Servcorp Limited (SRV) Earnings Call Transcript & Summary

[Audio Gap] Doing this year and a lot of our team have gained a lot of experience over the last 5 years, about half of them and half of them are performing, I rephrase that 70% are performing and about 30% are pretty average. This weekend, we've got [indiscernible] but they are a great team of people, and they absolutely want to work Actually, today, we've got a few -- we've got Allan runs our global accounts. Olga runs the operations in Japan. I don't know [indiscernible] pretty good. Steve runs the thing called Wombat, which is the -- which is an unbelievable debtor system that we had written or actually developed in Japan by the same guy that developed our first system way back 25 years ago, maybe 30 years ago probably. Rianna [indiscernible] and he was Japanese. He lived in Australia for a while, and he worked for us for a long time. Then he went back to Japan. But we've opened in Japan. I think we've been there 30 years. And Rianna worked on the debtor system which makes a massive difference to Servcorp and gives us a competitive edge. And because he's Japanese and all the developers were Japanese, they called it [indiscernible]. And so I had a look at it and thought was [indiscernible]. There's no way we're going to call this thing Wombat. And we'll change the name when we roll it out. And of course, it's still called Wombat. And well, I'll run through the slides in a second. This is a pretty comfortable position for Servcorp to be in, not because this is a profit which is a baby of the boom, but because years ago, we were the first company to run coworking period. We just want it, and it was called company headquarters. And we were 30 years, I guess, ahead of the pack, and I think it's stupid to tell the other operators, [indiscernible] we used to call it company headquarters. Why you don't have company headquarters. And then along came WeWork and of course, spent $3 million a day. And so the name changed from -- with company headquarters, networking then computers came. So we had coworking before computers. And then we called it virtual. And of course, it's now morphed into coworking. But Servcorp's chip sale and web page is about 20 years old, and everybody says it's a little old, but it is probably a better funnel than anybody else's in the business. So the base that we've built is not just a flash in the pan. It's taken 40 years. And it's always increased. And if anybody has ever really closely followed Servcorp, I don't think we've ever made less than, I'm guessing now, than $30 million in free cash. And we built it pretty well organically. And we're still holding over $120 million in cash now. We're producing free cash at the same run rate as the first half. And we're building new centers, and we built a few in Japan. We're building them in the Middle East. And there's not a boom that people seem to make out in coworking. There are a lot of people that are going into what they call hybrid space. But when we developed the Servcorp product was to help small business be able to compete. And I say it almost at every one of these meetings, we run about 10 people per 100 offices and for a floor where it takes 100 offices, which is about 2,500 square meters, whereas the industry average is less than 2. Regus is at 1.7, and they'll be proud when they get it back to 1. And we shocked one the other day, and there was a little sign on the desk. We just came in to talk to them. And it said, sorry, understaffed and there was a sign on the desk, and it happens all the time. This just happened to be in North Sydney. So Servcorp is now a mature business with a lot of clients that have been around for a lot of years. And so that if you take our EPS. I reckon that it will comfortably hit the $0.60 this year. I don't think it's ever been. I know it's never been there. I think the last -- when we -- all of a sudden, our share price years ago, probably about 10 years ago, hit about $7.50 or something. I think the EPS was about $0.40, so we're about 50% ahead of that. But it isn't that we're 50% ahead of it that it impresses me is that I think that it is sustainable. And I don't think we're going to go into a massive boom where people are going to be banging on our door. There's a lot of competition out there. They are still doing it the same way where they want to rent the space, use the space and then cap it up the way they normally cap up rentals in traditional space. And that doesn't work because they've got their churn rate, which in the industry is about 70% to compete with. They've got small spaces. They've got clients. They're used to having big clients like Servcorp that they can treat like ship. They've got little clients that actually demand service and they're on short-term leases so they can work. And so I look at the numbers from '21 to now and our underlying cash producers up 50%. Our profit is up about 110%. Our earning per share is up 100%. Our dividend over the period has gone up about 50%. Something wrong with this. It's all too good. There's a lot of competition, but there's not too much competent competition. So -- and there's not too much in competition where they have actually put together the IT solutions that takes into consideration putting a client up, taking the client down the churn and allowing you to work on subscription income. I mean coffee and tea alone, I might tell you we charge less than most people, but at least we can track it is about $1 million a month, forget anything else, but that's what we do in Servcorp a lot of coffee shops. A lot of our people make the right margin, a lot of people make half the amount they should. But anyway. So as inventors of coworking and the team has been around for longer than any other international operator. In fact, we're the first guys to do a floor outside their home country. We opened in Singapore nearly, I guess, 45 years ago. Let's have a look at the numbers. You read the numbers, forget the disclaimer. We don't need an excuse. -- underlying, with underlying free cash. I'm trying to see the word record. I hope it doesn't curse us, keep going. Anybody not read this? Everybody has read it. Well [indiscernible] from then. Statutory call -- well, they're a bit -- I would say we bring back $12 million or something?

$14 million.

$14 million. Well, a couple of million. That was because we had to take a hit on our stat profits last year because we closed Hong Kong, we couldn't do a deal on the rents. And Servcorp which has got a little like so that it was just a stand-alone operation. We try to do a deal with the landlord. Finally, we exited with no real liabilities. But under the accounting standards and rules, we had to take a $14 million hit. We bought that $14 million back, but it didn't affect the other results. All our results are pretty [indiscernible] what's that? Global expansion. We're going to [indiscernible] in Australia, improve global footprint. Okay. Next one. Well, office capacity has never been much over 6,000. We're pretty well back up there, and we're continuing to go grow that results. I mean, where could you get a better graph than that? Well you couldn't, it looks like I drew it, I probably did. It's better than going the other way. I'm glad that we didn't start at the top and coming down. Underlying net profit before interest and tax keep going. Underlying revenue continues to increase. It's a pretty slow that I'd like, but we still continue to build them coworking clients. We still continue to grow that portfolio, keep going. You got to remember that we've got 55 -- pretty well, 54,000 coworkers. So we're not like an IT operation that sometimes has $400 million to $2 billion. But if you have 50,000 and they spend an extra $10 a week with you, it's $2 million a month. Keep going -- free cash -- cash reserves segment overview. There wasn't a mature floor operation that didn't improve. I think that train is just getting a little better, keep going. And then sustainable income, none of these -- there isn't a one-off in where we're going right now, outlook and dividend. So dividend is an all-time record. I don't think there's any way that we won't pay a second half $0.14 dividend. We're producing enough cash to be really comfortable with the dividend and comfortable with our growth because we want to be able to grow it and control rather than just growing it and close some of it 5 years later. Anything else? Next one, guidance confirmed. Anybody got any questions -- how is that [indiscernible] always sends a question for me.

There's one question online [indiscernible] if there's any chance the IPO will be back on track and what was the reason for not going ahead?

Look at the results. They tell the story, the multiple that we were going to get. So this -- look, I might say that it is often problematic having a founder as the major shareholder. It looked like a good idea at the time. We spent and we've written off close to $4 million. I think go public, but we have put our corporate headquarters for that area in Saudi, which is great for Servcorp because we get a lot of benefits from that. I have no intention to kick start it again, although I have spoken to some of the senior bankers in Saudi, and they would be keen to see Servcorp listed on the stock exchange there, which would give a greater return to the Servcorp current investors in Australia, should one lump sum, so you might get a $0.60 or $0.70 dividend. I personally think we're better to continue to make money in the Middle East and to pay our dividends in Australia and $0.28 for where we've come from in the last 2 years is pretty good, and that's our 50th dividend -- we have 50 yet? Pretty close. pretty close to 50 dividends in a row. 52. So we paid back 280% on the initial list price, and we're still paying a dividend. So one shareholder is pretty happy. When I think about it, the majority of the shareholders are happy.

I mean you have annualized first obvious question first half well and truly be the full year in the second half, which is sort of slowing down or just [indiscernible]

Well, I think it will be pretty even because even an analyst can multiply the number...

52.

So for you, Anthony, I'm keeping it pretty simple. Take first half, multiply by 2, you got it.

That's the guidance.

Not that much. [indiscernible] I'm a simple guy like you. As your grandfather, I pointed out last time, he still [indiscernible] is a very exciting year for us because it's not that we're in a boom. It's that we've got a stable corporate entity with subscription cash flow that continue to underwrite our business. I think, something could go wrong. There's no reason for me to upgrade and put my own team on [indiscernible] that may be a little difficult. I want my team to be comfortable so that I can grow it this year. And we upgraded the last year, we've upgraded. We've doubled our profits in less than 4 years. I just think that we should just try and keep doing what we're doing and not put ourselves in a position where we've got a stretch. And we've got cash if any opportunities come up. And we've got cash if there is any sort of disaster out there. I don't think it's going to be a disaster. I mean I think that AI plays into Servcorp's hands, and we're spending a lot of time on development in that area. Look, people forget that we spend about $600,000 a month and we write it off on our IT teams that are around a month. So we spend $7 million to $8 million a year. And Navios has got the number of coworkers that Servcorp has on a per square meter basis, which makes a big difference. And sometimes [indiscernible] that advantage. But I think we're on the right track now.

And do you see many opportunities to deploy the cash over the next 6 to 12 months?

Sorry?

Do you see many opportunities to deploy cash over the next 6 to 12 months?

Yes. We're deploying the cash that we're making on an ongoing basis. And we're maintaining the cash balance that we've got. So it's a bit like a little private company where you try to grow organically. We're our own banker, we're our own insurance company, and that makes a difference to our margins because you don't have any more than 5% of your assets in any one location. In fact, it's less than that. It's about pretty close to 3% now, it's about 3%. So you're better to -- if you go to write off 3%. I mean years ago, when we looked at insurance and it was heading for $0.25 million a month. We come in [indiscernible], you can come in. You see this little rocket ship. She runs a few of the centers in Japan, and she's had a great year. And even though she only looks 25, she's been in Servcorp for over 20 years. And she runs Yebisu. We may even be drinking Yebisu beer tonight. And Yebisu, I've told my team 1,000 times is great because the things made how much a couple of hundred thousand pretty close last month. And the town was named after the beer. And so we have a place called Yebisu Garden Place and the people in the brewery downstairs make a great beer. And it's paid for by Manami, Chief Senior Manager. She also runs a thing called Tri7 where we got a whole heap of lousy write-ups when WeWork came because Tri7 opened 7 floors across [Audio Gap] coffee room had a cup of coffee that was pretty [indiscernible] So I had a beer that was pretty [indiscernible] too. So I came out the other end. And I thought, God, this guy is going to kill us, but -- and we lost $13 billion and some of those very difficult locations in Japan, remembering that in Tokyo, we've got 1,500 competitors and it's still profitable. We'll just build it as we said. And I doubt whether there will be any rapid increase in the dividend, just like where we're going now. We'll have our cash at the end of the period, look at our plans for expansion and decide what we think we should give back to the shareholders and what we should keep. But we are growing in a more in an organized fashion now so that we get critical mass in an area. We don't touch a location unless we absolutely believe we don't go into a location where they say, well, we're going to open our own and there'll be in competition to you or you've got to bid for the floor because there's Regus, there's [indiscernible] blah, blah, blah. We just come bother with that. We've got enough critical mass and we've got a good basic business. So we don't get too flushed.

Another question online from Eric, [indiscernible] you referred to -- as you get closer to wanting to retire, if you ever will not just you want you to, would you be more likely to reconsider Middle East or before that? Or is it unlikely?

No.

Are there any new countries you wish to expand to?

The problem is not cash or the Servcorp system; the problem is training the general management because I seriously don't think that we've got a competitor yet in the marketplace that has the underlying IT systems. There isn't one that has a global database, which we've got so that we can actually communicate with our clients. So it comes back to management. And I think that Japan, Middle East, Europe and America is getting there very slowly, I must say. We've got management that can handle it. And it's a matter of getting your own team to believe how different your product is. And often, they don't, it's a training problem. Once again, look, your return on your capital invested, if you have a look at your balance sheet, if you have a look at our balance sheet, 50% of our balance sheet is in cash. So we've got about, call it, $100 million invested in the profit earning entities. That's after you take all your write-offs, right, the net position. And we're going to churn in -- if you multiply by 2, we'll churn in 8. I don't see any reason to change dramatically what we're going to do and ask for retirement. The only reason I didn't board a ski yesterday, I started board skiing [indiscernible] petrol other than that. I'm still okay. I try and paddle it back with the ski, work out in itself, so I swim across the harbor. I said, hey, sharks, there are lots of bull sharks in Sydney Harbour.

The budgeted expansion of offices in H2 is very strong, which regions are they planned for? Are there any green shoots in China yet, for example.

There are no green shoots in China. There's a little bit in the Middle East. We're looking at a few more. We're looking at Japan. We're not looking at Australia because we don't get a return on capital invested yet. [indiscernible] in 10 days, I am going to London. We're also looking in London, but we haven't found anything we like.

Final question [indiscernible]

If everybody keeps complaining about the amount of cash we're keeping, we will seriously put a big down there, but we're not going to pay a higher dividend in the foreseeable future. Well, we will if our profits continue to increase, but we will never let our bank balance drop below the $120 million because when it hits $120 million, I get nervous if it's dropping rather than going up. How can you ask for a better result than this? Somebody should ask how do we ask how do we it? Can we stop now?

Yes.

No questions from you guys.