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

Hello and welcome to the IWG Quarter 1 Trading Update conference call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mark Dixon, Chief Executive Officer, to begin today's conference. Thank you.

Hello. Good morning, everyone, and thank you for joining our Q1 statement and for your continued interest in IWG. The update this quarter is quite light given we did have full year results for 2022, only a few weeks ago. However, looking to this quarter, we had really an excellent start to the year, and we're continuing to deliver on our range of promises that we talked about at the full year. Revenue has increased to GBP 760 million, that's 22% up year-on-year, and 4% up quarter-on-quarter. The quarter-on-quarter increase has been driven both by pricing and occupancy increases. And the Q1 2023 revenue includes now a full quarter of The Instant Group. We continue to see the tailwind of the movement to hybrid working, albeit they are the same headwinds from the economic climate that we discussed in March. But in spite of all this, I'm pleased to see that December's momentum has continued into 2023. In particular, I'm happy to announce, in addition to the financial results, that we were carbon neutral for the first quarter of 2023 and expect to be carbon neutral from this point onwards. This may not be an obvious benefit to investors, but it's really a key part of our business and investment proposition. Our clients are extremely interested in this aspect of our provision of service. And it will open our business to a wider range of customers who come to us in full knowledge that using us has no net impact to the planet from a climate perspective. Equally, our product offering continues to benefit the planet with a recurring theme of how business thinks about operating in a much more climate-friendly way using hybrid work as a key method of doing this. We continue to sign up more capital-light agreements with over 200 in Q1 alone. This is a key pillar to our future strategy, and I'm pleased that it continues to deliver. And with that, I'll hand over to Charlie for the financials.

Thank you, Mark. As Mark mentioned, the first quarter this year has simply been to deliver on market promises. We have increased revenue and decreased net debt through cash flow. Revenues increased to GBP 760 million, up 22% year-on-year or 4% quarter-on-quarter. Some of the annual increases as a result of our investment into The Instant Group, but also shows the benefit of our ability to drive inflation increases through to clients and also the quality of our products and services. We can continue to focus on cash flow pre-discretionary investment CapEx. Cash flow was GBP 46 million for the quarter. We are also pleased that net debt continues to fall with pro forma net debt of GBP 683 million, a GBP 29 million reduction from the end of December. Furthermore, we continue to reduce our gross debt, specifically on the acquisition bridge, which is reduced by over GBP 130 million since this time last year and over GBP 75 million since the past quarter to a balance of GBP 199 million as of today. The group continues to see a pressure on inflation and interest rates, which impact cost and cash flow. In particular, the strengthening of sterling, the group's reporting currency during Q1 2023 will negatively impact financial performance at the group level. As a result, we remain cautiously optimistic about the outlook for 2023 and do not change our financial outlook from our statements of the full year results on 7th of March 2023. We are confident that EBITDA will remain in line with management's expectations with net debt falling during the year. And with that, happy to take any questions.

[Operator Instructions] We will take the first question from the line of Steve Woolf from Numis Securities, London.

Just a couple from me. Could you give us sort of any indication of the performance of The Instant Group worker? Any sort of metrics you can give us regarding how that trading would be appreciated. Then on the regional trends for the business as a whole, perhaps the sort of the core -- what is classed as the core estate, I guess, in terms of the actual locations themselves. And then finally, on the new sign-ups that you've done for the 170 during the period. Any sort of color on where they're located and what's proving popular for those franchises or management contracts, please?

So I'll hand it over to Mark for a discussion on sort of the sign-ups. But overall, in terms of regional performance, we've basically seen those performance across the whole group, in particular, EMEA and the U.K. But I wouldn't say there's sort of a single sort of standout area that people should be focusing on sort of one way or another everywhere is improving across the board. In terms of The Instant Group and the worker group as a whole, that continues to progress nicely and through expectations, and we'll provide some further updates on that for the group as a whole at the half year.

And just also just to add on to what Charlie is saying, with -- China, which was sort of something that was affecting both Asia and China itself, China itself is not a huge part of the business, but it's still 140-odd centers has started to -- with the opening up of China. It's -- and post Chinese New Year, it's really started to pick up some momentum. And that's sort of more opening up of Asia because a key driver on the Asian market. That's a good following means that's just -- that's really the only different sort of performance. On sign-ups, look, a very good quarter. I think the -- again, the standouts there are two institutions. One, we did one deal for 50 buildings in France with a big REIT. It's a very well-known institution in France called PERIAL. That was for 50 buildings, and we've got another institution, which is a very large insurance company, European insurance company, that we've done, I think we're doing about 10 deals with, but they don't want their name disclosed at this point. So plus you've got lots of sort of individual landlords, and then you've got other institutions of all kinds that are not only doing new centers, but we've got people coming back for second, third, fourth, fifth, which is what we're actually looking for and which gives us sort of confidence that we're doing the right thing here if people come back and do multiple buildings. The weighting of it is about 50-50 in terms of about half of the growth is in the U.S. and about half is rest of world. And then that sort of matches the size of the business, really. And -- but we're not fully online everywhere yet on this. So the rest of the world should go past the U.S. in terms of number of openings as we move into the second half, all number of signatures as we go forward. I think just one other interesting piece of information is how many sign-ups fall off before you open. And this is -- we're measuring this number into a very small percentage. It's somewhere between 1% or 2% who pay us the opening fee, but then doesn't open. And this is because -- let's say if circumstances change and so on. So we're getting a good conversion rate. But Charlie has already mentioned, it takes time for these to open because of permits and various sort of obstacles, it just takes time. But the -- we're getting now more openings, more revenue. And so the fees will start to make a difference as we go through. They're already good, but it's a very high-quality income stream that will grow into the second half and into the following year.

We will take the next question from the line of Sam Dindol from Stifel, London.

A couple of questions from me, please. Firstly, on the center openings. Do you think that 170 run rate can continue in the upcoming quarters? Or do you think the French deal you just mentioned is that dip slightly remains at sort of a very attractive level. And then secondly, on inflation, can you give a sense of where cost of inflation is running out and any trends there in terms of if that occur moderate a little bit from last year.

So on both things, I think sort of first thing is on the center openings, only 8 of the center openings of first quarter were conventional center openings. And so you're really starting to see more of the partner sense coming through as well as a few of the franchise centers at the same time. So I think when we think about Q2 and the numbers in Q2, you will really see the managed partners center numbers coming through. When we think about inflation overall across the business, there's a little bit of inflation that we have as a result of increased such minimum wage increases, but that's actually quite low. We're actually doing a very, very good job of keeping cost under control. We're reviewing all costs on a constant basis, but also being a little bit smarter sometimes around how we are spending our money in some places and make it more efficient at the same time.

Okay. I've just got a slight correction on the number. I've just been told I've given the wrong number on opening. So PERIAL is 50 buildings, but we've only -- we've got 15 signatures because they're actually buying buildings that put us in, they haven't bought the building yet. So you've got -- excluding PERIAL, about 185, 180 -- 185 and then 15 from PERIAL. But there's more to come. You can see an announcement, they're a public company, PERIAL, so you can see the announcement on the 50 buildings with them. Sorry, second part of your question, Steve?

[indiscernible].

We have been through inflation. And no, we don't expect the growth rate to drop. We've got a very strong pipeline through the remainder of the year on sign-ups. And as Charlie said, the openings will keep strengthening because they're following, and it just takes time but very much focused on getting them open and getting the revenues up. We only make money if we get their revenues up.

We will take the next question from the line of Michael Donnelly from Investec.

Just one for me. Mark, can you please give an example on the carbon neutrality point of how that helps customers rather than doing their own leases? Is it a lower reporting requirements or some of that?

Well, what we've got is an offering to customers, which is more holistic than it was. So I mean just to give you an example, we're providing free additional health care to customers, we're providing gym membership. These are to the end users. We're providing social events and a whole range of things that sort of enhance the offering to the individuals that use the centers wherever they are. So that's the first. Second level -- actually, at that first level as well, the actual users of the space can participate in the carbon neutrality. So for example, whilst we're using renewable forms of everything in order to get neutrality, there is a gap and that gap is -- has been closed off by planting forests and our customers can get involved in the planting of those forests so they can sort of participate. Those are the users at center level, people that are coming. From a corporate level, we can give them a certificate that says that your 10 people in Trafalgar Square or Victoria are -- that is carbon neutral. So you have carbon neutrality, all included in the price is nothing you need to do. And that's a strong selling point, especially for small companies, it matters less. But for large corporates and midsized corporations that are focused on their carbon footprint, it's a real plus. No one else has it in the marketplace today. So it does give us -- it's an additional selling point, let's say.

[Operator Instructions] It appears there's no further questions at this time.

I think we're good to finish. And so thank you very much, everybody, for joining, and happy to take any follow-up questions if there are any. Thank you very much.

Thank you.

Thank you for joining. You may now disconnect.