Servcorp Limited (SRV) Earnings Call Transcript & Summary

[Audio Gap] month of the new financial year is a lot better than our budget and it's a bit better than last year. And I've had a couple of questions about the $15 million hit we took, impairment, in Hong Kong. Well, one, we've never parted with cash. Two, whenever we sign a lease, we sign it in an independent, separate company, and we lodged a substantial deposit, which we tell all landlords that's all they will ever get if it ever goes pear shaped. Three, we were locked down in Hong Kong, couldn't travel there and in China. And the Hong Kong rents were the highest on a per square meter basis in the world. And in fact, our Hong Kong operation had rent out of about $725,000. We dropped $6 million. So it finally lost the support of its banker who happened to be Servcorp. And we told the landlord, we gave the clients notice. We put the company into liquidation. And so the $15 million when the liquidation is complete, fortunately, or we should never have taken the hit, but carrying rules say we have to, will come back. So if you normalize it, it was a good year. If you have a look at our projections, I think that we should comfortably achieve those for the coming year. And even the U.S. was cash positive last year and started the first month of the new financial year with just a $9,000 loss and about an $80,000 cash excess. And so -- and sometimes when I look at that video, and I look at it quite regularly, it takes passion, which I guess was how WeWork started, and they finally crashed. But the reason was because they didn't ever put in the underlying infrastructure. They just had a great looking operation. And so their main client base had to come from the local coffee shops, Starbucks or wherever people worked. They had nothing for them when they came other than a chair, a great-looking location, some s*****, some s***** software -- some s***** Wi-Fi and I mean that, and no infrastructure. And then I look at Spaces, which is a Regus operation, they often have as many as 100 offices and only three incoming lines. And they have very little subscription income. And so I read the reports that analysts sometimes do on Servcorp, and everybody only ever talks about occupancy rather than the overall business and the subscription income that comes from the underlying infrastructure. And over the years, we spent over $100 million putting 200,000 extensions in the cloud, which we've talked about a lot. We have a voicemail system, which allows you to go to press 1 in mobile. We can intercept every call. We can answer it in a guy's company name. We can -- we've automated to set up -- we've automated our debtor system so that it even updates every 15 minutes so we can see exactly what sales we have and exactly how much revenue any one of our team members because our team members are pretty important. We were running 4x the number of team members per office as WeWork and we run 3x as many as Regus. So of course, if we've got those team members working for Servcorp, there has to be a charge if you've got a team to delegate to. And so our subscription income, and income other than rent now, is a fair bit more than 50% of the total revenue. So I have a look at it and think, well, next year's probably the most exciting year. If I look at it, that's what I think. It's going to be the most exciting year for at least the last 10 years for Servcorp. We've got a lot better management, we've got more depth in our management teams across the Middle East, Japan, North Asia, Europe than we've had for a long time. The Australian profit, and I was asked a question whether it was sustainable. Now some of it come -- some of the increase came from management fees, but there's a sustainable growth in revenue in Australia and in profitability. And it's coming from both rent, subscription income and service revenue. So Australia's growth is fairly broad-based. In the case of Japan and North Asia, which Japan is -- which has been supporting Servcorp and outperformed right through the pandemic, their revenue is stable. But they've got about 1,500 competitors now in that part of the world. So it's pretty competitive. And I don't expect its profit to grow, but I do expect it to be maintained at about its current level. In the case of China and Hong Kong, the losses of about $6.5 million, I think, will be totally eradicated and that area should be profitable. Now we've exited Hong Kong, and I think the Hong Kong citizens are finally coming to realize that they are actually part of China. And so therefore, their rents and other costs will start to reflect that as we go forward. Conversely, of course, Singapore rentals are going up. A lot of that I talked about 6 months ago, nothing much has changed, except that when I look at our underlying business, our real belief that if you offered small business the ability to compete in the marketplace with the infrastructure, with the team, with the locations, with a geographic spread, then it would work. I think I'll finish by saying next year is going to be the catalyst for Servcorp going forward. And while profitability has been a focus, staying alive is also a better focus, but being a sustainable business has been the main focus. And we're now promoting again from them. We're not looking for solutions from outside. We're not for sale. And that's about it. Anybody got any questions?

If you haven't seen the presentation...

[indiscernible] on the one hand, [indiscernible] On the other end [indiscernible]. What sort of [indiscernible].

Well, to start with, I think that the building, I was thinking that people will just work from some pretty smart foot space because they've got a seat that they can charge them double rent because they only stay for a short while. And then they can cap it up the way they used to without taking into account churn, whereas the industry average on churn is about 70%. We're a bit below that because of service level. But we do find that when people come to Servcorp and they work out that they've got everything that they need, they can come to work, and churn rate one is a bit lower than the average. And we allow our clients to give 2 months' notice at any time, no matter whether they signed 12 months or 2-year lease. The churn rate doesn't go up. Actually, funnily enough, that -- even if a guy's got a short-term lease, and now I'm talking about offices. If you talk about hot desk clients, they churn a bit, but it's very difficult for anybody to get to -- give the building address unless they do a 100-point check because otherwise you get caught and then building owners then hate you. And so most people don't do it. We take the time to do the check. We don't cut them as a sale until we finish the check. And so we have more co-working packages per square meter than anybody else. And the majority of operators don't even have a reasonable sort of telephone system, let alone a network. So you've got -- it doesn't matter whether you're in New York or whether you're in Sydney. You're only an extension away from any other Servcorp client, and we can control it all from this one point. And so nobody else has done that. In fact, I -- nobody else has done it. And I don't see how they can do it because to overlay it would cost at least $0.5 million a location. And so if you got a location like WeWork or you got 3,000 like Regus, it would cost Regus $1.5 billion, which they don't have. So maybe we'll get a competitor 1 day that really decides to put the same infrastructure in. Our biggest single problem is training our own people to understand how much better Servcorp is than the competitors. That's the biggest problem. But the last 4 or 5 months and going forward, because I can see forward 3 months, the business is growing every single month and not a lot, but it's growing every single month. So I don't know. I'll try and give you an update at the AGM in November. I should have 4 months window, then I'll tell you whether it's going to be better or worse, but my personal view is that this will be -- if we do the higher end of our guidance, this will be an all-time record for Servcorp. I don't expect -- God, there was a question that I was asked about whether we were going to expand out of cash flow, or I think the way they put it was use the cash pile for expansion. The answer to that is that it will depend upon the market, how fast we expand. But the way I currently see it, looking forward is that the cash pile shouldn't drop much. It will stay at comfortably above $100 million. We will continue the expansion. We'll do it out of cash flow. It's too early. We put forward what our projections are, and I won't attempt to even change or expand on them. But if the current run rate keeps up, we'll comfortably expand from cash flow and we'll continue to pay the dividends as we go.

From [ Stella Wang ]. One question on FY '24 free cash flow, please. With $65 million free cash flow and likely $40 million growth 12 months out of the 18 months budget of $60 million CapEx guided for FY '24.

Okay. That's the same question pretty well as I answered, which is we'll grow organically out of cash flow without reducing the cash pile. We will -- if the dividend is going to be at $0.12 this time, the minimum it will be next bit will be $0.10. The maximum will be $0.12. Cash balance won't drop. I think there's a lot moving in our direction, which is why I'm not in a great big hurry to expand. I think that rents are dropping because the fact is that in a lot of these markets, we're seeing vacancies go from 10% to 25%. And the building owners, either they believe, or they try to kid themselves, which is what's happening in Hong Kong, but the vacancies aren't coming up. But a lot of leases are 10 years. And in London, they're 15 to 20 years. Well, these leases are just starting to come off now. So for the next 6 to 7 years, I actually think that commercial real estate will soften. That's an opportunity for Servcorp. I mean, 50% of our revenue comes -- more than, comes out of coworking packages and service revenue. And if the rents drop, we should be able to take advantage of it. And we're only opening where we've got management that control -- can control the floors. So I think a few years there. It's taken us a long time. If you look at Servcorp, it's taken a long time to sort it out. I mean, in America, we lost close to $100 million over a period. That's totally stopped. We've still got the losses. But with the management team that we've got there now, I see America as a great opportunity. In the Middle East, we're very early in with the guest. In Japan, we've got a sustainable business with about 14,000 people pay us rent every single month. And so I think that if we can maintain the profit and the margins in Japan, which we are doing at the moment, then we can compete in any market in the world. I'm a bit gung ho this year. Sorry. Hope I'm right. Is that it? It's a bit early for beer time even.

From Stella Wang...

That's what -- she's the lady I read the last question from on slightly spotty video. I'm not going to answer it 3x.

How much loss has Hong Kong booked in FY '23 that won't...

Try and speak in English slowly because I can't understand you.

How much loss has Hong Kong booked in FY '23 that won't recur in FY '24? And what locations have the company committed to build new floors...