Servcorp Limited (SRV) Earnings Call Transcript & Summary

Good afternoon to whoever is at the other end of this. You've all seen the numbers, so we'll do a quick run through here. If somebody want to flick it through. Yes, it's pretty simple. I mean if you look at this day and age in the age of [indiscernible], the only thing you should look at, in my view, is free cash. And so if you continue to produce cash and you don't run-up debt -- can somebody keep rolling that? Then your corporation should be okay. And Servcorp produced $66 million -- forget the disclaimer, produced $66 million in free cash. Keep going, guys, whoever this is, until I tell you to stop. So -- and so your underlying cash is $66 million. Healthy cash flow. Okay, keep going. Global footprint, well, you can stop there, I'll talk very briefly about the global footprint. I have a view that the market is actually -- thank you, good -- consolidating. And that 25% to 30% of all operators will go out of business within the next 2 years for a lot of reasons. Mainly their business model was flawed because they all had too much co-working, and we have about 10% of co-working space, and they had put very little investment into IT infrastructure. And so therefore, their ability to run operations from people working from home was quite limited. And I will come to the Servcorp landing page, and I'll explain our virtual product soon. All right. Of course, Regus will survive and some of the other well-funded operations like JustCo will survive this pandemic. But at the end of it, there will be consolidation. We will continue only to grow organically because there are barriers to entry and the barriers to entry are the IT infrastructure. And the team that you need to delegate to, you need secure WiFi, and all those things that Servcorp already has that we talk about every single year. And we'll start to grow organically because we have to build our own centers because our centers are built to a model that is proven to produce profits everywhere but America. Keep going. Co-working, keep going. We've got plenty of capacity. Keep going. Global overview, well, I guess you've all read that. North Asia produced the majority of the free cash. The U.S.A. lost the majority of the free cash. And others, the Middle East, I guess, came in second after around North Asia. And then came the United Kingdom, which outperformed. Keep going. The Australia and New Zealand results were pretty abysmal as were part of Southeast Asia, but they were -- and they're continuing to struggle. I think that the division of the country into 6 geographic areas is something that was unthought of just 12 months ago, and we could imagine there being lockdowns in China where people accepted the word of the government because we always looked at that market completely separately as an autocratic communist, centralized, controlled government. My view is that Australia has done a worst job than anybody else in the world. They can all talk about how they've controlled the virus, but it's more about political control by individuals that have impinged on the freedoms of the average Aussie, continue to, and are destroying small business. Now in Australia, we're still profitable and we're still cash-positive, but the impost placed on all companies by the recent lockdown of Victoria is substantial. And if they lock it down tight and declare a state of emergency running for years so that our Labor Premier has dictatorial powers, I think it will be a bit of a disaster for Victoria and will be an absolute disaster for Australia. As for having a head office in Australia, when you can't travel to other countries because they have to deal with 6 states rather than 1 country, it is just, once again, another impost in trying to run a business out of Australia. In fact, it has become more obvious, the difficulties any corporation that has the head office in this country has with the advent of coronavirus. And for me, that is probably the biggest impairment to our ability to grow at a fairly rapid rate when this finishes globally. North Asia, we've already talked about. Europe and Middle East. The U.S., I mean, U.S. always goes the opposite way. Dividend, well -- and I don't know why we've got no money left buying 50% of Servcorp. We paid $301 million in dividends. We've never raised anything like that. So we paid 188.46% back to the shareholders on their investments. We continue to pay dividends. We've got a market cap of $200 million. We produced $66 million in free cash. We paid a dividend of $0.20. It's okay. So that I think the only people that I ever know of that pay a 10% dividend are those that are trying to support their share price because they're about to go broke. But I think if Servcorp goes broke, there's going to be a lot of tears shed in the corporate world in this country. The next 12 months, well, if somebody can tell me about that, I'd like to read that. I didn't write it. So okay. Medium-term outlook, okay. Good. I guess that was written by the Board. Oh, questions and answers. Well, look at that. Can somebody put the landing page up. So guys, can you just scroll up? So -- no, I want the landing page. That's the main page. I'll take questions, then I'll show you the landing page because that's the secret of this whole thing. So if you have a look at the Servcorp work-from-home product, you get 3 hours a day co-working, so that's the sort of space. You get an office available when you need it. If you take premium work from office, you get the top line batch and so you got a whole team. You got a [indiscernible] a month where you can use an office in a building like this. You get 3 days [indiscernible] 3 days office use in any other Servcorp location, where you answer your phones in your company name. We put them through to you if you're working from home or to your mobile if you're just down on the beach. You've got an office when you need it, you've got a powerful address that you can use in any one of 53 or 54 major cities around the world. And you can do all that for between $300 and $600 a month. And every small business starts as a big business. And if you need more office space, we make it available. So we've got over 50,000 of these little guys which we talk about. And nobody else has ever tried to cater to them, whereas we've been catering to them for 40 years. Okay. That's -- I don't have anything else to say. Anybody got any questions?

Yes?

[indiscernible]

New offices coming up this year is about the same as last year. But the sales rate in offices is a little slower, but not as bad as it was. Saw that in April, I think, it was, the number of offices that we normally sell in a month is about 220 and it dropped to 59. And it's back up to an area where our occupancy is pretty stable. It's very difficult to tell whether it's going up or down, but it's no disaster. And virtual office is probably up. Working from home stuff is probably up between 10% and 20%, depending upon the geographic location. And I think that somewhere in there that in one of these reports, they said that we would break square. But if you think about break square, Servcorp's depreciation is between $24 million and $30 million a year. So break square should theoretically mean unless we blow it all on the currencies, which is possible. But we'll be $30 million ahead on the cash line. And if we make $10 million, which one would hope we would do because at our current run rate we'll exceed that comfortably well, we'll do a lot better than that. Then you make $40 million in free cash which is no disaster.

[indiscernible]

Say again?

Your guidance [indiscernible].

Did you all read that? I didn't think I read that out. Guidance was to grow our profit this year. I mean, that's probably something, I think, misreading my mind. My answer is that your underlying profit, I think they said would break square, didn't they? What did they say in the Board pipe? Can you go back? Somebody? I did read it. Can somebody grab it off my desk? I don't have a secretary, and I always need a secretary.

Underwriting business [indiscernible].

Yes, free cash. Well, I think -- look, if you ask me, there'd be no way I would project that our free cash would grow past $66 million in the next year. And it's too -- it's impossible to see. But if you ask me whether we're going to make profits, I would say, yes. I don't think there's any chance that we won't make profits. And that even if we make $10 million, your free cash will be about $40 million. But I mean, this market's a bit -- it's not the market that worries me, actually, it's the politicians. I mean these politicians have G7 and G20 meetings to talk about the financial problems and then they'd blow all the economic markets in the world up, and they don't even have a meeting to talk about it. Yes, we don't know? Well, I got nothing else to say. Anybody else got any questions?

[indiscernible]

The competition is pretty fierce. And so in my view, a lot of it depends upon management. And so that if people -- I tell this my team all the time, if you have a look at it and see that it's only a problem that you need to solve, it's not going to cause our demise because we have 50,000 guys that work from home. We can be competitive on a price basis. The U.S. is probably the worst because it sits at under 50%. And so if you take the U.S. out, we're up over 70% and we're holding at that. Australia's performance, dragged down by Victoria as much as anything else, is pretty abysmal. And so they're in the 60s and so -- in the low 60s side, so I just look at it and go. I think that they will be competitive, which is -- as I look at our numbers, I think anybody that's exposed to Victoria in a big way has a lot of problems emerging out of that because of the government, the way they handle it. I think if you're in Australia, you've got a few problems. I think if you're in North Asia and even Southeast Asia, you're probably in a better position because, politically, and I noticed everybody here is in a mask, those guys wear masks religiously. They play by the rules. And there's a bit of a panic in Japan because they are up around 1,000 new cases, but they've got 34 million people in Tokyo, and they're starting to open their borders up. And most definitely, they haven't locked -- other than really specific outbreaks in geographical regions, they don't lock the place down. So you can read here that there's a recession in Japan, but it's not my experience. And I'm finding the same in the United Kingdom and in parts of the Middle East, particularly Riyadh. And it often goes with management. I think our management in Qatar is great. David in Riyadh is pretty good. So it's not as patchy as one would think. If you take out America, I think we're going to sit at an average 70%.

And you spoke about your [indiscernible]. There's obviously a lot more sort of market shift changes [indiscernible] overflows from last year. So there was [indiscernible]?

Everybody wants to get out of the enterprise market business because I think big business is moving into space, the -- like type of space that we provide. To start with, I don't think that's a business we have ever been in and nor do I think that we're in it now. And so that we will quote, and we can cater to them because we have the IT capabilities to do it. But enterprise space is not a high-margin space. And people say there's no barrier to entry. There's a massive barrier to entry into this business if you're going to do it correctly, and so that WeWork looked good. And when I first went there, I was so excited about WeWork, I thought, man, this is just fantastic because it was 4:30 and they had a [indiscernible]. And so that was exciting. But they don't have any telephone-answering. They didn't have a team to delegate to. There had none of the things that you -- that a small business absolutely needs to grow. They need a powerful address. They need somebody to answer their telephones. They need somebody to delegate to, otherwise they're going to do all the small s***ty jobs. So it looked good/felt good, was never going to work. And so I still think that that's the case. And then everybody raced into enterprise. I think Executive Centre's moving towards enterprise. I think Regus went to enterprise, JustCo aims for enterprise. But every big business was a small business. And so people have to start. And when you look at the number of people that work for private companies, small private companies, they exceed the number that work for the big guys. And while we will do it, we will never sacrifice margin to do it. And I think that the other thing that is missed is that my view is -- we used to call it click the ticket, but it's now called subscription businesses, the way the profitability. And I think that we're a subscription business, we've got these thousands of people that pay us a little bit each month. I think the opportunities in the next 2 years are going to be quite substantial because while many of the landlords, in particularly Dexus giving us a hard time -- have we got those slides up, the Dexus slides? Can you find -- all right? Have it? All right. So if you know the address, this is -- was the front of our building, right? And this is what we've got. And when they sold it to us, they told us it's a 5-star building and was going to stay that way. Keep going. That's the entrance where the Theater Royal was, that's the current. That's the steps for Martin Place. That's the council -- so we're not looking for any help, real help from Dexus from a coronavirus perspective, but we would like them to either drop the rent or, that's the way it looked. You should have a look at it now. That's the way it looks. The big Dexus sign. If I was Dexus, I'd hide that bloody sign. I wouldn't put it up on that [indiscernible]. And so I guess, of all the landlords in the world, maybe we have our problems in Australia, but we're in 4 or 5 Dexus buildings, they're probably the worst and the toughest. So they're the bully boys on the street. I've told them, so it's okay, I'm not talking out of school. I probably am, but we're not in a bit of a fight with them. But they're the only -- out of 120 landlords around the world, the only one we're fighting with would have to be Dexus, and it happens to be in our hometown. But I think that time's on our side because I think the rents will drop. Some of the incentives have gone from 15% to 30% in pretty rapid time. But I think they'll probably go at 40%. And they're not going to drop their real rent because analysts and everybody else has allowed them to give 30% to 40% rent incentive and get cap up at the face rent. So I guess, they'll continue to do that. So really, incentives that will increase, but the rentals will probably stay the same. And so my view is if there is rationalization within the market, so 25% disappear, rents drop 40%, and we've still got $100 million in the bank and a system that works, taking it that we can train our management team, we should have some great opportunities. That was that? See you. No other questions? Wonderful. It's a bit early for beer. What time is it? It's 5:00. Nobody's got any questions? What did you think of the dividend? None of you said, "Hey, gee, that's not bad in this market." Sure?

[indiscernible]

You wouldn't try to make it, however. I think that we need to save our pennies for some time in the future. I got to have a look and see how it [ went ] today.

Will you do [indiscernible]?

It depends on the term. But the answer, yes, is we have been as generous as you can be. And so it's a bit of a balancing act, right, so that we ask our landlords for relief and then our tenants ask us for relief, how do you balance the 2. We've tried. But the problem that you have, if you've got short-term space, as WeWork and some of these guys are finding out, is that a big landlord can sue a guy like us. He may or may not win, but he can. But it's very difficult to sue a guy that's on 2 to 3 months tenancy because he just walks. And if there are travel restrictions or lockdowns so that people can't get to work or get to their buildings, then it's very difficult to force them to pay 100% of their rent. And so while our collections are well above 90% this -- it's still a lot higher, the bad debt ratio, than it was. But a lot of these little guys are pretty straight. And if they've needed to, they've done a deal. And if we're being totally locked down, we've been pretty generous. Look, if you look at the amount that we're holding from the landlords, which I believe that we should remain holding because I think that finally we'll get most of it. I think. I don't know. I'm just -- this is just -- they could all call the guarantees and kick us out of a few floors, I don't know. But I'm anything but scared of the landlords because I think times are on our side because the market is going this way. And if the market was going up, it would be -- the boot would be on the other foot. So they've got to take it as they get it. And so while I can cry over America and say, well, we lost between $70 million and $100 million, depending upon which way you count it, it's been a disaster. Conversely, it's been pretty good because I would think that Servcorp would have grown its co-working footprint at least 3x the speed it did, which means we would have spent, in my view, between $120 million and $180 million, getting it up and running just to walk into the coronavirus, which is what's happened to WeWork and to Regus and to JustCo. And no matter how well they've managed, the -- what's happened in the world has been fairly tough. So -- WeWork deserved it. Regus is a reasonable sort of operator, but they run on their margin. And all these guys that run on enterprise. I mean if you look at Regus' numbers, it seems as if they are holding about GBP 100 million worth of rent, too, so that their -- our accounts controller over there is holding up 2 fingers. I don't know whether she's going -- whether they're like this or whether they're like this. But I guess she's trying to say, 200 million, I hope she is. The answer is I'm conservative. I know what the number is, you guys think. But I don't think that you can be sure that's the whole number. My view is that they're probably holding -- they're probably paying credit of 60 days and they'd be holding about GBP 100 million in rent. That is only me looking at it. If we look at the rent we hold, our free cash could be as high as $81 million, which you would have seen in the $81 million number, so that's where it comes from. So that money that isn't yet ours. The fight with Dexus is not over coronavirus, it's over this building that we've got, which is a bit s***ty. I don't know, I think it's okay. I mean I'm not scared about the future. I'm not a seller. I'm -- if I'm allowed, probably a little buyer and just need a few more top up.

And where do you see the opportunity [indiscernible]? What's the approach you've taken in that [indiscernible]?

Well, if you're right, you want maximum -- if you're right, you want maximum advantage. I don't want the maximum advantage to be really honest, because the maximum advantage is too big for us to run with our current infrastructure and our ability to grow organically out of our own cash flow. So you will go -- there'll be a lot of reasonably high paid young people. So this year, for the first time, we paid one of our GMs over $1 million. You've got to wait and read the annual report to see all that. But my view is that you build your business under you and the opportunities are so immense that if the management is confident and gets to understand how the market works and a lot of our management doesn't, then they can build a business under them that will be ginormous. And when I say they're not geographically tied, I mean, if you take Tokyo once again, we said 34 million people, 12 million people in Osaka, we haven't expanded around up at Benelux area through Belgium, Antwerp, The Hague, those areas are all really close and on the TGV. We -- but we're not going to do in America where we're just going to run dots all over the map and then try to run it. We're going to do them one at a time in geographic areas, and I'll build them where I think I've got confident management to run them. And that's pretty well how we'll go. We're not in a hurry. I mean, rephrase that. We're in a hurry but we're not in a desperate hurry. So wherever I get management, I'll fund it to run it. And we should pretty easily make $100 million out of this business when you see it coming back, one guesses. If you're good, you're going to be good.

One last question before we [indiscernible].

I need to put it in commercial technical terms. It looks like s**t. But give us a bit of time. And I think that the general manager in the U.S. is under a lot of pressure. She's good. She's tough. I think she'll be successful, but a lot of pressure there because she inherited -- unless, it's the only way to put it.

[indiscernible].

No. I have not tried it with Servcorp people. She ran -- worked with Regus for 18 years and she worked for...

Serendipity.

Serendipity, where they built from 12 to 32 centers just on the East Coast. She's a New Yorker. She's probably 50, I'm guessing. Sorry if I'm wrong, if she's listening, I don't know. I go into so much trouble from my comments, man. You're not allowed to mention ages -- the age or [indiscernible], it's banned. Unless you want to create eating disorders and stress.

And what is she bringing [indiscernible] model?

Well, one, she doesn't need to understand the model, right? So -- but she brings a depth of knowledge in New York, and she knows all the agents and the other people that work in the industry, and she understands basic [ south ]. I mean it's not a big business in New York. In New York -- it's only New York, Chicago and Washington and Houston. The business there has got -- get its revenue to about 25% of Japan to get being looking like a business, so that we can grow it. The growth potential there if we can make it work is really great. We have a management agreement, as much as management agreement in partnership with the Sterns who are probably the only family in New York. They are very happy that we don't have Aussies running it anymore. They're making them all work in their 1 location on 667, I think it is, Madison Avenue. This -- the only reason the U.S. doesn't work is we just haven't worked out how to run it and it's on a different time zone. So that unfortunately this morning, obviously it's 6:30 and at work, which is unusual for me because normally I work out and come in at about 9:30 and probably one of the few times because our Internet is up 99.8% of the time, some of the IT guys told me it was down this morning. So I got to be here at 6:30 again tomorrow morning and it pisses me right off. But that's the problem with America. The time zone is different. And we haven't worked out how to run it yet. I hope that we bring our loss down from $11 million to $4 million or $5 million. But we've got a footprint there. I don't want to -- I could have just wiped that out. I think you need to be in New York, Chicago, Washington. Okay?

Online question from [indiscernible]. How have you managed to retain occupancy at 69% compared to Victory office sub 35%?

Different chief executive.

Thank you.

I can answer that a little more seriously. They're exposed to the Melbourne market. And while I wish no evil to anybody because it's better to have competition that hasn't quite got it yet, I would hope they survive but it's going to be difficult. I guess I could reverse the question and say how come their shares are worth $0.30. And they're at that occupancy, and they've got no real virtuals, and our revenue is holding at $25-plus million a month and we've got $100 million in the bank. I mean we're at $2. Interesting. And I always be -- it's always interesting the Servcorp share price, not because I buy and sell them and maybe because there's no free float, and there's some guy that hasn't got a great succession plan other than he's [ never going to die]. Did that answer the question? If I was them, I'll have -- well, I don't know too much about the competition, but I do know they've got 15 in Melbourne out of 23. Jesus, that's another s***ty day for anybody to be dealt in coronavirus and a Premier that locks the bloody state down. I mean, sheesh. It's almost as bad as having offices in Auckland. Oops, we're there, too. That's it. Thanks, guys. I'll have a look at this then I'll have a beer.