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

Good morning, and welcome to the International Workplace Group plc first quarter trading update. Hosting today's call will be Mark Dixon and Charlie Steel. This call is being recorded. I will now turn the call over to Mark to begin. Please go ahead.

Thank you. Good morning, and many thanks for joining us today to listen to our results for the first quarter of 2025. As a global market leader, we've continued to build our network, and with that, a moat around our business as we continue to sign and open significant numbers of locations to grow our network and the platform for our customers and our partners alike. To put the scale of the growth into context, in the last 12 months, we've added more locations to our network than several of our closest competitors combined have in total. The commercial market itself is changing as more and more companies and workers want to move to a more flexible and more platform way of working, and that is continuing. In spite of some of the stories you may read online or in the press about people coming back to offices per se, they are coming back to offices, but those offices are in completely different places to where they were before. The real change is people using technology to do commuting rather than bringing everyone together in inconvenient locations. So more people are working on platform. In fact, also, there was a growth in homeworking, but homeworking more and more is about support workers, back office people, very easily manageable jobs that can be done from anywhere, and that continues to grow. And it's a significant part of the growth of our business in the service area. What we do is good for companies, why do they seek it out? They're looking to become more capital-light. Pretty much universally, they're trying to become more capital-light. I had a meeting with the CFO of one of the largest companies in the world, in fact, certainly, one of the ones with the strongest cash flow, a tech business, huge cash flow, even they want to be capital-light. So they just don't want to be spending capital on things other than their core business. So they want to be capital light. They want to [ rentalize ] more of the cost and they certainly don't want long-term liabilities of any kind on their balance sheet. And this, by the way, was a company reporting under U.S. GAAP. IFRS 16 customers are even more aware of the problem of a balance sheet risk, balance sheet liabilities. And they also want flexibility in terms of where they can put their workers, where they can hire people and also just have outright flexibility in terms of whatever liabilities they take on. So we're very much in the right place at the right time. The overall trend towards a more outsourced and capital-light world is very much what we're part of. It's clear that for workers, it's also a great thing. And if you can give people back an hour or 2 hours a day, less commuting, you will clearly get workers that are happier. And many, many studies now showing that workers are more productive if their commute is less. But it's not about homework or office work. That sort of dialogue and narrative really is really off the mark. It's not what our customers are saying. If we then look at the investment side of our business, which is working with partners to grow the network. Here, we continue to see very strong demand. Our investor partners, the people that own the buildings and invest in the buildings can very much see our type of activity has been a good long-term investment that provides superior returns to whatever else they could do with the building, and that continues to grow, you can see that in this quarter result numbers. So really, we've got a unique proposition, both from our partner side of the business, but also from the customer side of the business and the user side of the business, and we've got excellent momentum and you can see that in these Q1 results. You can also find more and more research papers and it's well worth looking at them as they talk to this movement in workplace, which is about becoming more outsourced, about it becoming more and more about platform working as opposed to everyone being asked to come to a single place. And very much they're talking about it becoming the norm for the -- for a large percentage of the workers. Not for everyone, but a large percentage. Remember, there's 2 competing narratives here. One is property owners are saying everyone is going to come back to city centers. And the other narrative, which is the more research one, is about how workers want to work and how companies want to support their people. But what's clearly happening in our business and with our customers, and we have hundreds of customer conversations every day with significant corporations, is this is what they want. This is the way they are moving. So quite big changes in the macro at the beginning of this year with tariffs and more uncertainty. Look, so far, we haven't seen any changes, but we remain cautious. We're seeing the opposite to a negative effect. We actually saw record inquiries and sales in March. I think it's too early to say whether that's as a result of companies seeking flexibility because they don't know or was it just a good month. So we're obviously very happy with that, but we do remain cautious in terms of this global macro and -- but we can see that whilst that may affect demand at some point, it's not affecting demand at the moment. We think it will also help us get more supply. We think that less companies who want to seek out longer-term contracts will move more to the flexible, and owners will see that, owners of buildings, and will look to other options such as ours to create cash flow on their existing investments. Market potential here. We've said it many times, it is huge. It's not getting any smaller. We're well positioned to capture the market, and we are doing so in network growth and continued revenue growth. And we're very happy with this quarter and we're very happy with the momentum, in particular, as we kick off the year, and we think it's another important step forward on the journey. We continued to deliver, which is something that Charlie and Richard and I have talked about pretty much every quarter now for several years. And we can see the business working on all levels with network growing, coverage growing, fee revenue growing, and most importantly in these uncertain times, in fact, I say at all times, is increased cash flow production all the while focusing on returning cash to shareholders. Remember, the business generates cash, doesn't consume much cash these days. So it gives us the options now to do -- continue with our progressive dividend policy and include a share buyback, which we announced this morning that we will extend, Charlie will talk about this more, to $100 million. System-wide revenue up 2%. We're very happy with that. Capital-light strategy continues to deliver. Lots of new locations signed. We're catching up more and more with the openings, which was important. And then critically converting openings into full centers, which create revenue, which drive the fees. And all of that good in that area. Company-owned, up 3% on open center. Remember, this is all about margin target and we continue to edge closer to our target margin here, which is at 30%. So with that, I won't talk about any more numbers. Charlie, I'll leave that to you. Charlie Steel, our CFO, is going to run through in bit more detail on the numbers.

Great. Thanks very much, Mark. As Mark said, Q1 saw revenue momentum year-over-year and we delivered system-wide revenue of $1.057 billion, representing 2% growth. Our business continues to deliver in line with what we have previously communicated to the market, that is fee income, growth and management franchise, margin growth in company-owned as Mark just mentioned, and cash flow generation and continued delevering. More signings and openings in 2025 and 2024, so far, and we continued to see that momentum going into April as well. In line with our capital allocation policy, we're sharing the proceeds of our business with debt and equity holders whilst maintaining a commitment to the investment-grade BBB flat credit rating. Our Managed & Franchised business delivered year-over-year system revenue growth of 23%, driving fee income growth of 44% or $23 million. System revenue is evolving as expected. As we previously outlined, it takes an average of 10 months from signing to opening and then a further 18 months to revenue maturity. We exited Q1 2025 with 44% more rooms open than at the end of Q1 2024 with over 200,000 rooms, and we have signed a further 192,000 rooms that are not yet open. RevPAR is also evolving as expected. The results of this pipeline is that once all of these nearly 400,000 rooms have opened and matured, the system revenue generated by the Managed & Franchised business is expected to be $1.5 billion per year, which in turn will generate a very healthy fee income and cash flow. The Company-owned division saw a return to reported revenue growth, driven by 3% growth in revenue from open centers. As we've said previously and as Mark just mentioned as well, we'll continue to manage the estate for margin and margins continue to expand on a year-over-year basis. Note that we continue to sign and open new locations in this business, but the vast majority of these have no CapEx requirements from the company and no minimum leases. In line with our guidance [ re signing ] and opening more locations in 2025 than 2024. We signed 6% more locations across the IWG Network in Q1 and opened 16% more as we continued to expand our networking coverage. Digital & Professional Services saw underlying revenue growth of 2%. Reported revenues have been impacted by the exit contract that we mentioned before, and it's worth noting this contract will be -- will impact reported revenues throughout 2025, but the impact by Q4 will be minimal and has been minimal in Q1 as well. Our capital allocation policy has been very clear since its introduction at the Investor Day in December 2023. Cash generation has improved markedly and it's pleasing to report that net debt has fallen by $83 million since the end of Q1 2024 and fell further during the first quarter of 2025 to $708 million despite the $10 million of equity we bought back in Q1. This strong cash generation and deleveraging has resulted in the group increasing the size of the buyback from the already announced $50 million to $100 million this morning. Whilst the group's activities are not directly impacted by trade tariffs, we are cautious given the macroeconomic uncertainty and volatility. As Mark mentioned earlier, we have not seen any impact on our business. March is a record sales month in the U.S. and globally and lead indicators such as [ tourism ] inquiries are at an all-time high in the U.S. Accordingly, we reiterate our guidance as outlined with the full year results on the 4th of March, and that is that we expect pre-IFRS 16 EBITDA for 2025 to be in the range of $580 million to $620 million on a constant currency basis. Net debt-to-EBITDA as a ratio continues to fall. Center openings and signings above the 2024 levels. We maintain our commitment to maintaining an investment-grade credit rating at BBB flat and medium-term EBITDA guidance of $1 billion. We expect U.S. GAAP to be implemented for the half year 2025 results and we will host investor workshops to discuss the impact of these changes before the interim results. And thank you very much for that. And now with that, we hand over to Q&A.

[Operator Instructions] Our first question comes from Michael Donnelly.

Mark, the last time you spoke to us, you mentioned some exciting projects in workplace consulting that I think no one else was doing at the time. Can you talk to us about how that demand specifically is developing within Digital Services over the first quarter?

It's looking -- sure, it's quite small. Charlie, numbers there. I think it makes $5 million, $6 million, something like that.

Yes, it's a few million. It's definitely not double-digit millions.

No, it's low sort of single-digit millions, but we're only doing it today here, Michael, in the U.S. and the U.K. We're expanding that globally. So look, it's -- consulting is not necessarily a high-margin business, but it's a business that generates more business for the group. So whilst it's profitable, it's more people intensive, but it sort of helps companies make the change from doing what they were doing to a new sort of outsourced platform and is very useful from that point of view.

Our next question comes from Daniel Cowan.

Two questions, please. Firstly, on net debt and the share buybacks, where would you think we should think about net debt for the year-end this year based on the new share buyback amount you've announced this morning? And the second question is on fee income within the Company-owned segment, please. Remember -- I remember that in 2024, that was down year-on-year. Have you seen growth reemerge in that segment in Q1 following the normalization last year, please?

Yes. So Dan, first of all, on the net debt, I'd expect net debt at year-end to be around $700 million mark. As I said, we continue to expect deleveraging on a net debt-to-EBITDA basis throughout this year, but we'll see the majority of that delevering coming from EBITDA growth rather than net debt reduction. However, as we say in the statement and this is very important, if we start to see changes in the cash flow generation of the business, we'd slow down the share buyback to maintain that delevering profile and the credit rating. Those 2 things trump the rate of share buybacks. But as I said so far, we're not seeing that and that's the reason why we've increased the share buyback today. In terms of the fee income, I think you said fee income within Company-owned, so I'm not entirely sure what you're talking about. Are you talking about the capital-light centers within Company-owned or something else?

No, no. I just recall that in addition to the workstation revenue that you also have the ancillary services that you charge to your tenants. And that's what I'm asking about specifically, the sort of fees for ancillary services, please.

Overall Charlie, with -- the answer is we're 3% up on open center basis. So there are -- your 3% up revenue, [indiscernible] you've got closures and openings in there and the important thing on there is the progress of the margin. That is what that focus should be. And so if you've got a 3% open center revenue growth, that is helpful.

But I think, Dan, when you're thinking about the ancillary revenue that goes with the Company-owned revenue, that's been performing very well. We've seen some good momentum, in particular, around things like short-term meeting rooms and office space as well.

Our next question is from Steve Woolf.

Steve? Are you there?

Yes. That might help. There we go. Just to follow up on that Company-owned section, the open center growth of 3%. Just trying to get a sense of where that might have come from, improvements in utilization, whether that's pricing? So any comments around pricing where rent has gone up to help alongside that margin point. But yes, the 3%, any breakdown you can give of that to start with. And then the evolution of the Managed & Franchised, are we still seeing that principally coming from the developments of landlords? Or has there been a sort of higher uptake of the private entrepreneurs section? And then thirdly, in terms of the pricing overall, just any thoughts you could give there. And then the regional expansion on the Managed & Franchised, is that still principally America? Would we put 50% of that in the U.S.? Or is it far more broad than that?

Starting on the back ones first. So Charlie, I might go -- so it's mostly landlord, Steve, not private. That is we've got people coming back and doing more, but they're mainly landlords. We are expanding the type of landlords. We're getting really -- some really good traction here with repeat business and new entrants. The makeup of the growth is changing in a good way. So we're still doing a large number in the United States, but we're starting to now see more accelerated signatures, for example, in larger Europe and some parts of Asia. So we're starting to get more of a balance. I think it's fair to say, Charlie, that -- just trying to remember the numbers that it was more than half would have come from the U.S. Now whilst the U.S. is still doing really good numbers, it's [ balanced up ] where we've got more network growth coming in, in Europe and some Asian countries, which is exciting in that. What we've done here is there's more investment gone in and we've improved the management -- many, many things actually to pick those up in these countries. So it is changing in a good way. Overall, the key thing is to keep the growth rates, improving it wherever possible. Our ambition is to do in excess of what we're doing at the moment. And whilst we're saying, I think this year, Charlie, what's that guidance here?

It's just higher than last year.

Higher than last year. Again, we'd like to do that more. So remember, this is quite a new program. It's, what is it, 2 years old, 2.5 years old. We keep improving it. Some of the improvements we've been -- we've invested more in the team and in the structure and we've learned more about it, and that's starting to come through in improved numbers. So yes. That's good. I think then coming back to the increase in revenue, it's a bit of everything. It's a big mix thing, but it's a bit of price, Charlie, a bit of occupancy and a bit of service. I mean, 3% is small, but it's helpful. The key thing is costs, Charlie, what are we saying about costs?

We haven't given any cost guidance, but where we are on cost so far is pretty much flat year-over-year at the moment.

That's the kit -- so overall, Steve, and this is again, we're very focused on the cost, and we've got -- rents are not necessarily moving in an upward direction, let's say. Some are, this is -- again, it's all mix. It's all to do with inflation, index leases, not indexed. But overall, increases being absorbed by decreases and better cost control and all sorts of things. The key thing is translating performance into higher margin from the company, and it's a key deliverable for us over the next couple of years.

Perfect. That's great.

And finally on that, I'd, say again, within the Company-owned, you've got things closing and things opening. We're not breaking those out. We look at that, but we're not sort of trying to bore our investors with asking them to look at it, but -- and so you're improving the quality of the company on the whole time by adding things in that are much more like management contracts, that are much more -- they have a lot of very attractive aspects and very low, if not no, CapEx. So the CapEx is the thing that's really different. Anything to add, Charlie, on that?

Yes, nothing else.

Okay. Thank you. [Operator Instructions] Our next question comes from Samuel Dindol.

I hope you can hear me?

Yes, we can hear.

Two questions from me, please. First on the Digital & Professional Services, are you able to give a sense of what's going on under the surface? I mean, the [ work ] are out now up and running or any color you can give there would be great. . And then secondly, on the buyback, should we see that as an ongoing program and you sort of incrementally add to it through the year as your cash flow continues to improve through the evolution of the business? Or any thoughts on that would be great.

Charlie, do you want to do a buyback and I'll do Pro Services...

So on the buyback, look, we definitely do want to see that as an ongoing program. I'd love to increase it again. When we first announced the $50 million at the full year, we just wanted to get going with it, show that we can buy back a decent amount of shares. We've shown that we can do that already. It would be wonderful to be able to announce further buybacks at the half year if we feel comfortable with that program.

And just dealing with the Professional Services part and Digital, lots of activity here, Samuel, and we're getting some good traction that will give us more revenue growth as we go through the year. We've invested more. We've saved some costs. We've streamlined some of the operations, but we are confident this not only is a very important part of the overall offer that it will become a sort of third leg as we said from the beginning of revenue growth and profit contribution in the years to come. And the short answer here is we're gaining momentum. It will take time for that to come through into the numbers. And we've certainly got -- you've got legacy things that we have to keep talking about. But underlying, I think this business is now starting to look in great shape. And there are multiple platforms, just to be clear, it's not 1 platform. There's lots of them. And the key thing here is sort of app usage and more companies taking the app. That's what counts here. And we talked earlier a few -- I talked about consulting. If you go back to the previous results, the full year, you'll see on there an excerpt from our sort of presentation to customers. There, you'll see the whole range of services that we do. And what's happening is customers are buying more and more of the range. They're less seeing us as space provider or a service provider only. They're starting to buy the fuller range of the offer, and we can see quite strong demand here. But it takes time to convert this into real revenue improvements.

Thank you. We have no further questions. So I'll now hand back to Mark for closing remarks.

Okay. Thank you all very much for joining us this morning. And as usual, we'll be available for questions and follow-ups as and when required. Appreciate your time. Thanks very much.

Thank you. This now concludes the update.