegotiating rents, together with center closures. In total, GBP 240 million of savings were property-related. We've also made good progress in improving internal efficiencies within the business, reducing overheads and delivering other cost-saving opportunities. GBP 40 million of savings have resulted from these areas. These cost savings have been partly offset by the investment in new centers of circa GBP 130 million. The net impact of these initiatives is GBP 150 million reduction in costs on the prior year. Looking at the cash flow. In terms of cash generation and our net debt position, the business has made significant progress in generating cash flow from centers during the year, amounting to GBP 118 million. This has been partly offset by investments in growth of slightly in excess of GBP 110 billion. In the second half of the year, we've continued to reduce net debt. So we're closing the year slightly below the GBP 400 million of net debt that we guided the market to last year. We've recently refinanced our group facilities, providing us with the appropriate flexibility and lower cost base to execute our strategy going forward. We've a strong balance sheet and liquidity to support this. In terms of the net debt bridge, the business has delivered a mature EBITDA of close to GBP 150 million in the year. We've also had some proceeds from transactions and the sale of franchise businesses. We spent under GBP 100 million on maintenance CapEx and, as previously guided, net investment growth of GBP 110 million. And on the right-hand side of this table, you'll note some nonrecurring one-offs, primarily in relation to working capital and the receipt of an investment loan. These partly offset each other. All in all, we exit 2021 with just under GBP 400 million of net debt, of which over GBP 300 million relates to the convertible bond issued in 2020. The net debt under the RCF is GBP 90 million. With that, I'll hand the call back to Mark.

Thank you, Glyn. So look, I'd just like to pause on this slide. Hybrid is working, and it's -- it has become an integral part of how companies are thinking about how they support their workers and their teams, how they attract the best talent. It really is an important moment of change in the way people are working. So much so that this year, hybrid working was listed for the first time in the Oxford English dictionary. People are talking about it. It really has become mainstream. And it really does support work in a new and practical way. So we think it's a huge opportunity, and we're very pleased that we completed our strategic review to look at how we best grow into this clear opportunity and navigate this fast-growing new market. So the strategic review was a chance to stand back to really take some time, consult and decide how to move forward much more decisively into the opportunity. And we really feel that this opportunity is a once-in-a-lifetime one. It's such an important change to the way companies and people work. And we're really at the center of this change, being the market leader in this provision of new platform workplaces. We came out of this with a set of very clear objectives, accelerated growth, capital-light, a new digital strategy, which also includes the spin-off of some of our digital assets, continued investment in our own digital at the same time, maximizing our company-owned performance and all of this translating into free cash flow as we monetize our investments and our platform. Just to stand back for a second and look at the market itself and the dynamics of the market, lots of pieces of research out there from all sources showing that the expectation is that flexible space, which is what we do, will become 30% of the market within a decade. And that's going from 2% today to 30%. So this is very, very rapid growth, 15x growth rate over 10 years. It's being driven by what companies and people want and facilitated by technology. So the technology advances that made all of this possible, think Zoom, Teams and Slack and others, that's what we have today. There's going to be major additional breakthrough technologies that come in and make the whole of flexible working, hybrid working even easier and much more effective tomorrow. And so we think this market is growing today, but we think the growth will only accelerate from here on. The drivers, and we've talked about these during the last year, are there. It's what people want. If you want to hire the best people, 80% of them are asking, do you have flexible working. The idea of being asked to commute on a daily basis really is something that will not get you the best people and your teams very often won't be satisfied. The second driver, planet. There's a whole range of sustainability benefits to moving towards hybrid working. It will reduce footprint by up to 70%, and it improves community. So very important, high on the list for many companies today. And then finally, profit, it's cheaper. Hybrid working, every worker moved to hybrid working, the saving, on average, is $11,000 a year. So it's really too good to miss. And most companies are not missing it, they are reviewing it. That's translated, for us, into an increase in demand. We reached over 1 million new requests and inquiries last year. This is very significant, and it's what's driving our revenue improvements as we go through '21 and into '22. Overall, our objective is to grow to 30,000 locations. We set this out many, many years ago as what we thought the platform should look like. The demand is what will make it happen. The demand is coming from large companies across the board, and we talked during '21 of the many customer wins that we had, customers using us in a very significant way. And as I mentioned earlier, this has helped the order book as we've come into '22 as more of these sticky companies that were using us on a network basis become a bigger part of the book. So it's not just large companies, just to be clear, it's SMEs and growing companies from every sector that are making this change. So it's a very, very broad-based change that's occurring and we're very excited about the future as more companies talk to us. A minute to look at our brands. This was an important part of our strategic review. We felt that our brands were an undervalued asset that we had accumulated over the last 30 years and that we needed to bring them out more into the forefront. They're a valuable asset because it allows us to hit more price points and more work styles. These are established brands that are known in the market for their niches. And they are helping us both convert the demand into revenue, and they are also helping us to grow the network. These brands can be used to cover all price points in all types of geographic location. And so as we grow into different types of location, whether those locations are rural, business parks, town, cities and so on, the brands are an important part of the mix and have a value in their own right that we felt was necessary to both start talking about but also to continue to develop. ESG was an integral part of our strategic review. And so it became at the heart of the strategy for 2 reasons. One, we felt that the right thing to do, to be focused on reducing our own environmental and carbon footprint and improving our social -- the social part of our ESG strategy. We've been doing it for quite a while. This is not new. But we've got a renewed focus on it. We've brought back our carbon-neutral target from 2025 to be achieved in 2023 as an example of this. So right at the heart, ESG, it's important for our business, but it's also important for our customers' businesses. So as we improve our ESG outcome, so we bring in new demand. It's very high on the list but in particular, large companies, very high on the list is ESG. The more we deliver on ESG, the more demand we create from our customers who are focused on this as well. So that's the background, if you like. Now, the objective. So it is all about growth going forward. Lots of investment, lots of work to improve the method of how we do this. We're now delivering on this. So we expect in 2022 to achieve a 15% growth rate, and our target in '23 is a 30% growth rate. These sort of growth rates, you would achieve your 30,000 network in about 9 years, mathematically. We believe that, strategically, network is at the heart of customer service. The ability to serve our customers wherever they want to be is key to our attractiveness and their success in moving to hybrid. Most of this growth will occur through capital-light. And we think that this scale of growth that we will produce from the capital-light part of the delivery around GBP 200 million of contribution by '24. Remember, that's coming through partnering. So our investment is only an overhead to achieve this. So there's a good drop-through. Clearly, it's not the same margin as we make in our company-owned units, simply because that margin is being made by our partners. And it's that -- the attractiveness of the investment proposition that's making them come into it with us. And so we're seeing good success on here in this whole area, and that with a gradual restart of MFA and unit sales, we will move the entire portfolio into a new place. Maximizing company-owned performance. It's an obvious thing, and that is to bring the centers that we have back to their previous performance. And you saw the performance charts that I showed earlier in the presentation. Here, you can see the historic performance of today's open group of centers over many years. And this performance goes back more years than this. And so you can see that in normal circumstances, centers produce about a 30% contribution margin. So a key strategic objective is to build back up to that 30%. At 30%, when that's achieved, the approximate revenue from this group would be around GBP 3 billion in revenues. And clearly, you can calculate the drop-through from that in contribution terms. So the third area is leveraging our intellectual and digital assets, importantly, our digital assets here. And so we have continued to invest each year, GBP 50 million into the core technology platform. It's a key investment and it supports the growth in the number of users, which today is GBP 8 million. But as we move towards 30,000 centers, that number will increase to GBP 100 million-plus. And it is impossible to deal with that number of people without a fantastic, fully functioning digital platform. So these investments are critical. We also continue to invest in R&D and product development. These are an integral part of facilitating the move to hybrid and other ways of working and they require constant investment so we can keep ahead of the game. These investments also produce a like-for-like reduction in overhead. So we are improving efficiency in all areas of the business, mainly through digital technologies in the supply chain in the innovation of the interaction between customers and ourselves and so on. And so you can see that coming through in the overhead, and we will continue to do so. We believe it's critical to this strategic mid- and long-term success of the business. So this is for our business, but we're also prepared -- preparing to spin off our digital assets. So some of the assets we've invested in that we use only for ourselves today, we will spin off into the new company that we've invested in, The Instant Group, which we're very pleased to announce today our investment here. Now in short, The Instant Group is a company that's the market leader in servicing the rest of the industry, the non-IWG world. And that world is a world of 30,000 buildings in 175 countries. And it's a huge and it's a growing market. We are growing into hybrid, but so are many others. Instant, we expect, will grow our digital assets, become theirs, we merge them in, and they will grow the number of services that they provide to that growing group on the other side. It's an investment of GBP 270 million. The management team are also investing GBP 50 million, and that provides money to both invest in growth but also to buy out some existing shareholders. The objective of this business is to continue to rapidly grow it, it already is growing rapidly, and to list the merged business on the U.S. or U.K. markets within 2 years. That's the broad target here. But this gives us a very interesting outlook. It allows us to monetize some of the work we've already done and our investment into Instant. It's a great management team, they will focus on serving the rest of the industry. It's an independent business and will, as I say, list within 2 years. So bringing it all together, the key objective here for our shareholders is to pivot to much more free cash flow generation. And it's quite a simple pivot really. In -- historically, for the last 25 years or so, we have been investing all the cash flow we produced from our operations into growth. We've paid some dividends and so on, but the majority of the money created was reinvested into growth. As we move to capital-light, the requirement for company-owned investment reduces significantly. If you look on the other side, it's clear that we have a huge upside to come as we move our company-owned centers back to a 30% margin. At the same time, a continual flow of unit sales and small MFAs, maybe larger ones over time, will -- that just simply accelerates the company-owned cash flow as we sell it. Management income will grow significantly. With that level of growth, and I gave an indication of what that could look like earlier, that will become a bigger and bigger part of our earnings. We continue to focus on scale and cost efficiency, and that also will help underpin anything we can do on the revenue line. And then finally, we believe, well-executed by the Instant team, there could be an exciting outcome with the separation of our digital assets and the eventual IPO of those assets. So we think the balance is firmly swung onto cash flow generation, coming from a very, very difficult period in '20 and '21 for obvious reasons, to a very exciting period today and we're extremely positive looking forward from here. So in conclusion, we're very clear about what we're doing. We've got the resources in place to deliver on it. Tailwinds are behind us very much. So this was already happening pre the pandemic as more companies moved to hybrid working. That small move is now really mainstream and will continue to help us deliver into the future. We're very well-established in a leadership position and we're very conscious of having respect for that, continuing to develop our business into the future. Great start to the year, both in terms of our revenues and also capital-light growth, which we believe is very important to be doing those two in tandem. So look, we're ready for this revolution that's taking place. I don't think we've ever been readier, and I'm very pleased that we've taken the time to review the business in a strategic way and be clear about the way forward. And with that, we'll move to questions. Thank you.

[Operator Instructions]

Can you hear me?

Yes.

It's Sam Dindol from Stifel. I think I've got 3 questions. Firstly, on the core business. I think you spoke before about it being back to full power by mid-2022. Is that still what we're thinking? And should we think about that in terms of price and occupancy getting back to maybe towards the Q1 2020 levels? Secondly, on The Instant Group, can you give a bit of clarity on the ownership of that business? I think given management are investing GBP 50 million, do they still own a certain percentage of that business and will continue to do so pre-listing? And then also on that Instant Group, can you give an idea of the revenue and EBITDA that IWG is transferring to that entity? And any sort of names of the digital assets, if it's Worka or anything like that?

Okay. So thank you for the questions. So back to full power by mid-'22, I think good power by mid-'22, not quite full power. I think when we were saying full power mid-'22, that was -- the effects of the pandemic went on a little longer. But it's largely there. It's just not fully there. You're not going to be back to a 30% margin. That sort of will occur more likely at the beginning of 2023. But margins will be significantly up by the midyear. There's just a bit more to come after. Do you agree, Glyn?

Correct. Pricing will lag, obviously.

Pricing, yes. It just takes about a year to get it all through the book. Okay. That's the first one. In terms of Instant investment, look, this is an independent business, independent management team, they've got a significant investment. They will have about 15% of the equity. The brands that we're putting in are Worka, Rovva, Meetingo, the co-working -- it's Coworker, EasyOffices. There's a whole range of brands and technologies that go in either right now or during the course of the year. Some of them take a little longer to put in, some of the technology ones. Then what do we expect -- final part of your question, what do we expect for -- in terms of the return on this investment. We would expect that overall, this business would produce somewhere around GBP 50 million in its first year of operation. That's about GBP 30 million from the current business, Instant business. It's about GBP 10 million from businesses we transfer in and about GBP 10 million to GBP 20 million in synergies. So somewhere between GBP 50 million and GBP 60 million, GBP 50 million net, if you like, of what we're putting into it, of synergy plus EBITDA so -- but it will do GBP 50 million to -- it'll do about GBP 60 million a sort of pro forma stand-alone basis.

And one quick follow-up. Of the GBP 270 million you're putting into that, how much is sort of selling shareholders? And how much is for ongoing investment?

It's mostly for outgoing shareholders, in short.

[Operator Instructions]

It's Andy from Credit Suisse. Just one, Mark, if I may, but a slightly longer one. You talked about the 15% -- sorry, 30% growth and then 15% growth. Can you just talk about the split of that growth in terms of owned versus franchised versus managed and also where you are now? Because it's just trying to get our heads around when you talk about GBP 200 million contribution, where is the starting point? What are your expectations for your current owned business? Just to get a sense of what that's going to mean for the P&L.

Yes. That's a very good question, Andy. Thank you. So you have to break it, I would suggest, into 3 parts. The part that we've put onto the slide is just the management part. That is management and franchise. It's that delivers the GBP 200 million, okay, approximately. And you can work that out. That's going to be roughly 2,000 centers and an average of about GBP 1 million revenue per center. The drop-through is, net-net, somewhere in the 10% range. And that's where you're getting the GBP 200 million from. It's about GBP 2 billion in revenues. But that is only from that group. And sorry, that's perhaps a little bit unclear on the slide. The second group, which is outlined in the slide, is the company-owned existing units. So what we're saying there, at maturity of this open group, you should get about GBP 3 billion in revenues, and they will be at a 30%-plus margin so you can work out the contribution from those. And the third group are the company-owned investments. So this is a continuation of company-owned with less capital invested and -- but a higher movement to return. So that group will be about 15% of the growth this year, that is in 2022 as we see it today, and will become a smaller percentage in the '23 year if that -- and that number will probably come down to under 10% in '23 because what is growing is franchise and management. These are the high-growth areas. The company-owned investments are much more limited as our preference is always to partner.

Just to follow up on that. The GBP 200 million of franchise, is that franchised and managed?

Yes, yes.

And where would that be now or last year, just to think about the delta?

Small-ish. What is it, GBP 50 million?

[indiscernible]

No, no, it's not that. It's about 50 or 50s, isn't it? We'll come back to you with that number. It's about...

But in -- if GBP 50 million is the right number, so that from here, the expectation is that the contribution from franchised and managed quadruple over the next 3 years or so.

Absolutely, yes.

That your existing business will recover...

Yes.

And mature, and then there will be limited growth, which you haven't quite set out of your -- as you invest into your company-owned, but that's going to be probably low single digits. Is that the right way to think about it?

That's the right way to think about it, Yes.

[Operator Instructions]

It's Dan Cowan here from HSBC. I just got a follow-up question, please, on Instant. The synergies you're talking about there, Mark, how quickly do you think you can realize them? And where are you going to find them? And the second question is about the dreaded I word, inflation. We've all got our knickers in a twist over that. I was just wondering if you could remind us, please, about how we should think about that, how IWG as a business will manage in an inflationary environment, please.

Okay. Just to deal with the synergies first. These are basically -- it's the beginnings of transfers of some of our digital into serving the rest of the community, which is the rest of the market. So these are efficiencies that we can help with to a much broader market. And we would expect to achieve these within the first year, so by March of next year. And they're pretty well laid out. Again, the important thing here is that the instant management team is, we feel, one of the key assets that we have -- that we're investing behind and their ability to -- they already have a successful track record for growth with us supporting, and that's all we do. We're not involved in the business, but we have synergistic support of some of our technologies that just could be applied to the broader market that there's a big opportunity there for synergies, both in efficiency and also in revenue. Turning to your question on inflation. Look, overall, inflation, if handled properly, can be our friend on average. I mean we -- some of our arrangements are index-linked, but it's a relatively small number. About 1/3 of our group, it would be sort of index-linked and 2/3 is not. So what is important is our ability to manage price during this time and clearly, to be as efficient as possible. If you look at supply chain, that is the construction of new sites. Here, there's significant inflation. But we've also achieved here significant efficiency. In particular, we're adopting more environmentally sensitive methods of construction. These also can lead and have led to lower costs. So we found efficiencies in that supply chain that mean that the cost of adding centers, whether they're partnered, franchise or our own, have not significantly moved.

[Operator Instructions] And there are no further questions at this time, sir. Please continue.

Okay. Thank you all very much for joining us this morning. And as usual, we'll be available today and the rest of the week if there's any follow-ups. Thank you.

Thank you. And that concludes our call for today. You may all disconnect. Thank you all for participating.