Servcorp Limited (SRV) Earnings Call Transcript & Summary

Good afternoon. I'm Alfred Moufarrige, Servcorp's Chief Executive. Welcome. So we are going to share the financial results. We've all seen the full year '21 financial presentation. I'll quickly run through it and then will give you a report on where we think it's all going, after disclaimer. Underlying free cash, we've got $49.9 million. Somebody could have chucked in an extra $100,000, but I guess, hopefully, we'll do that next year. Cash balance, well, the balance is at $97 million. If you -- in constant currency terms, they are up a little. So it's not too bad. Cash balance is currently in excess of $110 million. It's about right. Keep on going guys. Underlying net profit, up to [indiscernible]%, well, keep going. Balance sheet, our balance sheet has been adversely affected by the strong Aussie dollar. So it doesn't make any difference anyway to our operations, keep going. Underlying performance, all pretty clear. Revenues dropped. It's pretty interesting when you look at the revenue drop because we also had drop -- a revenue drop in constant currency terms about 10%, and our number of locations also went backwards about 10%. Keep going. And mainly the operations that we closed were underperforming, often in not great positions. This is our global footprint. I think we've got 120 locations, roughly maybe 125, keep rolling. Co-working. Well, I keep hearing all the good things about co-working. I'll talk about that in a minute. And it definitely will come back, but it just depends where you are. Keep going. Global overview. U.S.A., what a dog. North Asia, it's running okay; keep going. Southeast Asia is a nightmare. And Australia is underperforming. In fact, I got a question from Peter Bell. Peter, if Australia starts to perform, my view is we should be franking in the next 12 months 30% because Australia should grow in a profit -- should grow on a profit of $12 million, but it should -- realistically, it will comfortably throw about $9 million this year. So with a bit of luck, we'll start franking again. And my view is Australia is our home base. It always stays a home base. We should be paying more tax in Australia than anywhere else. And so that if we make the profit target of the mid-30s, then we should have some franking credits. And he did also ask a question about WeWork, whether they were [indiscernible]. I think their business model has always been pretty ordinary. And they have no technology, although they often pretend to have, and they've just signed a deal with Saks Fifth Avenue, which I think is just another dog. But when you look at it and you look at the profits that are made out of SoftBank, and now I'm guessing somebody can go and have a look, but one thinks that this year they will turn in close to USD 100 billion. And so WeWork is almost just a rounding error, just a bit of an embarrassment for Masa. Keep on going. Got it. Keep going. We've got a dividend of $0.09, keep going. Outlook and guidance. Well, you can all read that, and that's being written by the Board. I'd feel a little more conservative [indiscernible] not the numbers, just the excuses for not making it. Craig, that kind of go to questions and answers yet. I've done a lot of work on this. Because if you look at next year, everybody seems to think that next year and the year after are probably years to be in this business. So if you have a future vision and you have a look at the shape of the recovery, the exciting new markets, the sea change the way corporate clients are engaging, best corporate sales in our history, growth moving space almost at the speed of light. And the likely recovery should be clearly visible. And the inflection point should be -- should have been in February or March of this year. Real improvements expected in Q3 and Q4. Hybrid work is becoming the norm. You've got to remember that we are right in the middle of the hybrid revolution. We'll permanently shift our direction. Workplace is anywhere business workers want to be, and we will be a leading enabler in the flex industry space. Everyone is talking about hybrid work. It doesn't matter whether it's Bloomberg, BBC, Guardian, The Economist, hybrid work is what all senior employees are saying. There was a report out by Ernst & Young on it. There will be favorable tailwinds for people that are in this business, better for employees, better for companies, good for the environment, better for people. New enterprise, the way we are, wins. Stop press, unprecedented surge in new membership deals, more than 0.5 million new members added to the network. It was too hard to write a talk today when you look at how the market is changing. So I stole that from [ February's ] one of our competitors. The only other publicly listed company. They're listed on the U.K. stock exchange. They went pretty well, too. I think they're losing about GBP 1 million a day, and they are still building and closing new operations, which puts a lot of pressure on the Servcorp and its team members. So that if you look around the world with Regus losing supposedly GBP 1 million a day. And WeWork, I guess, will lose $2 billion this year, I guess. We've made free cash of around $50 million. So I guess, compared to other people in the industry, we look okay. I think that a lot of what Regus said about hybrid work coming and being finally a boom could be absolutely true. But it's too early. So I try to look back at Servcorp and I look back at all of our competitors and not because of any other reason as I want to try and understand what pressure my team members are under in the marketplace. And they're under extreme pressure. I'll give you 1 very small example. In the United States, which we don't do so well at, JLL stole 7 of our -- or took -- or 7 of our people went to work for them, and then they targeted our clients at half the rate if they provided the invoice to about what Servcorp was paying. It's -- and that's just a small example. WeWork, targets our clients and so does Regus. I think that there is a massive difference between our business model and theirs, and that is, we spent the money on the underlying infrastructure. We've got all of the IT solutions in the cloud. We can take 200,000 extensions in 1 spot in the cloud. We can connect to them. We spent the $100 million and depreciate it over the last 20 years. And so I look at Servcorp and say, we're well positioned for any boom that may follow. And so if I go to my notes, in the last 5 years, we produced $370 million in cash. And one would guess for the next 5 years, if Regus should be better so that if we produced $370 million in cash the last 5 years, we should produce $400 million in cash the next 5 years. And our net market cap is about $225 million, if you take off the $100 million we've got in cash. And I look at the amount of pressure the Servcorp team members have worked under in the last year and think that this year was the best year that Servcorp has had for the past 5 years. Whether it will turn into substantial profits or not, I accept that at times, what we'd hoped for hasn't happened. But if I look at the teams, I look at our position, I look at rentals dropping around the globe, I look at our cash, and I look at some of the management team and in particular, in the Middle East and in Japan, I believe that we'll be able to expand carefully, but we'll be able to open centers that inevitably will be well managed and will make profits. So that really means that we're going to open new centers in both Japan and the Middle East. I think if we can get London -- right in London because a lot of small centers are closing there. So I sort of look at our free cash in 2020 against 2021. And well, there was a currency difference. There was a bit of a free kick. And so that if I try to normalize it in my head to get the accounting, I'm looking there was about a 10% difference in the free cash and that is a pretty good performance when you have a look at the mess Australia is in. And I don't mean a mess from our point commercially because we are still profitable, but we've got a 5-state solution for what is a global pandemic. We're locked down 1 day, we're not locked down the next day, and everybody thinks that the economy will bounce back every single time. Well, we catered at 10,000 little businesses in Australia. And I can tell you this second lockdown has done a hell of a lot more damage than the first. And I look around our world and I look at this performance, and it's the first time I -- quite a long time, probably 10 years that I've been really happy with the performance because we were locked down in London, Paris, Brussels, Dubai, Abu Dhabi, KL, Singapore, Bangkok, the whole of China, and there was a state of emergency in New York, Chicago, Tokyo, Osaka. Most of our landlords, some helped, but most of our landlords need to have a gun held to their head before they give us any assistance, whereas we've been providing a substantial amount of systems to many of our clients. Lockdowns commercially don't work. Maybe they stop the virus. They seem to have worked in New South Wales. We've gone from 100 to 1,000. So that's pretty good. And we're still locked down. Are we going to park [indiscernible], you get no [indiscernible], no swearing. You get no benefit if you're vaccinated. People are allowed to come to work even if they're vaccinated. And when I get depressed, I get twice yesterday that police came in because 1 person said that we were making our team members come to work. We've got 15 out of 85 here. We wrote to everybody and said if they're worried, they don't need to come to work, yet the gentleman in blue turn up in 3s, walked around our floor twice yesterday. I might add that a few years ago, you may remember we lost $850,000, we reported to the same police station, trying to find a policeman was almost impossible. Now we don't have to go looking. They come to talk to us. They viewed the floor and said that they will talk to our team members. Well, that brings me to the point, why would you stay in New South Wales? I mean it's not a pro business. You can't run a global head office out of New South Wales without being harassed. So the question is, should our head office be in Australia? Should we sell it? Should we privatize it? The answer is we should stay in New South Wales. We should try and train the politicians. And right now, we should expand it and start building it out from here. So somebody should start saying, if you've had to [ Jed ], you can leave the b***** country, as can your project managers and team managers. And sometimes, if you look at head office, and we haven't traveled, and our performance is average. But if we get people back on the planes so that we can actually manage our global business the way it should be managed by people that have vaccinated, then I think that we will substantially improve our performance. I'll go back just for a second to the outlook. I actually think it's probably a good time for Servcorp. I don't think that anybody -- and we've underperformed in some ways. But I don't think that anybody has made as much free cash as we have on a smaller revenue. And most of ours is because we've maintained all of our IT systems, and we are more a subscription business than anybody else in this industry. That gives us a great base on which to expand because the IT solutions, a lot of them are done. I might add, we're still spending $80,000 a week completing a system, believe it or not, named by the Japanese developers called the wombat. They didn't even know what a wombat was. When we put a picture up, they thought it was a rat. But anyway, the wombat, one hopes, it has already started rolling out, and we're pretty happy about it. It is such a help to people that are in shared space. One day when that is -- it might be worth as much because while Servcorp's not worth much and it worth more than Servcorp. That's it. If anybody's got any questions [indiscernible] can ask them. Wow, my questions straight on. While you're waiting for questions, I will say that if I look at next year, when we weren't locked down in Australia, it was coming back at a very rapid rate. And I would think that our first quarter this year is going to be fantastic. Our second quarter is going to be pretty ordinary. And third quarter will be average. Fourth quarter should be fantastic. So that's pretty well how I see the year going. Far away.

We have a question on the shortfall basis. You seems to be doing better at 73% versus Regus of 58% in 2008, similar occupancy levels for calendar year 2019, and we [indiscernible].

Well, still to start with, Regus and Servcorp are in the same business. But they don't run it the same way. So the systems in Servcorp are completely different. The number of team members that we run is about 3 per client. It's about 3x the number Regus. So that on 100 -- a floor that had 100 offices, Regus had run 3, we would run 9 to 10. So we sell a lot more services than Regus. And I think that our co-working is a little different to Regus' co-working. And hopefully, that adds a little. I might add to that, that it's very difficult if you cannot automate the sale of services. And by automating I mean help the clients so that they can make a profit because their job is to try and take Servcorp team members, delegate to them so that they can help them make money or free them up so that they can make more cash. And it's easy to promise services if you haven't got a team, but in Servcorp, there is a team and there are real IT solutions. And I think that's fundamentally the difference. I don't think Regus make money at the moment. I think that's a problem, a fairly rapid expansion, and they don't run 1 really upmarket operation. They run 3 or 4 different operations. It doesn't mean I don't respect them but I -- when I look at them, their PR is a lot better than ours, I must say, but that's because I write ours. And but you know, he has educated the market. So I like Mark Dixon. No more questions. No more comments. This is your last chance. You got to write questions or you can speak questions. Okay. Well, I'll finish on. I pick next year, particularly the last quarter is going to be great. I think the potential for Servcorp in the '23 financial year will surprise even me. Thank you.