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

And thank you very much for joining us for our interim results presentation for the first 6 months of 2024. The first half of this year has been another period where we've confirmed our numbers very much on track. And we continue to consistently deliver what we said we were going to do. It also continues to demonstrate the underlying shift that we're seeing as more and more companies change towards a different way of working, platform working, which we are seeing growing in almost every part of the world today. So just to go back to the investment case, just to reconfirm our position, market leader in what will be a mega industry. As real estate changes from being a product that people have to put together, companies have to put together in order to use it as it turns -- real estate turns into a more productized industry. It will become a mega industry. That is the packaging of it and the selling of it, which will move away from the current model or the past model, which was one of it being brokered very complicated, very CapEx intensive to no CapEx, just OpEx, very easy to use for no matter how many people for how long that is the future of real estate. And in particular, the future of real estate in a digital world where people want to buy things in a digital way in an easy way. And we are the market leader in this field, and it is continuing to grow and gather momentum as we go through each year. The growth that we're doing, we're doing in the vast majority through capital-light growth. That means we're partnering with the investors in property in order to convert their properties into products that can be sold on a platform to people that want to work or companies that want their workers to work on the platform. And so this capital-light growth now, well, I think, well proven. You can see in the numbers today, Charlie will talk to them some more. And we're seeing really excellent results for ourselves, but more importantly, for our partners. As you can see, we've got a slide in that talks of the revenue ramp-up that we're delivering to investors who invest in properties. And bottom line on that, in a market where it's quite hard to just get rent, we're delivering pretty much universally the rent up to 4x the rent in the best performers. So it's a really good investment for property owners to partner with us and get ahead of the game and convert parts of their properties, sometimes all of their property into a more flexible, consumerized productized platform offer. We are delivering significant and growing cash flow as we grow. So Charlie will talk to it, we've broken out a bit more what we're investing in, but we're growing with very little capital going into the property investments that we used to do. So -- and that cash flow will just continue to grow into the future. And it's a really important thing. I think in this world that we're in is the actual net cash flow that we're producing for investors. That's what they can spend in the end, that is their return. We've got a real advantage in the global network, but much more importantly, national coverages. So when you look at what we're actually doing, countries like Italy, we just reached 100 centers. We expect Italy to be somewhere between 800 and 1,000 centers for rollout. We have very strong presence, of course, in Milan and Rome, but two dozen other cities across the country from north to south. If you're visiting Palermo on holiday, you'll find a center there, you can work from very soon. Places like Solano most of you probably don't know where that is, but you're going south into Italy. That's just Italy and that's happening in each of the countries across the world. Because this change is not limited to a single country or a single geography. This change is occurring worldwide. It's a technology-driven change. And it's a consumer-driven change. The consumers being the companies that are actually paying for the product. So coverage is really important in terms of -- it's not just about being in London in the U.K. It's about being all over the U.K. and in places that quite remote. We're just opening in Banff. If you know the geography of Aberdeenshire, you'll know Banff, not a high population. If you look at Midlands, just opening our third center in Leamington Spa. Again, this is the heart of England. This is the network really growing across England, Scotland, Ireland, et cetera. So that is a real advantage no one else has anything like the coverage that we have, both provincial and city. And we want to continue to grow to keep that competitive advantage. Half of our business in the U.S., I've got some questions this morning about the U.S. economy. Obviously, we're not economists. But what we can see in the U.S. is the most exciting growth in terms of U.S. companies changing over to this platform working. And we -- the U.S. is our, let's say, our north star in terms of what somewhere like Italy could be in the future. Or what we can see in Italy -- sorry, in the United States is a whole different dynamic. The U.S. has got so big now and the growth is so significant that it has completely different dynamics of scale, of cost advantage as we work the supply chain to open centers, foot partners at cheaper prices. And a variety of other new initiatives that help us -- help owners to get open more quickly. We're seeing more and more network users across the United States, the more centers we have, the more useful it is, the more national network users we get. And that's we'll be saying Italy in each country we're in. So -- but what is different there is the margin -- what is different is the customer makeup. It's the highest margin pretty much for any country we have, and it's really a vast scale and it's the fastest growing, not in terms of percentage growth because it's so big already, but in terms of numbers of centers added. And I think also one of the ingredients is that -- in that is the U.S. owners and investors are slightly more entrepreneurial than some more institutional countries. And so they're happy to investigate and take a chance after diligencing to try a different way to gain revenue. And the market for real estate there is particularly bad in some markets, so that helps them in that decision making. Structural cost advantage. I think, again, looking back at our business over the past 6 months or 18 months. We've been in a continuing inflationary economy. But through continued work by a significant team and with significant investment on the supply chain, we've managed to hold costs pretty flat, Charlie, against inflation everywhere, although less than it was, it's still there. And we keep finding new ways. The focus on it is allowing us to find more and more ways to be more efficient in everything we do. And the scale helps us get more buying power. We've introduced our own warehousing, our own logistics, many things that strip out costs, narrow the distance between a manufacturer of anything and ourselves. Now I'll give you an example, coffee. I've used it before. We're buying coffee direct in Colombia. We have it roasted. We ship it around the world, and we sell 100 million cups of coffee. That just transforms the margin from what we used to do, which was an espresso to what we do today, which is ground coffee that actually makes very good profits. That's 100 million cups is the size of a small coffee chain. That's just one example. But that continued focus on the many things that we do buy, there's more and more benefits from that as we go forward. We've also got an experienced management team. I think more importantly, we are investing in new management. So we have a very impressive young team. We've invested -- you can't see it in these numbers, but within the overhead, we invest more and more in both business development and product development. Business development is new ways to do things, new methods, which requires additional thinking and additional project management, change management from day-to-day operations. So again, in the past 18 months, and in particular, this year, a lot more focus and a lot more investment in how do we keep building the IP of the company into the future to take the opportunity that's in front of them to a different level in terms of the offer and then the performance. So a few numbers here. Look, it's growth around 3,700 units, 120 countries. We have signed up the 121st country, which is Montenegro. If you happen to be there, although I've never visited, but they tell me it's a really great place. Look, I've got asked questions about what are we focused on. There's another 70, 80 countries and territories to do. It's not a major focus, but we are doing them. Our customers are asking for universal coverage and a lot of these outposts in particular in Africa, they would like to have representation, and we would like to provide those. But really, the major focus comes back to the major countries in the world, creating very strong national platforms and being very good in each country and getting more and more national companies and companies with all kinds using that network. So a lot more to come here. And I think the more what's clear, and I mentioned it already with the U.S., the greater the volume of centers, the more the coverage in terms of towns covered, not necessarily just numbers of centers, really gives us strength into the business and starts to transform the margin. Competition. Well, what we've opened this year is equal to pretty much everyone on that page by the top 2. And what we signed up completely swamps it. So really, the competition is it's super fragmented. There's some very good offers, but they've got one or two centers. A lot of them don't make very much margin because they have no scale and the offer isn't right, it's not set up right. And some of that growth, I must say, is what we call roll-ins of existing operators probably about 5% of our growth is that, and that is poor performing competitors. They put the investment in, can be landlords put the investment in. I think it's a good idea, but they can't operate it. This is a tough business. It's not an easy business, although it may look like it is. And you -- many of the companies on here have got into difficulty by miscalculating the business model and what it is and what it isn't. So in terms of what we're doing, size is important, but you have to use it. So this is about getting more and more people, more and more companies using the network. It's not about single site. A lot of people have single site. It's about us selling the network and it's an important focus for our sales team. Look, the future. Now, you can see our minute value in the middle there at $2 billion. And these two companies either side, Uber and Airbnb, they are similar to what we're doing. We, in particular, as we start to do management contracts and partnering with landlords to effectively create a middle man between vast amount of real estate that's out there and the huge number of customers that do want to use real estate. It's a platform business. It's what consumers want to use. Consumers are what makes Airbnb what it is, and consumers make Uber what it is. It's a convenient service. I was going to say Uber's everywhere you want it. It's not actually, but it is in the big cities, and it's a great service. That's what it's about. And that is what we are about in the middle there. That is why, we think that the future, as we continue to grow, as what we are doing becomes more and more mainstream and certainly, research, if you look at the people, universities and trade institutions researching what we're doing. They're all coming to similar conclusions that this is a way -- this is the way that real estate will go in the future and people want to consume it as a product on a platform rather than put it together themselves. So we need to, obviously, our valuation to come up. And as we continue to grow, we expect that to happen. Consistent delivery and producing cash all the way, we think the investment proposition has a lot of future runway. Okay. So just bringing it all together. This first half is a half where we just continued to deliver 465 locations signed, a lot of openings. So the openings are starting to catch up with the signings. The sort of time delay is starting to narrow, and we're going to get a lot more openings this year. The openings are converting into RevPAR and RevPAR is turning into fees and Charlie is going to talk about that. Overall, fee income grew 23%. Fee income, Managed & Franchised and system revenue growth in this group, 13%. And company-owned, again, this is all about improvements in the margin. And here, we had like-for-like growth 6% -- 5%. 5% in open enters. And we expect to see full year continued improvement in the margin as we really grind out the results of the existing investment in all of those centers. And that we can see month-on-month coming through. Great. I think a great job by our team in the first half also in completely refinancing the business, ahead of schedule, good terms, an investment grade bond rating helpful and reasonable interest rates. I would have liked them to be lower, but they're reasonable. They're not usurious as some people are seeing. So I think a good job. Balance sheet is in shape, financing in shape, keep the cash flow coming, keep growing the business, and we keep on delivering the promise. The trend is pulling everything along. So we just got to continue doing a job in this secular trend that is changing real estate overall. Overall, it's -- we have a target to get to $1 billion of EBITDA and first half progress towards that 2x the first half is more '23. Cash production coming out of that continues to build. And we're confident on this that just continued delivery each year will get us to this point. We're really focused on doing it. And with that, Charlie, you can talk to how we get there financially. Thank you.

So as you've heard from Mark, the first half of this year has been very strong from IWG, and we're very pleased with these results. We generated over $100 million of cash before growth CapEx and expect all three business to continue generating cash through the rest of this year. As we stated before, our growth now comes with far lower CapEx. Our total CapEx in the first half continued to reduce and came in at $79 million, as we continue to cut our own spending on growth CapEx as our Managed & Franchised business grows. This trend should continue. We've continuously said that our priority is to pay down debt until we're at 1x net debt to EBITDA, and this continues. Over the past 12 months, we've reduced our net debt by further [indiscernible] million at the end of June. As Mark mentioned earlier, we issued an inaugural investment-grade bond in June. And so our funding is now longer in duration than it was previously with a corporate bond maturing in 2030 and a smaller RCF with a 2029 maturity. As part of the transaction, we also bought back 1/3 of our convertible bond and the investors rolled into the new corporate bond as well. All of this is being delivered profitably. We generated EBITDA of plus 13% year-on-year at $274 million and importantly, returned to positive earnings for the first time in a while. We've also announced an interim dividend of $0.43 per share. As you can see from Slide 12, our three divisions are all contributing well towards the group results in line with our strategy. Managed & Franchised saw system revenue growth of 15% and fee income growth of 23%. EBITDA is only negative here due to the way that we allocate central cost based on system revenue. And this is an important point overall because this will continue as that division grows relative to the other one, you'll start to see that allocation continue to move over. But actually, if I give you a sort of a small example of that, in finance, we've only added two employees for all of that reporting because we've automated the entire lot. So the actual increase in overhead on that division has been very, very margin on the back office stuff. Company owned and lease continues to see margin expansion as we drive efficiency and revenue from open centers grew by 5% in the period. Workers underlying earnings have also remained stable and continues to produce a lot of cash. This will result in a group EBITDA of $274 million. Managed & Franchised. The strategy for this is to continue the platform growth, and this momentum has been really good and grow the system revenue with it. As we mentioned on previous slide, fee income grew by 23% year-on-year to $35 million. Signings have continued at a very healthy rate and importantly, are now evolving to openings at pace. Signings and Managed & Franchised grew 19% year-over-year to 387 and room openings grew by over 170% year-on-year. So we're very much on track to open the new centers in line with our guided 10-month average. Clearly, eventually, the rate of room openings will trend the number of rooms being signed. The pipeline continues to build. At the end of June, we had 154,000 rooms open and 151,000 rooms in the pipeline. Alongside this, RevPAR also continues to evolve as expected and expand the network into more suburban and rural locations. When the current network and all the rooms in the pipeline are open and mature, this delivers an annual revenue of over $1 billion, and that's system revenue. One of the questions that I do ask about is, are we good at filling these things when we open them? And actually, this has been a huge success story. As we've shown, this chart shows how RevPAR has evolved from the Managed & Franchised partnerships we've opened since 2022. As we announced last year, we target $250 of RevPAR per room per month, and that was GBP 200 when we've mentioned last month, it translates through to $250 at maturity after 18 months. And as you can see from this chart, at 12 months, this is doing really, really well already. So sneak preview, we're actually doing pretty well at 18 months, but the cohort is quite small at the moment. So it's an early green shoots, but we expect to get there, and we'll update you next time on that. So we're really, really happy with how this is evolving. So huge growth in the signings, huge growth in the openings and also we're filling the things at the same time. Whilst the strategy for Managed & Franchised to grow the system revenue, the strategy for company-owned and leased business is to grow the margin and drive the margin higher by extracting efficiency gains and top line growth. The contribution margin for Company-Owned & Leased expanded by 260 basis points in the first half to just over 24% and contribution grew by 13% in the first half year-over-year, with revenue growth of open centers up 5%. We have and always will continue to add locations opportunistically, as Mark mentioned earlier, but all of these have far low capital intensity than we had historically. As you can see from the chart on Page 16, our maturity has always delivered very stable returns and margins across the cycle. This margin was 26.1% for the first half of 2024. We've been to 30% margins, and we fully intend to get there again. The main thing here is that growth is not a drag as it was previously because this division is remaining stable. As previously guided, revenues for Worka have been flat, but continue to produce over $100 million of cash flow. Worka was focused on the continued development of the platform services to capture the full value chain from the structural growth, resulting in the continued expansion of hybrid working. The Worka management team commits to delivering the benefits in the strategy, but it's not expected to be a key continuing to earnings growth in the short term. As I mentioned though, this division is still producing a lot of cash, but the platform delivery has been slightly later than we expected is the case with a lot of software development. CapEx. So total CapEx in the first half has fallen to $79 million versus $102 million for the first half of 2023. And as well as falling ,the shape of our CapEx is changing. Maintenance CapEx has been held broadly flat, but we continue to reduce our net growth CapEx as we grow by capital light and spending more of our CapEx on platforms and systems to yield efficiency gains and further products for the long term. So what does all this mean with the numbers? Underlying revenue growth combined with cost efficiencies has led to healthy margin expansion and EBITDA of $274 million for the half year, up 13% year-on-year and earnings of $0.16 per share. On the cash side, we continue to generate cash flow from business activities of $118 million for the first half of the year. Overall, we paid down almost $70 million of net debt during the period as well, in line with our strategy. Sustainability is very important for both IWG's customers and also ourselves. IWG empowers businesses and people to work more sustainably. And as a solution to global workforces and as a business, we're committed to ensuring our business activities achieved the highest level of environment, sustainability and it's central to everything that we do. IWG benefits as our customers do. And as they adopt hybrid working, the environment benefits substantially lower commuting. 100% of our workspace is a carbon neutral and we see this as a key differentiator versus everybody else who might compete with us. IWG is also AA rated by MSCI and IWG was also recently included in the U.K. FTSE for good Index, which we announced a few months ago. So in conclusion, what do we see for the second half of 2024 and beyond? In short, no changes to expectations and continuity for us is key. We continue to expect growth and net debt reduction through 2024. We have a medium run rate target of $1 billion of EBITDA, including strong cash flow production, and we expect the positive earnings to continue. We have made a successful transition to U.S. dollar our functional currency, and we also expect to announce the timing of our transition to U.S. GAAP during the second half. We're spending money on that project at the moment and have been for the last few month. And we've also announced a dividend of $0.43 per share. So overall, great first half, great foundation for continuing for the rest of 2024. And with that, very happy to take questions. Thank you.

It's Michael Donnelly from Investec. Just two questions from me. Charlie, you mentioned the, I think, the 10- and the 18-month number, so starting to open to revenue. But then I think, Mark, I may have misunderstood, but did you talk about a narrowing when you were talking about those two numbers earlier on? So that's my first question. And then the second one is small working cap outflow in the non landlord bit. Can you just help us understand what's behind that and what the full year working cap picture is likely to be?

Just on the narrowing, the sort of -- the openings are catching up with the signings. So the sort of gaps narrowing. We are working on narrowing. The first gap, which is the time it takes to open, and that's basically supply chain. It's quicker work on project management and so on. But you should still count 10 months from signing to opening. We'll let you know if it actually changes, but it's a focus. But then basically, openings are starting. They're almost there alongside signings. Charlie?

So on the working capital, this goes back to what we announced at the full year results and then you saw in the Q1 net debt balance. So this is where we have the systems cut over at year-end. So we had payables that we paid out in the first quarter that contributed to the flat overall net debt in the first quarter. And as you can see, we continue to pay down net debt, continue to generate cash that is continuation of the expected strategy with that.

Two questions, please. One, in terms of the kind of comments on overhead, Charlie, how internally do you look at the Company-Owned and Managed & Franchised business? And how should we look at it externally, is it best to think about contribution rather than EBITDA because EBITDA is maybe not the clearest picture. And then secondly, in terms of Company-Owned, obviously, the 5% revenue growth for open centers is very impressive. RevPAR was up 1% in the first half, I guess, what's the delta between that 5% and the 1%?

Yes. So starting off from the overhead. I would agree the contribution is probably the best way to look at that. So as I mentioned, we allocate the overhead just for the purpose of the reporting by system-wide revenue. So if you look at my time, for example, that is getting more disproportionately on a -- from a cost base is being put into or my costs being put into that bucket. So the way we think about it internally for what it's worth is we look at contribution and then the overhead for Company-owned and the Managed & Franchised is one single block. That's how we think about everything internally from that perspective. On the 5% revenue growth. I agree that that's been very impressive. The way that I think there are two things that are going on in that. One is whether you're looking at some average number of rooms opened over the period versus period end catch up with you on that later. But also there, when you get the new rooms coming in from sort of the bolt-on add-ons, clearly, you're not filling those to maturity instantly, they take some time to ramp up as well, which gives you a small dilution in the RevPAR as that happens, if that makes sense.

Samuel from Stifel. Two questions from me, please. First on capital light growth, obviously, very good progress with 465 deals signed in H1. Do you think that run rate continues in the second half or sort of accelerates integration next year? And then secondly, on Worka. I just wonder if you could give us any color on things that are going well in that business and things that may be proved to be slightly more difficult than expected.

Yes. Run rate growth, we expect it to continue into the second half and beyond. So we have big pipeline of unsigned deals. So we've got a lot to do, but good signs all through the first half. And what we're looking at is more and more repeat customers or partners who have a good experience and then do more. So we expect that to continue short answer. In terms of Worka, as Charlie said, Worka hasn't developed at the speed we would have liked. And that's partly caused by the platform development. This is a lot of software. It's been delayed. It's a very big project. It has taken quite a bit of CapEx to get it there. It will make a difference once it's there. And that has -- that's behind schedule, and that has affected some of our calculations. Underlying -- the underlying business is going well. We've already talked about older fixed contracts dropping off, that's past. It's now all about organic growth in the business and some inorganic growth we continue to bolt on very small acquisitions on to that platform to make it a more global offer. And yes, overall, look, I've said this many times, in the medium term, this will be a good investment, and it's an important part of the overall picture as it gives you a whole market view. In the short term, it's lower than our expectations. As Charlie said, still producing a lot of cash, but it's slower than our expectations.

As a reminder, if you're watching on the webcast, you can ask questions in the chat function. One question that has come in. The margin progression in Company-owned & Leased was very impressive in the first half. How do you expect the evolution in the second half and beyond?

So what I said in the first quarter, we had a great margin progression. Some of that was about 70 basis points of that. And I said at the time was a one-off. So we've continued to see that margin progression happen from Q1 into Q2 as well. Through the rest of the year, we continue to have a strong focus on both costs and the revenue in that division. So we expect the second half to be better than the first, but our overall guidance is just below 1 percentage point margin progression year-over-year.

Any other questions?

Just one more question that's come in online. Could you just remind the capital allocation policy, please, Charlie?

Yes. So capital allocation policy is focused on paying down net debt to 1x net debt to EBITDA. We have a progressive dividend that goes alongside that, which is last year was $0.01 per share. We expect that to be very literally progressive, but our focus right now is paying down that net debt, maintaining our investment-grade rating, that's very important to us for a number of reasons and then share the proceeds of growth with equity investors and debt investors when we get to 1x net debt to EBITDA and we'll announce sort of more on that when we get to that point.

Just one follow-up question. I've noticed, I guess, some smaller kind of I suppose people in your space or using your platform working with you. Are those people still running their incentives, but I guess, using your sales platform, do they sit with Managed & Franchised or are they kind of the variable rent piece in Company-owned?

They're Managed & Franchised, clearly. But they -- these would be roll-ins where they keep the brand name we're in fact running it. I mean, basically, they may have the same people. But the reason they've joined is they didn't have the right discipline to make proper margins from the business. And that is our experience, how do you make the required margin and the required margin is in the 30%, 35% range. That's where you need to be for new centers, that is -- that's where you need to be. And those are the skills we bring. It's not just scale, it's method. And so that is what you're seeing where the brand was actually a good one, but just the style of management was wrong.

And I guess as a follow-up, what share of Managed & Franchised are these roll-ins?

5% over the growth roughly. It's -- unless we do larger ones in any given month, but I think about, on average, you're thinking about 5% overall.

Two questions. The first one is on the signings run rate. It's a bit shy from the 1,000 target -- annual target of yours. Is it because the demand from the landlords is a bit weaker than you expected or is it your own decision to control it a little bit more? The second one is on the opening to -- signing store openings. Do you expect next year, your opening would be around 800 a year?

Sorry, second question, last question, what was that?

From signing openings, do you expect the opening rate will be around 800 centers from next year?

We haven't looked at it. So we'll come back to you, but it's whatever the 10 months is when you see them start to open. Coming back to momentum in signings. This is somewhat controlled by us. And we continue to expand our capacity to absorb. So we need to get supply chain in place and various other things to make sure that we're opening centers that can be successful. That is why you see the most openings in the U.S. and the other well-established countries where we've got the infrastructure in place to do a good job. So this, we are cautious, even though the management contracts, we're cautious. What we know is extremely important is that the partners we partner with are successful. Having said that, the run rate is a good run rate. Will it be 1,000 centers this year? You have to see what the second half looks like. But as I said earlier, the pipeline is strong. The number is good for the first half. So we expect second half to be a good one as well. And certainly, we aspire to do somewhere close to 1,000. But we wouldn't forecast that.

Mark, you partly covered this question earlier, but a question has come in. Have you seen any recent change in ancillary services in the U.S. specifically which would coincide with slower macro backdrop?

Short answer is no. We've seen strong demand. Again, in the U.S., we've got many questions on this from this morning from journalists because basically, there's a feeling that there's a U.S. slowdown. We're not seeing it in demand or conversion. And generally speaking, we would see these things if there was a slowdown. There's still a lot of money in the economy in the United States. There's still a lot of activity. And importantly, that's on the sort of growth side. I think on the other side, we see companies in the U.S. very focused on costs and the adoption rate in the U.S. and what we're doing is higher than you would find in many other countries. They are much more willing to change something. They're not -- they're less bound by convention or how they used to do things. So if they can find something that's cheaper that gives them more productivity that their people like, that's our products, where they want to be. Then they're much more likely to adopt more quickly. The U.S. lease cycle is quite a long cycle compared to others in Europe, for example. U.K. is the longest then it's U.S. So the lease cycle is also -- that sort of slows the change down. But as every month goes by, a year goes by, you will see -- you are seeing more and more conventional lease or conventional building vacancy as more people move to a flexible platform. And so the change is occurring. And it's happening fastest in the U.S. So what I'm saying, overall, it's hard to discern what's actually happening completely in the economy because you've got this trend towards more flexible working. You've got more companies than before focused on costs as opposed to cost and growth. They're very focused on costs. It's slightly harder, I would say, to get growth. And so demand continues to be strong and grow in the U.S. No change to services, the service makeup, they're not sort of economizing on things. We can't see no evidence of that. We're seeing growth across all the revenue lines. Any other questions? Excellent. Thank you all very much for coming. And as always, Richard, Charlie and myself will be available for any follow-up questions you may have. Thank you very much, indeed.