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

Hello, and welcome to IWG Q3 Trading Update Conference Call. My name is Priscilla. I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Mark Dixon, the CEO, along with Mr. Charlie Steel, the CFO; and Mr. Mal Patel, Investor Relations of IWG to begin today's conference. Thank you.

Thank you very much. Good morning, everyone, and welcome to our Q3 trading update. I'm pleased that we've been joined today by Charlie Steel. It's actually his first day today. So no difficult questions, please. And I think most of you have spoken already to Mal, I'm very happy to have him on board. So let me take you quickly through the key highlights, and then we'll turn to Q&A. Another very good quarter where revenue grew strongly. EBITDA month-to-month continue to move upwards, and we started to generate very good cash flow, which has brought net debt down. So taking these issues in turn, group revenue grew in Q3 by 25%. It's 16%, excluding Instant. The growth came across all business lines and pretty much over all regions. On a year-to-date basis, this reflects our continuing strength in pricing, which is ahead of inflation, combined with recovering occupancy, which was 650 basis points up across the estate. We've continued to largely mitigate inflationary pressures or at least reduce them by maintaining our focus on costs and efficiencies. And as a result, EBITDA across all regions continue to grow. The monthly run rate EBITDA is developing according to plan and is now at almost GBP 30 million. And as we pointed out in August, this improvement is somewhat weighted towards suburban and provincial centers with a few city center and a few Asia Pacific locations recovering at a slightly slower pace. Finally, we generated nearly GBP 45 million of cash flow before investment in growth, which has enabled us to reduce net debt by nearly GBP 20 million compared to where it was at the end of June. Turning to our strategic priorities. Firstly, capital-light growth. You remember that capital-light contracts such as franchise agreements and management or partnership contracts, typically involve a fee structure, no CapEx spend by IWG and no lease liabilities. The good news is both demand and supply remain very strong here. In total, across the first 9 months, we signed 252 capital-light contracts with nearly 60% of these happening in Q3. These new capital-light contracts represented nearly 90% of all the contracts we've signed to date in 2022. The rate of monthly signings has continued to accelerate, and we have a good line of sight to a year-end target of 500 agreements. I'm also pleased with how these contracts are translating into openings with over 1/3 of the capital-light contracts we signed in the first 9 months being now opened. And given our signing activity, they only began to ramp up from June onwards, but it's running now at a good run rate of both signings and openings. And we expect that this will continue to pick up through Q4 and into '23 and for these to begin contributing to EBITDA as the center revenues build during next year. So moving to Instant. Let me just remind you that this is the world's largest independent marketplace for flexible working solutions, all on an innovative technology platform. Instant grew strongly during the quarter, showing strong year-on-year progress accompanied by continuing growth in EBITDA. The integration of IWG's digital assets with the Instant platform is progressing well, and we're seeing the benefits of this coming through. Finally, cash flow generation. As I said, pre-growth investment, we generated very strong cash flows in Q3, and we expect this to continue through Q4 so that with improving month-to-month EBITDA, we'll be able to further reduce net debt by the year-end. So to conclude, this has been a good quarter for IWG. We remain cautiously optimistic about the outlook for the full year. We've got strong visibility over our forward order book, and monthly EBITDA is continuing to grow in line with our expectations. So we expect adjusted EBITDA for the full year to come in towards the lower end of the range of market estimates currently between GBP 304 million and GBP 380 million. So with that, I hand over to the operator, and we'll pass over to anyone that has questions.

[Operator Instructions]

Could we have the first question from Sam Dindol, please?

Three questions from me, please. Firstly, on monthly profitability, I think you said almost at GBP 30 million. Are you able to give a sense of the comps and you expect that to incrementally increase in the coming months? Is it a couple of million more times or anything like that? Secondly, on Instant, can you remind us what you expect sort of run rate EBITDA for that sort of combination to be at year-end? And then finally, on the bridge loan, I think that matures in September next year. Given the rising cost of debt, would you prefer to sort of repay that? Or are you looking at sort of refinancing options? Or any color around that would be very helpful, obviously.

Okay. Monthly progression of EBITDA, we expect that to continue to improve through the fourth quarter. Generally, December is a flatter month than we expect, and we can already see EBITDA improving both in October and November. So it should lead us here to a good run rate. Mal, I don't know if you want to just add something here. Or is that the color?

Yes. Look, Sam, I think as I said to you before, with today, nearly 30% we expect that to improve as we go into the fourth quarter. I don't think we're going to give you specific numbers right now, it doesn't really make sense. But I think the message that we feel very confident about is that month-on-month it continues to improve. And therefore, we'd expect to exit the year at higher than GBP 30 million per month.

Thanks, Mal. Just to add to that, we see a solid -- we can see a very solid book into first quarter of next year, which is also important. So the outlook is positive. I mean it's -- there are incremental gains month-to-month. And it's -- we'll give more color on that clearly on the full year. In terms of Instant, this is another one where we are working on the integration at the moment of our digital assets into Instant, and the -- we're going to give a lot more information around this on the full year numbers. We're not going to give too much now because it's still in the integration phase. Fully on plan, contributing excellent EBITDA and excellent improvements on the previous year. So we're very happy with it. And we're happy that there's been a good investment. And -- but we're not ready to -- we don't want to give information that's sort of not super clear in terms of either guidance or performance. In terms of moving to the bridge loan, Sam, we are working on a variety of different strategies for the refinancing of the bridge loan. And we expect to, during the first part of next year, be able to have a solution to that, and we're comfortable that this is not an issue for us. And then can we go to Steve Woolf, please, Priscilla?

All right. Sure.

A couple from me. I appreciate the disclosure has changed a little bit in trying to simplify the business and have more work to do over that for next year for the moving parts, which is for sure appreciated by everyone. Just if you can give any color behind that on the old world and the way that, that was put together. So any comments on the profitability or occupancy of the mature pre-2021 estate? And then secondly, just in terms of the moving parts between getting from a consensus of GBP 340 million, closer to GBP 300 million with revenues largely unchanged. It's just -- I appreciate things you're saying that the slowdown or slower recovery than expected in Asia and city center locations, but it's still a fair -- big chunk of profits to downgrade if the top line isn't changing much. And obviously, you've got the benefit of FX coming from the U.S. estate, if nothing else. So just anything in trying to square that for me, if that's possible.

Mal, I'll hand it to you in a moment, but first, these numbers, I believe, Mal, are constant. They're not the actual, are they?

The -- we've reported constant and actual.

Yes.

Yes. So it was more anything to do with the makeup of that in terms of the pre-'21 estate, rather than constant versus actual at this point.

Okay. Mal, do you want to have a go on that one?

Yes. Steve, look, let's step back a bit. I think over the past 3, 4 quarters, I think our reporting has probably become slightly complex with quite a lot of metrics there. So this is a conscious decision. It's a first step to simplify reporting, but also certainly by the full year stage to improve disclosure. So in terms of that pre-'21 estate, that was actually very important when we were adding lots of conventional leases because we gave you a better idea of the underlying estate. I think it's less relevant now because we're adding fewer conventional lease centers and we do want to evolve disclosure to give you the most meaningful metrics. For what it's worth, the Q3 performance of the pre-'21 estate was exactly in line with what we've reported for the group versus 16% and similarly in terms of occupancy. So -- and I think that tells you something about how evolving disclosure to be simpler and reporting to be simpler. We're actually very confident that will help people get a better understanding of how to track the business and how to model it.

Yes. That's how I do think. That's appreciated. So yes. Cheers.

I think it's worth adding here as well because we've got excellent revenue growth. And we've got slight -- we've got inflation pressures that are there. We're mitigating, but they're still there. So there's some inflation movement. And we are investing also into the -- growing the management contracts and partnership part of the business, and that does take investment in people. And we've decided to do that because it's the right way to go, and it will change the mix as we've spoken about in the future. But I think underlying this -- the performance in the third quarter and the performance we expect in the fourth quarter will be absolute -- both of them very good improvements in terms of EBITDA and cash flow from the core business. And if we're not giving it on this particular call, clearly, but the graphs that we provided on the half year, where you can see the improvement on margin in the open center group, that has continued. So internally in the business, we're making -- we're very happy with the performance. There's just some of the -- there's slight sort of headwinds coming from inflation and from lockdowns in China and a few -- there's just a handful of cities that would just take the shine off the growth, but the growth is still very much there.

Thanks, Mark.

Okay. Thank you, Steve. Move on to Michael Donnelly, please, Priscilla.

Just 2 quick -- Can you hear me?

Yes.

Two quick ones for me, Mark. Back in August, you were talking about service revenues that were getting close to the pre-COVID level. Could you just update on where they are at the moment? And secondly, also back in August, you spoke about how the strong growth in capital-light had been acquiring further investment. I think at the time you were guiding that the second half about 25% to 30%. Clearly, the capital-light has been strong since that time. Is that quarter of investments still between 25% and 30%, do you think, in the second half?

I think just -- I'm not sure if we've got a number on the capital. But the services revenues continue to improve. They're not yet at pre-COVID, but they could -- there's a chance they could get there, and they can get close -- much closer in the fourth quarter. So overall, it continues to improve. We're not there yet, but every month, they get better. And certainly, just looking at fourth quarter, things like [ medium ] revenues have picked up a lot. And so you do -- and this is mainly city center circulation. You've got more people circulating and that's picking up things, basic things like coffee revenue and so on. Still not quite up there, but it continues to get closer. In terms then of CapEx, I think that was your question.

Mark, should I take that?

Yes, please, just going to pass it here.

Yes. So Mike, I think what we said was in the first half, we spent around GBP 20-ish million on the growth team for capital-light. And then I think at the time, we indicated about GBP 30-ish million in the second half. So no real change there.

Okay. Moving on to James?

Three questions, please. Firstly, on the capital-light signings, can you give us a rough idea of how to monitor the terms of these deals and what you estimate that kind of breakeven occupancy will be around your fee revenue? Secondly, on leverage, what if any, working capital unwind might we expect in Q1 based on the guidance of the net debt reducing at the full year? And then lastly, just on the kind of bridge facility, do you already have the terms available to credit there? Or are we not quite at that stage yet?

Okay. So that sort of net debt is sort of unwind. And the first one was -- I didn't quite get that.

On the capital-light, is it kind of roughly the same terms across those signings? Or is there a bit of kind of variance? And what would you expect in terms of earnings to be the breakeven occupancy for that type of model?

Dealing with that one first. I mean these are management contracts. So there really isn't a breakeven because it's a fee revenue. The issue on them is simply they start off with no revenue and the revenue then builds. And as it builds, we get a percentage of that revenue. What I can tell you is -- there's a number of centers that we've already opened this year that have -- that pretty quickly reached 100% occupancy, the number of them. And then if they do that at speed, the fee revenues start to come through. But the average field time would be about 12 months. So the -- to get them to fee revenue maturity takes about 12 months. So they just keep anniversarying in. We open them, the revenues build, and you sort of get to close to optimal performance in fee revenue and after about 12 months on average. And that is what we'd expect to see. In terms of the sort of return on their upfront fees, which mean that you get some of the fees upfront and that does cover some of the costs, but not all the costs because it takes time to get this new sales force, which is about 200 people, and that was only put in place really at the beginning of this year and really got going in about April. So you have quite a lot of upfront cost to get everything in place. But those people are now starting to perform. We've had a very good month for new signatures in October. And we can see a very strong pipeline that will continue to build. And it does take time for those fee revenues to come in here. And we will give some more shape on that as we come into next year. In terms of...

On working capital -- sorry, Mark. James, are you happy if we say that? Yes, James, on working capital, we'd expect to see some of that rewind beginning in quarter 4. And I think that's what we said in the first half day that you will see the unwinding happened to quarter 4, and then I think the next year across the full year, you will see -- we would certainly expect an increasing working capital position across the full year compared to 2022. I think beyond that, to go into granular detail at this stage on working capital items is probably not massively helpful for anyone.

Yes. Again, just trying to get -- some investors look at, I guess, net debt cycles through the year. I was just sort of referencing this year, there was an outflow in 1Q, so whether that means the 1Q net debt is kind of missing for the...

Just looking back at that. There was an outflow actually in the first quarter and the second quarter. And this was the -- there's quite a lot of it. If you look back at the documents that we produced, there's quite a lot of it that applies to the COVID period. So even though it's occurred in '22, it's applying to '21, and there was quite a bit of catch-up because of the negotiations we did, et cetera, et cetera. I think that's now reversed the other way; we've got much more -- we have almost no one-offs. And the EBITDA is converting into cash flow, and you've got a smaller -- an increasingly smaller investment CapEx. So you're starting to get -- you will get more net cash flows, and that will continue to grow through 2023. You should not see, I think, now it would be fair to say, big movements in working capital improvements positively as revenue comes up and deposits come up and so on. But you won't see the same disruption to working capital that we saw during the beginning part of '22 and of course, through the whole COVID period. You have to remember up here, we renegotiated more than 1,000 lease arrangements. And that's -- all of that, a lot of it -- some of it cost money, but we got a much better result for the long term. And it made the working capital much lumpier and stable, but that is now over. Mal, Anything to add on that?

No, I think that's a very comprehensive answer. The bottom line, James, is that this year 2022, we've seen basically the washout to working capital of prior impacts. You won't be seeing that in 2023. So would expect much cleaner working capital movements and the magnitude will be that much lower.

Yes. I think, again, we could go on and give more clarity, James. We also have acquisitions in there for the first half, not Instant, small things we picked up. There's noise in there. And -- but that noise is largely over, which I think we can be much, much clearer now going forward. And then your final question on the bridge. No, we don't have any term signed nor do we need them. We have, as I said earlier, a number of things we're working on that will make us comfortable that we will be able to refinance that bridge in due course, not least of which is a much stronger cash flow in the core business, by the way, and from the Instant business itself. So -- but overall, we're comfortable that we can have -- we will get some good outcomes here as we move to the next stage of developing Instant office in 2023. Steve Woolf, again. Oh sorry, let's move to Daniel Thanks, Daniel. I see you've got your hand up.

All right. We'll move on to Daniel.

Dan Cowan here from HSBC. Just a question on cost cutting. You've mentioned that you're looking at cost cutting and efficiency to help offset the cost inflation that you've been talking about for the last 2 to 3 quarters. I was just wondering what areas you're managing to make headway in there and how that affects this year and then annualize it maybe into next year. I appreciate it might be hard to quantify things, but any speed you can give us on that would be helpful. And the second question would be on corporate clients. There was some, I think, quite a flurry of activity relatively early in the pandemic. And I was just wondering how that could -- how that's been bought out this year? How is demand? How are you seeing incomings and -- incoming requests for space from that particular cohort of clients and how we might think that might develop over the next year or so, please?

Okay. Let me deal with the corporate clients. Thank you for that. The corporate clients first. Look, very big picture. We've got huge amounts of research, which I think now just as an off point here, we need to prepare some of that research with Simon and get it to our analysts and followers here because there's just so much now important scientific data. I mean it has all been tested now not by us, but by Harvard and Stanford and all sorts of professors working on it who see this as being an important change. So that will give you a backdrop of what's going on without me saying it. What I can tell you is that pretty much every corporate is considering hybrid working, which is -- this is moving people to a different sort of work platform, which is not all based around big, centralized head offices. It's having some of the people, maybe in some cases, all of the people working in a more decentralized way, close to the home, a fewer people at home but mostly decentralized close to home. And this way of working is becoming more and more entrenched, and that is leading to more and more demand for what we are doing. And that is even though we have what's clearly a very difficult economic period, recession in many countries, our demand remains very robust. And this is because more and more companies are looking at it and saying, "Look, it's what our people want and if we can cut costs doing it, then why aren't we doing it?" It certainly doesn't affect productivity. You hear all this gossip and common sense saying that it's not good for productivity. That is disproven on every test that's been done. So properly managed, it's something that works. We win because we're providing those decentralized locations. We win because companies that used to have a larger head office in a big city make it smaller and come to us. So demand is robust. I think inquiry levels for us in the past couple of months have been at record levels, I believe. They're marginally above what the best we've ever done before. And that is the sort of September and October current period. What we can see though is that the large project work, the type of business has slowed down a bit, and this is what you see in recessions. And -- but we're seeing it being picked up by companies moving to getting more of their people working hybrid. And they're either doing it with them controlling it, or they're giving their workers an allowance to pick up an office from us themselves, and we've got a lot of movement in there as well. But overall, demand is good. Whether that's from corporates or people that are working for corporates or smaller companies that are looking to conserve capital and rentalize, demand is good and revenues are moving up as a result. So -- and we see that continuing into the future. This -- it's becoming more and more popular. Cost savings, I will just turn to that. So just briefly on here, these really fall into supply chain areas. This is -- and digitizing everything we do areas. So things like cleaning costs, if I just take that as an example, it's a cost for us of about just a little over GBP 40 million a year. We -- where cleaning costs should be inflating, we've managed to hold them flat. We haven't managed to reduce them. But obviously, in cleaning cost, there's a high level of labor in there and labor has inflated. But what we've become a lot more digitized, a lot more efficient at how we're doing things, and we've managed to hold it flat, which means we're cleaning our places, keeping them very high quality but using less hours to do it. And we continue to do that throughout 2022. And there's a lot of digital in there. So it does take investment in the digital platform in order to get there, and we continue to do that. I think the investment overall this year will be around GBP 40 million, GBP 45 million into the digital platform. And these are all the things that we're doing to improve the simplicity of how we run our business and lower the people element, the labor cost. And then to supply chain, we just keep attacking the supply chain in 2 ways, driving down costs by -- and driving down the -- any middleman cost in the middle or any transport costs to -- and we've been successful at that, substantially reducing costs in an inflating market. We haven't been successful across the board, but on balance, whilst we have inflation coming in, we're managing to mitigate a large part of it. We still got inflation, just to be clear. And then labor cost is a key one for us. We expect that to continue to inflate, and we've budgeted for that in 2023. But we're becoming more and more efficient in how our people are working, and we can just trim off the hours by making people more efficient, more digital in that as well, everything automated. So we keep super focused on this. It is working. And then final part to this is -- the backdrop to this is we are managing to continue to get very strong inflationary increases where we're, Mal, at the moment, I think you've got the number in front of you, what is it?

Sorry, Mark, is it number 4?

No, the price increase, I think it's 11...

It's 11 -- it's just over 11% in embedded pricing.

Yes. So it's sort of embedded, it's moving up, and that's you're well ahead of what we're seeing inflation. If we're seeing inflation here, we're after efficiency, let's say, 5% or 6%. We've got the price inflating more than that. And we've got Steve, if you can follow up with one more question?

Already been answered in a couple of the answers you've given previously. It was about further savings from the lease restructuring. You mentioned it was over 1,000 getting restructured. I just wonder whether we were done at that point or whether there was still a proportion that you were going after sort of the heavier restructuring that were associated, obviously, as we came out of impacts of COVID.

This does not -- there's still a little bit left to do, but there's not much left to do. So it's not going to be -- we're not budgeting for a meaningful change here. But we continue -- look, it's just now business as usual, Steve, in all honesty here. We're not prepared to -- we're very focused on sort of immediately cash immediate cash flow and profitability. So we're in a sort of in a more, let's say, a more booming economic environment. You may be more patient with units, no patience in the current situation. We -- because we're very aware that '23, '24 will be difficult periods. We don't want to carry anything through that period. But as I say, most things have now moved into profitability and then moving up the profitability, but we continue to work through the portfolio on things that we don't think will make it. They need to be adjusted.

And one final thing from the statement I'm looking at is, what is the number of centers in operation now relative to where we were at the other 3,100 at the H1 stage? Just any sort of net movers in and out for the year as a whole if possible.

Mal, I'm not sure if you have that.

Yes, we're at -- we have 3,323 locations, Steve. If you want any more detail [ into that ], I can pick that up with you offline.

No problem. So that's 3,323.

Yes. It is actually at the very top of the statement.

Okay. So apologies, I missed that one. Yes, there it is. Perfect.

Okay. All right, Steve. Any more questions? Priscilla, can you see anyone who's got their hand up, I think?

No. It appears there is no further questions at this time, Mr. Mark. I'd like to turn the conference back to you for any addition or closing remarks.

Okay. Well, once again, thanks very much for your questions today. As always, we'll be available if you've got any follow-up questions. And welcome, Charlie, on board, and look forward to speaking to you all in due course. Thank you very much indeed.

Thank you for joining today's call. You may now disconnect.