Servcorp Limited (SRV) Earnings Call Transcript & Summary

Yes. Right. So can we just flip, Jason, next slide, next slide, next slide. So first half performance, pretty good, I think, given the context of the pandemic we're in. Underlying free cash, down 14%, $30 million, which, again, pretty strong given the environment. Revenue and other income, down 22%. Like-for-like revenue, down 14%. We've seen -- definitely, we've seen some FX headwinds. So on a constant currency basis, revenue -- like-for-like revenue is down 11%. Underlying net profit, down 10%. And I think supporting the strong cash flow generation, we're still paying a dividend of $0.09 for the interim. Strong balance sheet still, $90 million at the half, 31 December, over $100 million in cash currently. So I think that's, again, reflective of our tight cost control, which we've been very proactive since the start of COVID in March, April last year. Underlying free cash, 155% of underlying net profit. That's going to support maintenance capital programs, which was quite small, I think, in the first half. I think we only spent about $800,000 in maintenance CapEx. And then dividends, providing everything stays the same. Next slide, please. So there's the underlying results. So the arrows have moved out a little bit. We have stripped out of underlying -- the -- we excluded from underlying -- excluded from revenue the JobKeeper. I think that's all set up there. And if there are any questions on that, that's been in the [indiscernible]. Next slide. It's balance sheet. Again, strong cash flow. The underlying free cash rec, $29.4 million. Next slide. Next slide. Here's the cash flow bridge. Not too much orange there. Next slide. Our capacity, we -- I'm sure Alfred talked to this, but we closed quite a few floors in the last financial year. This financial year, we've only got 2 floors that have opened. Well, we'll open. We eventually managed to open the floor in Manila, had quite some serious lockdowns there. So we opened that floor last month. And then we expect to open a new floor in Parramatta. It's really a switchover floor. So the net there is 0. And we closed a floor in New York and one in Al Khobar in Saudi. Next slide. Next slide. Our global overview. The standout's definitely North Asia. And to a lesser degree but pretty reasonable results is the Middle East. U.S.A., certainly on a cash earnings basis, we broke even. So I think that's the first time we've done that in a while. So I think that's a reasonable result, certainly demonstrating the decision to close some of those floors at the end of last financial year. A disappointing result, though, from ANZ, Southeast Asia, still cash positive, but on a profit basis, there's more. Next slide. We deal with the segments, I won't go through each one. I'll leave that for Alf. Next slide. Next slide. Again, again, dividend, again. And I guess our outlook, still focusing on the controllable measures, so certainly, cost control, maintaining strong liquidity, making our clients feel safe and our teams, preparing for a recovery in some of the markets. We're perhaps seeing some slow recoveries, but I think it really depends on the uncertainty of the timing of when the vaccines roll out and how that timeline will end up looking. And certainly, looking for opportunities for growth in markets where we have proven management. I think there's real opportunity on the other side of this for us. Flexible workspace industry is certainly not dead. I think it's going to come back in bounds once this COVID, to a certain degree, normalizes, I think. Next slide. So I think all things being equal, we certainly still expect to produce cash and be profitable. But I think we do envisage that the rest of this calendar year will be quite challenging. Alf?

Well, that's the past. I've got no idea what's going to happen in the future. So I haven't -- I'm just -- I talked on the past, if I can comment on what's [indiscernible]. It's been a pretty interesting 6 months. And I had a look at what I said last time, and it sort of rings a little true in that there's no hurry. This pandemic's got a pretty long tail. And I don't think that anybody's felt the real commercial and financial impact. And in fact, from a P&L and a performance perspective, the places that have got the higher amount of assistance from government seem to be the worst performers, as I look at the world. See, I can't talk on the future. I thought I'd talk on the past. Just a little dream that this Chief Executive as he sort of reflects on what happened. The time is coming when we are going to expand, but if I look at the past, if we even look at today, we've got a market cap of $300 million. We've got $100 million in cash. So we've got a market cap in effect of $200 million. We produced $25 million in free cash in the first half, so in real terms. And so I reckon, you get pretty close to that next half, say you're close to $50 million on $200 million. So that's 25%. That's 4x free cash is what our market cap is. And at the same time, I sort of reflected on Regus. They sort of roll along, losing about GBP 1 million a day. And they've got a market cap of GBP 3.5 billion, and they've got GBP 7 billion borrowed, and they're probably our main competitor. And then we pay a dividend of 6%, which is about the yield at $0.09. We have 120 floors, which if you try to replace them would cost in excess of USD 500 million, would be my estimate before you start to fill them. And we're running at 70% occupied. So I'd reckon that each one of those 120 floors would have to lose a couple of million before it got full. So that's another $240 million, which is why everybody seems to raise $1 billion to go into this business. We paid dividends in 21 years. And today, for those of you who don't know, the lady that started the business was a lady called Joan Salter. And she died 21 years ago at 4:00 on this day. So this is the anniversary, which is -- so normally, I don't have it on the 24th. And she spent a lot of time working on Servcorp. And we really only had -- well, I had a bit of cash because I had a reasonably small real estate business, but it was organic growth in real terms. Anyway, we've raised $140 million. We paid $310 million in dividends. And if you take that over the 21 years to this day, it's been about a 7% per annum return to our investors, which is one of the reasons I'm a pretty happy shareholder. Everybody says, man, you continue to buy shares. Well, it's not a bad return, 7%, 21 years. And we've still got $100 million of the $140 million that we invested that we raised in cash in the bank, plus we've got the business, which is paying 6%. So I sort of look at it and think, well, that's not too bad. But then I went one step further as I look back because, as I said, it's impossible to look forward. And our balance sheet's got $200 million in net assets. And of that $200 million, $100 million is in cash. We're going to produce cash of no less than $50 million, I'm guessing this year. Guess, guess, Chief Executive's dream, I'm not going to do any projections. That's 50% -- we're going to have 50% free cash on the amount of our balance sheet, net assets that we've got -- equity, I'm sorry, that we've got to invest, which is not bad, actually. Particularly, we're in the middle of a pandemic, guys. Well, not only -- nobody else seems to have noticed because they're all in Australia. So -- and then I look at it and I get all the questions, and we get first strike against us because we paid some of our international executives bonuses. Well, as a matter of interest, guys, we made no dough in Australia. Very, very little. 90% of our money is made offshore, and 60% of our tax is paid in Australia. Why would you stay here? You got ASIC, DFAT, ACCC, they're all like t*** on a bull. They are bodies that inhibit our ability to grow and compete globally, yet we do grow and compete globally. But they attack the people that have their head offices in Australia, and DFAT's now [ hover ] overseas. But that's another story. So I think that in the past, we haven't run Australia, New Zealand, the U.S. or Southeast Asia the way it should run. And so for us to be producing the profits and free cash that we're producing with half the business working the way I would expect it to is, I think, quite admirable. And so a lot of the team members worked pretty hard. We've dropped a lot. We've cut costs. It's been a pretty tough year. And the competitors we're competing actively with have raised close to $40 billion. And my current view, I don't know, Regus' numbers come out, I think, normally about March 3 or 4, is that we are about the only ones that are producing free cash. And that means that at the end of this pandemic, we should be in pretty good shape with 50% of our net equity balance sheet in cash to start to expand. My view is the incentives will be around 30% to 50% across the globe. And so -- and we've got systems that work. We just need to train a bit of our management, and we should be able to go close to doubling our size. We do have a lot of trouble in traveling because in Australia, we're at one country where 5 states that we work in, you can't travel in and out of them with confidence because they can close their borders at any time. There's no international travel. We can't travel to manage our team members and our people. And so we're finding that the culture is being eroded at a -- now at quite a rapid rate. First 6 months, it wasn't too bad, but now you can feel it, you can see it. I've been overseas 3 times this year, but it's very difficult to go anywhere past Japan, then you've got to isolate in Japan for 2 weeks, isolate in Australia when you come back for 2 weeks. And if you're -- even if you're an old guy and you make an application to have a vaccine so that you can travel and support your business, so that you can keep Aussies employed and keep your head office here, it falls on deaf ears. So I'm not that wrapped in Australia at the moment. Competitive landscape, man, Argo in the U.K. have 36 centers in London, and they were insolvent. They've just been rescued by a fund. They're a pretty good operator. Knotel had 100 in New York, they've gone bankrupt, owing $2.6 billion. Victory, well, my view is that they're only surviving on JobKeeper, and the revenue is between $20 million and $30 million. And so their revenue -- pardon me, per location is well under half Servcorp's revenue per location, even if they're the same size simply because they don't have the occupancy, and everybody thinks there's no barrier to entry, but they don't have the IT solutions that enable the phone systems to be set up, et cetera. So I look at all of this and think it should be a time of great opportunity because we will survive and we will stay liquid and we will stay profitable. It is uncertain, but the only certainty that I can see out there is that the competitive landscape will weaken and the opportunity to sign new deals will work in our favor. And because we have paid all of our rent to 90% of our landlords on time, we will have a reputation and a covenant that building owners will value because it has been shown that having people that run shared accommodation, taking large swaths of space in your building lowers the cap rate. So that it means that the value of the building, if they ever want to sell it, drops. Our covenant is so good that if we become a client, it doesn't lower it, it increases it. And people across the world that are in this business, they call it rationalizing. That just means they're closing centers that don't work. The only place we've really had to close centers that didn't work was the United States. We still haven't worked out how to make it work, but we should. And I did touch on Australia and Southeast Asia, that's just management. They will come good. It's just a matter of how we run them. That's it. Anybody got any questions? Goodbye. Anybody wants to sell their shares at $3? I'm available. I'm serious. I'm still a buyer. I'm not allowed to buy it, go away today.

Alf, I can't leave -- Alf, I can't let you go without any questions. Obviously, massive change in the way people are working. That's going to have a big impact on shared workspace, flexible workspace, offices, all that sort of stuff. What do you see apart from the better environment for leasing and so on, what do you see as the opportunities coming out of this? Is there perhaps opportunities to have some centers in more suburban locations? So you have a bit more of a mix of centers in different cities? What are your thoughts on the [indiscernible]?

Right. Right. What I think it is, the center of the cities will still be a vibrant place to work. I do believe that people that have an office, so whether it be a service office or -- but mainly a service office. So what was our bread and butter when we first started this business. We'll want to have remote workers. And to do that, you're going to need to have the IT solutions that allow you to do that. So we're the only guys where you can have 10 remote workers to one office. We're just releasing this product now. It's just going up on our global workspace work -- sorry, on our global platform. But -- so what happens is that you have one lead telephone number, each one of your workers can take his business number on his mobile phone, can work from home or work from anywhere, can use 3 hours a day in the co-working space within the environment. And so that the guy that's running a service office is going to have up to 10 remote workers per office. The suburbs, I know it sounds great that you can just ride your bike to the office. That's my bike sitting there. But I'm not sure when you think that we're not geographically tied that I would go to the suburbs. I mean rather than being in [ Cameray ], I'd rather be in Riyadh because it's a major city and we can run a business hub and remote workers out of that location. And we're already the biggest in Saudi. So I look at that. I look at where we've got management. I look at the city of London. And I think the city is going to remain a city. So we will probably be city dwellers more than suburban dwellers.

[indiscernible]

A massive impediment. The -- having your head office in Australia is becoming a greater impediment as time goes on. And I don't know how -- we are talking to government, but whether we make any headway, I don't know. But I believe that with the vaccine, things will almost get back to normal. And so once we can travel our executives again, it'd be great. But right now, we're putting -- I'm putting more infrastructure in Japan and in the Middle East than I'm increasing in Australia. So I'm dropping the amount of people we run in Australia and increasing it in those diverse locations because if you look at -- well, take Singapore. They're giving the jab to their bankers and business people that need to travel, whereas we're not even on the list, except I'm old, sort of helped. But that's what I held -- what a stupid excuse to be able to get the bloody vaccine. I mean old guys are going to fall off the perch anyway. So that's [ done deal ]. And when I look at where we're going to expand, it will be where we've got the management that can handle the expansion because they've got a management team around them. So at the moment, I would think London, Tokyo, Riyadh, and the young lady that runs on -- maybe who runs at [indiscernible]. I'm just trying to work out how to put some strength around her because she's pretty close to Europe, and she can travel and help us and she's a great general manager, too.

[indiscernible] unique quality management determining results in each location. And what we've seen over the years is that good locations stay good and bad locations so far have stayed bad. Not without much effort, I'm sure.