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

Good morning, and welcome to IWG's 2023 Q3 results. Hosting today's call will be Mark Dixon, Chief Executive Officer. This call is being recorded. I will now turn the call over to Mark Dixon to begin. Please go ahead.

Thanks very much, and good morning, and many thanks to all of you for joining us today to listen to our results for the third quarter of 2023 and what is really a truly fascinating time for the hybrid working industry. Multiple imminent research papers by professional firms, universities and many others who have shared a view that, ultimately, the hybrid in flexible work market will support 30% or more of the global white-collar working population. This is clearly a huge potential market. We are, as a company, uniquely positioned to capture that market across our network, and this quarter's performance is another good market on this journey. Q3 2023 has seen a continued momentum for the company. And we are delivering on what we said we had planned to do, which was to deliver on revenue, capital-light growth and debt reductions. As the world of work continues to evolve, the structural growth in hybrid and flexible working combined with our unrivaled -- rivaled market position has resulted in continued momentum in the third quarter in revenues with systemwide revenues now growing to GBP 830 million, which represents an 8% year-on-year growth on a constant currency basis. Our capital-light growth strategy is also continuing to deliver. We are signing up many new locations, which will underpin our growth strategy going forward. The pace of signings in the first half has accelerated, which means that we've now signed up almost 40% more locations thus far in '23 than we had in the whole of '22. As these capital-light locations have opened, we've seen an excellent performance also in creating revenue in these centers for our partners. As we previously guided, it does take, on average, about 10 months from signing to get these centers open and a further 18 months to revenue maturity. So the 600 or so capital-light locations we've signed up already gives us great visibility on the pipeline for revenue production in the future over the next couple of years and leads to a group with a far lower operational leverage as capital-light locations start to become the larger part of the overall center network. Our active management of costs, including those associated with supporting this accelerated growth has enabled us to maintain our strong financial performance this year and our continued commitment to reduce net financial debt, which is now down to GBP 634 million, GBP 24 million less than the previous quarter. We're going to host a Capital Markets Day on the 5th of December in New York, and this will allow us to shine a light on the business in more detail and help the market to better understand the company and its objectives. And with that, I hand over to our CFO, Charlie Steel, to run through the numbers and other matters. Charlie?

Thank you, Mark. As Mark said, Q3 saw strong revenue momentum year-over-year, delivering system revenue of GBP 830 million, representing an 8% constant currency growth. As we previously indicated, both Q1 and half year results, currency has been a headwind given the weakness in sterling in the second half of 2022 and strengthening during 2023. As a reminder though, less than 7% of our business is in the U.K., so currency is weighed resulting in our actual currency growth coming in at 2% year-on-year for the quarter. In order to reduce financial volatility from FX going forward, given that the majority of the group's revenues are in U.S. dollars, we confirm today that the group will be changing its functional currency to U.S. dollars from the 1st of January 2024. This will put us in line with other London-listed global companies. Our revenue growth and disciplined approach to costs has enabled us to continue to reduce net financial debt. And over Q3, we have reduced net financial debt by a further GBP 24 million to GBP 634 million. This is down almost GBP 100 million from this time last year. As we discussed at the half year, our guidance is maintained that net debt will continue to reduce through the year. As Mark stated earlier, IWG is accelerating the signing of new capital-light locations. This means that the group will be far less exposed to operational leverage moving forward. Center-related growth CapEx will also continue to fall as we already showed in the first half, it will continue to fall in H2, and we expect to be minimal in 2024. Worka continues to perform in line with management's expectations. To ensure we are best faced to fully capture the value chain from the structural growth market of hybrid working, we've been investing in the platform to best position worker for the future. Further to the announcement regarding accounting standards, the Board is continuing to evaluate the adoption of U.S. GAAP with a decision to be taken in H1 2024. On guidance, we do not see any change to management's expectations for either net debt or EBITDA for 2023. Thank you, and we'll now hand over to Q&A.

[Operator Instructions]

Steve, you've got questions, Steven Woolf?

Our first question comes from the line of Steve Woolf. Please go ahead. Your line is open.

Can you hear me now?

Yes, we can hear you now, Steve.

Perfect. No worries. It was just regarding the one for me at the first to start with capital-light signings. Obviously, there's good momentum with those signings. Have you seen a change either in the type of person who's coming to type of entity, whether it be individuals, existing landlords, et cetera. Has that changed? And then secondly, as you're learning and moving through this, have the deal terms changed in any form in terms of what's being included packages around that. So just any thoughts on those changes?

So, I think, first of all, the deal terms haven't changed. We're getting more institutional investors, which is helpful. We're getting better at sort of opening them. We've invested into better opening programs, and we're certainly doing well or filling them. So I think there has been a learning process. And as -- the more we open, the better we get dealing with partners and issues that may come up. But overall, it continues to be positive, right, up to and including the month of October. So yes, lots of learning, Steve. But overall, the terms are the same, and we're adding some excellent sites to the network and expanding it.

Are you seeing any particular demand takeup in any particular region? Is it something that's been more embraced in the U.S. or parts of Europe?

I think it has definitely been embraced in the U.S., throughout the U.S. U.S. investors adjust more entrepreneurial, less fixed, more focused on cash. And so that, therefore, easier to deal with 1, 2. However, we have seen other countries starting to open up. And part of our issue to really get the numbers moving up better is to open up more countries to this type of arrangement. And as we do that, and we've seen some notable conditions, we can then start to create more national networks in more countries. But overall, U.S. leads the way quite definitely.

Our next question comes from Kelvin [indiscernible]

We'll jump to Dan Cowan if Kelvin can't get through.

We'll take our next question from the line of Daniel Cowan. Please go ahead. Your line is now open.

Can you hear me, okay?

Yes, we can hear you, Dan.

Excellent. Thank you for the [indiscernible] operation this morning. I've got a couple. The embedded price growth that you mentioned in the release of 6% looks pretty steady. I was wondering if you could comment on what you're seeing with sort of current sales prices given the sort of broader developments in the market and the news on WeWork overnight. Just sort of wondering what -- if any pressures you're seeing externally there and how things are developing with the sales prices, please?

I think, look, sales price is -- basically, we've got -- we seem to have some inflation pressure coming off in various countries. And we've got good momentum in new sales price and importantly, renewals is as important as the new sales price. But definitely, the level of price increase wise it will still be there will taper off over time. As -- but the costs are also doing the same thing, Dan. So and then the influence of WeWork, it -- they're only filed yesterday. And so we picked a few centers up last week, the prefiling will no doubt pick up some more in the coming weeks and months, which is helpful. And clearly, there will be some customers that will avoid using them because they are going to be closing quite a number of centers. And that's a difficulty if you're thinking of putting some people in space. So that should -- all of that should be helpful in the short term. We haven't seen -- there has been an effect with the rumors, but it's a small effect. It's not something that's going to meaningfully move the numbers.

Understood. And just -- just a quick question on the -- on volume growth, sort of implied by the revenue growth numbers you've given today. And really about the -- your own rate of managing the network. You're still taking out centers at a -- or closing centers, I should say, at a relatively high level. Can you just talk around those and how you'd expect that to sort of continue into Q4 and next year, how you're thinking about the closures that you're making and the adjustments that you're making to your own portfolio?

I'd say, first of all, it's not at a high level, Dan. It's -- when you look at those as a percentage of the overall estate, it's a small number. It's not a significant number. But in answer to your question, we will continue to rationalize the estate. We -- this is -- quite a lot of these are older centers sort of end of life. Some of them are centers that are problematic in one way or another. But you should expect that to continue. The -- every one of them that we do is earnings positive. We're not doing things here that are earnings negative. And so -- and we take a careful view of it, but that will continue. We are in a particularly difficult economic period. I think going into '24, 1, 2, the property markets are weak, but it doesn't stop. Sometimes counterparties demanding terms that are not acceptable to us. So when we can't get the right terms, then we don't renew these centers. And we can get better centers down the road. That's what we do.

We'll take our next question from Samuel Dindol. Please go ahead. Your line is now open.

Can you hear me?

We can.

Brilliant. Two questions from me, please. Firstly, on occupancy, would you expect that to tick up next year with price moderating with wider inflation? Or do you think it will be more difficult to get that to progress given the tough macro backdrop? And then secondly, on WeWork, I'm just trying to understand what that means for you guys, if they are able to continue in the sudden form and saw there sort of balance sheet out, could they actually be a better competitor going forward? Or do you think given they're so free cash flow negative, they will have to price normally and hence, that should be a positive for you?

Thanks. Yes. I think you've answered your own question. So then pricing normally to make a margin would be helpful. So the problem, part of their problem is they have not been pricing to make a margin. In fact, they've been pricing in some cases to lose money. So that will be overall helpful. I think in terms of occupancy, we're in a very good position on occupancy to date. We're at sort of mid-70s on sort of mature occupancy. That's -- and with a decent margin. That's an excellent place to be. So we've still got plenty of leverage left in terms of both occupancy and price because we -- there's a lot more stock that we have available to move. So I'm quite happy with our position. I'd be more concerned if we were at this occupancy with a low margin, but the margin is quite healthy and improving. And we've got everything, and we will flex it. I think there's no doubt '24 will be a difficult year economically, but it will be a year also that we'll see more and more companies adopt flex work, adopt hybrid working as a way of working. So there will also be revenue growth and with that occupancy growth from there. So -- and clearly, we're opening lots of new centers that we're also filling up as well. So overall, I think, we're well positioned as we go into next year from a margin perspective. And there are many things that play into that. And I think we're confident that we're ready with a good start as we come to the end of this year. Charlie, do you want to add anything to that?

No, I think that summarizes it pretty well. But I think, as you say, Mark, we've got a lot of capacity as well going through to next year, which is also thoughtful.

Yes. The other question -- part of the question, Sam, sorry, it was?

I think you've answered it on WeWork. But if I can have one follow-up. In terms of the capital-light growth, will the CMD provide us with some sort of data points or trajectory to sort of judge how that can go in the next few years because it is a little bit difficult from the outside, given it's such a rapid growth area.

Yes. I think we are going to add some numbers on here. So you'll be able to look at the sort of pipeline as you would look at a hotel company, Marriott or one of the other certainly, because at the moment, you can't see what the potential revenue will be. And we're aware of that, and we will deal with it at that at the Capital Markets Day. It's good stuff. We need to explain it better and we're clear about what we need to do.

The next question comes from Andrew Shepherd-Barron. Please go ahead. Your line is now open.

I'm assuming you can hear me. Two questions, if I may. One, on U.S. GAAP. Can you just talk through a little bit about what your sort of decision process is as to why or when or why not adopt it? And the second one is on Worka. I'm optimistic that at the CMD, you'll be talking about that as well. Can you sort of talk about -- I mean, is that the case? And what sort of things should we be looking out for at work in that CMD?

Do you want to, on U.S. GAAP, Charlie?

Yes, I'll start with that, and then Mark can cover Worka. So Andrew, basically, the valuation around U.S. GAAP is that we think that it will show the company's financial performance better than IFRS, in particular, better than IFRS 16. So for example, the IFRS 16, as you know, puts all the operating leases as net financial debt, U.S. GAAP still shows them on the balance sheet, but does not put it as net financial debt. And it sort of gives a better indication of the performance of the P&L in particular. Clearly, there's no difference to how we generate cash in the business. We're doing a great job of generating cash at the moment. As we said in these results, net debt almost down -- net financial debt almost down by GBP 100 million in the last 12 months. And -- we expect net financial debt to continue to reduce during the course of the year. So the U.S. GAAP change will not make any difference around that cash flow production. But at the same time, we think that we'll show the P&L in a much better way that investors can understand it more easily. And from investor soundings that we've made so far, it's been very well received. The decision-making process around that is we just need to work through that it's not going to produce any spirits results, but we're not expecting it to do sort of around things like financial covenants and the like. We don't think that it will. But at the same time, we want to be certain that it won't before we announce that we will be making that transition with certainty.

Okay. Thanks, Charlie. On Worka, you're absolutely right, Andrew, that we will enlarge a point this sort of division at the Capital Markets Day. And number one, basically, it's -- there does seem to be some confusion as to what it is. But essentially, it's a collection of services lines and digital businesses that provide services to the whole industry. That's what it is. And it's sort of all of those things added together in a single store for the industry to go to and to use. And it's a [ 15% ] margin business that will continue to grow as we both add services and add geographies to it, which we are doing at the moment through regular M&A pretty much each month, small additions that are building out the platform. So look, it will take time. We've explained that more at the CMD, but we're -- overall, we're happy with this investment, and we're happy that it will produce an excellent return for our investors over time, but it did need more and more development. In the meantime, it makes great cash flow. And it's a good third division. We've got 3 divisions here producing great cash flows now. We've just got to grow each one of them and continue to do that as we go through '24/'25.

Our next question comes from Michael Donnelly. Please go ahead. Your line is now open. Apologies for this take guys. It's if you can hear me, because it's not great. Okay.

Michael, you there?

No. Okay.

So we have a follow-up question from Steve Woolf. Steve, please go ahead. Your line is now open.

I think at the H1 stage, you said you've taken over about 50 WeWork locations during H1. I was just wondering what terms and deals are you making on those locations? Is that back to sort of the core business as it were with the traditional leases that are being renegotiated with landlords? Or has there been a change in that, and it's been shifted more to capital-light, more of those structures just thinking about that in the terms of the growth.

There's a whole variety of structures, but the majority of capital light. If not pricing capital, all of them are capital light, it's where the risk lie, most of the risk lie.

We have no further questions in queue. So I will hand back to Mark to conclude today's call.

Okay. Thank you all very much for joining us today. And as usual, Charlie and I will be available, if you've got any follow-up questions.