Transcript
Speaker: I'm Martin King, property analyst at Edison Investment Research, and I'm joined today by Charlie Steele, CFO of IWG Group, the world's largest flexible workspace platform.
Speaker: Charlie, welcome see you. Thank you. Thank you very much for having me Martin. Charlie, for those who perhaps aren't particularly familiar with the company, could you just start by giving an overview of what IWG is?
Speaker: Of course, so IWG is the world's largest flexible office group and we operate in 120 countries. We have around 5,000 locations and what we do is we provide office space to people from individual meeting rooms that can be booked by the hour up and until some two years worth of meeting rooms as well. We have that global network which means that if you are a member of one you can be a member of all. And fundamentally, we assist um so startups, enterprises, individuals in giving them office space and good places to work around the world.
Speaker: And in the UK, what would people recognize you from? so So we've got a number of brands. Our largest brand by quite a long way, actually, is Regis. And that's the one that it got started as nearly 40 years ago. And then we've got a number of other brands that go with that. So the primary brands in the UK alongside Regis is Spaces, Signature and HQ. And we use those brands as different price points and different product offerings to our to our users.
Speaker: Can you talk a little bit about the the key drivers of the business, the market you operate in Sure. So from a demand side, it's really about that flexibility, about having space for your business that you need at exactly the right size. You're not overpaying for space, but equally you've got the flexibility to expand and contract as your business might expand and contract. And we also provide all the ancillary services um that you might want, such as coffee, printing, other stationary services and virtual office services and the like. And that's sort of the reason why people use us on the demand side is that it's really a one-stop shop for all of your needs. um On the supply side, so in terms of like the actual space itself, um we provide landlords with of different solutions. So in some cases we take leases and that's historically been and ah what we've done as a business. We've taken individual leases. on different buildings. ah
Speaker: We're doing less of that now and now what we do is we go and manage buildings or locations on behalf of landlords and take a fee for doing that. So we provide landlords with a lot more flexible cash flow, um more cash flow than they would get through a lease and actually we partner with them as well so they take advantage of our scale economies and also our network in order to fill these centres quickly.
Speaker: And I'm sure a question you get asked quite a lot, Charlie, is what is the impact going to be from AI? So think first of all, it's still pretty uncertain. But what we say is that AI overall in the market has a lot of very positive drivers for us. So to start with, if you go and ask a CEO or CFO how much office space they need in five years time,
Speaker: very few will be able to tell you. And therefore, what what do you not want to be doing is taking out a 10-year lease at this point in time until you've got a bit more certainty around that. And that's where we can provide some really good solutions.
Speaker: ah The second thing that we also have is a big tailwind from AI is that we've got many more startup businesses coming because AI is lowering the barriers to entry for starting businesses. So, for example, um you can have accountancy services and other sort admin services done by AI agents already, which enables like lower barriers to entry for business startups, you don't need as much funding. And again, that's where we can be very useful for for businesses as well.
Speaker: um Because you can come to us and use us as a way to flex your your space needs at the same time. So overall, we see AI as ah as a big tailwind for the business. we We do hear a little bit of people saying, this is AI going to put all workers out of jobs and therefore no one's going to need office space any longer? But certainly the drivers that we're seeing in the market definitely don't support that thesis. If anything, people want more flexibility at this point in time, which is a tailwind to our business.
Speaker: So against that background, Charlie, can you talk about the growth you've been seeing in the business and what your expectations are? So at the moment we're seeing phenomenal growth in in the business and that is coming from our capital light side of the business in particular where we go along to landlords and partner with them directly. To give you some context we're opening about a thousand new centres every single year. our second Our largest competitor has around 500 locations at the moment so we're opening twice as many locations as our largest competitor has in its entire network at the moment. So you can see That level of growth is absolutely phenomenal and we're dealing with that very well. We're opening these high quality centres, we're filling them very quickly and our landlords are very happy with the progress that we're making. um And the reason why this is working so well is that we're expanding out both our scale and also our network. So our landlord partners are benefiting from those scale economies. we ah
Speaker: of the second largest furniture bar in the world, we believe, after the US government. And therefore, that means we just buy furniture, as as an example, just significantly cheaper than anybody else can, and we pass those savings on to our landlord partners.
Speaker: So huge growth all around the world at the moment. It's not sort of concentrated any one particular location. um But what I would say though the US economy where we have about 40% of our revenues at the moment is doing really, really well. The US economy is just one of those economies just continues to outperform every single year and we've been very happy with the progress there.
Speaker: So Charlie, you've got all this growth going on. It's in a focused on a capital light way of doing it, which should be reflected in stronger cash flow going forward. That wasn't immediately obvious in the first half figures, which caused some disappointment.
Speaker: And I know there's some reasons behind that. Do you want to just talk about those? Yes, so I think first of all, we've given guidance on the full-year numbers and so ah the main guidance we've given is our EBITDA range, so $585 to $625 million. dollars um The guidance was updated or reiterated at the first half, so we believe will come in for the full year within that guidance range and ah remain very confident around that. um In the first half though, when we look at cash flow, we've been updating a lot of our systems, making a lot of investment into our systems and processes and and therefore some of our investment that we've made into the accounts payable system has also had the the effect of accelerating some of those payments out. We're currently working through those at the moment, so that's not a sort of structural thing within the business. When you look at the level of capital expenditure within the business, it's nearly at an all-time low um ah ever for the business. like To give you some context, we're spending close to half a billion dollars a year in 2017, 18 and 19, and now it's sort of the guidance for this full year is $150 million dollars for the year. So you can see the capex has come down a lot, and we expect the cash flow come through on that. and um We've got this target out its in the medium term of a billion dollars of EBITDA. The guidance that goes with that is 50% free cash flow conversion at current levels of leverage. Very confident that we can deliver that. And look, the EBITDA guidance for this year is up nearly 100 million on last year. And that's just showing the that the growth coming through in the business and that and and that will also deliver cash flow generation as well.
Speaker: And Charlie, another question that is sometimes raised by investors is whether the company is overly levered. Yes, so I think it depends how you look at leverage leverage overall. So some people include the lease debt. We don't think that's a a valid way to look at leverage overall for IWG. And the reason for that is that we have non-recourse leases um all held in their own special purpose vehicles, and we use that as a way to manage our risk. and The second thing is, though, and actually more importantly, the market doesn't look at it like that either. So ah none of the equity research analysts include the lease debt within their debt metrics. um And the second thing is that Fitch, the credit rating agency, that rates our our bonds, which is our debt, don't look at it in that way either. So the only debt that we have are the the two bonds that we have outstanding. So we've got one bond due in 2030, another one due in 2032, and then a revolving credit facility that sort of ticks up and down with that to use for working capital. And then obviously our cash. And that's how we look at debt. That's how everybody else looks at the debt as well. It excludes that lease debt, and I think that's actually quite an important point when you're analyzing ah IWG in how you sort think about our overall liability stack.
Speaker: And I think also the the cost of those leases, the the payments on those leases has already come out of the EBITDA that you are reporting, and so you don't want to double count it. Yes, and and the way we see those leases is basically it's just rent. it's ah It's a cost of doing business in the same way that we've got um ah people in those centres, which is also a cost of doing that business. As I say, the credit rating agency Fitch have raised us investment grade at BBB flat, and that does not include the effective leases within those numbers.
Speaker: So a billion dollars, 50% cash flow conversion, that's an awful lot of cash that should come through in the future. What will you do with it? What are the plans? Right now our capital allocation policy is to buy back shares. So we have a small dividend um and that is a progressive dividend but fundamentally it's increasing on dividend per share basis.
Speaker: through the share buyback program that we've been executing over the last two years. We've bought back nearly 10% of our market cap over the last two years. We'll continue to do that. um As the EBITDA grows, that also means we've got more debt capacity within the business to be able to use some of that to buy back even more shares.
Speaker: And fundamentally, we will continue to do that because we think it's a very efficient use of cash flow. And um we're very happy with the progress of that buyback scheme so far um and for the foreseeable future, we'll continue on.
Speaker: Hotel operators went through a similar conversion to capital light business ah business models, and they've been rewarded with much higher valuations and are attached to IWG. Is that a fair comparison?
Speaker: Look, I think in the long term, it is. ah In fact, actually, we believe we've got a higher quality business model, fundamentally hotel operations, because all of our revenue is long term contracted. Whereas hotel operator operators are sort of night by night. They've also got a lot more competition. As you say, hotel operators. um As I mentioned earlier, we're opening more locations than our largest competitor has in its existence. So we're just so far ahead of the pack at the moment, and we see that as a big advantage over hotel operators. What I would say though is the hotel operator model is now very well understood. It's been proven over ah more than a couple of decades. We're still fairly early in that's in that um in that transition and I think the market will start to see the benefit of that coming through fairly quickly. ah Right now, though, I'm very happy buying shares extremely cheaply and and reducing that share count. And at the point to which the market flips, I think those people who have been patient and have invested in this for a long time will really see the benefits of that come through as they actually are already.
Speaker: Charlie, that sounds very interesting. Thank you for that. It'll be interesting to see that cash flow continuing to build and also the market reaction to the valuation that it puts on that. So thank you very much.
Speaker: Thank you. And look, like from our perspective, we just see if we deliver operationally, the cash sale will come, the market re-rating will happen in its own time. And in some ways, the the best way to get that market re-rating just straight delivery. And as I mentioned earlier, we're very happy of buying back our shares cheaply and we'll continue to do so.
Speaker: Great. Thank very much. Thank you.
