Good morning, and welcome to IWG's 2023 Q3 results. Hosting today's call will be Mark Dixon, Chief Executive Officer. This call is being recorded. I will now turn the call over to Mark Dixon to begin. Please go ahead.
Thanks very much, and good morning, and many thanks to all of you for joining us today to listen to our results for the third quarter of 2023. In what is really a truly fascinating time for the hybrid working industry. Multiple eminent research papers by professional firms, universities, and many others have shared a view that ultimately, the hybrid and flexible work market will support 30% or more of the global white-collar working population. This is clearly a huge potential market. We are, as a company, uniquely positioned to capture that market across our network, and this quarter's performance is another good marker on this journey. Q3 2023 has seen a continued momentum for the company, and we are delivering on what we said we had planned to do, which was to deliver on revenue, capital-light growth, and debt reductions.
As the world of work continues to evolve, the structural growth in hybrid and flexible working, combined with our unrivaled market position, has resulted in continued momentum in the third quarter in revenues, with system-wide revenues now growing to GBP 830 million, which represents an 8% year-on-year growth on a constant currency basis. Our capital-light growth strategy is also continuing to deliver. We are signing up many new locations, which will underpin our growth strategy going forwards. The pace of signings in the first half has accelerated, which means that we've now signed up almost 40% more locations thus far in 2023 than we had in the whole of 2022. As these capital-light locations have opened, we've seen an excellent performance also in creating revenue in these centers for our partners.
As we previously guided, it does take, on average, about 10 months from signing to get these centers open and a further 18 months to revenue maturity. So the 600 or so capital-light locations we've signed up already gives us great visibility on the pipeline for revenue production in the future over the next couple of years, and leads to a group with a far lower operational leverage as capital-light locations start to become the larger part of the overall center network. Our active management of costs, including those associated with supporting this accelerated growth, has enabled us to maintain our strong financial performance this year and our continued commitment to reduce net financial debt, which is now down to GBP 634 million, GBP 24 million less than the previous quarter.
We're going to host a Capital Markets Day on the fifth of December in New York, and this will allow us to shine a light on the business in more detail and help the market to better understand the company and its objectives. And with that, I'll hand over to our CFO, Charlie Steel, to run through the numbers and other matters. Charlie?
Thank you, Mark. As Mark said, Q3 saw strong revenue momentum year-over-year, delivering system revenue of GBP 830 million, representing an 8% constant currency growth. As we previously indicated at both Q1 and half-year results, currency has been a headwind, given the weakness in sterling in the second half of 2022 and strengthening during 2023. As a reminder, though, less than 7% of our business is in the U.K., so currency has weighed, resulting in our actual currency growth coming in at 2% year-on-year for the quarter. In order to reduce financial volatility from FX going forward, and given that the majority of the group's revenues are in U.S. dollars, we confirm today that the group will be changing its functional currency to U.S. dollars from the first of January 2024.
This will put us in line with other London-listed global companies. Our revenue growth and disciplined approach to costs has enabled us to continue to reduce net financial debt, and over Q3, we have reduced net financial debt by a further GBP 24 million to GBP 634 million. This is down almost GBP 100 million from this time last year. As we discussed at the half year, our guidance has maintained that net debt will continue to reduce through the year. As Mark stated earlier, IWG is accelerating the signing of new capital-light locations. This means that the group will be far less exposed to operational leverage moving forwards. Center-related growth CapEx will also continue to fall, as we've already shown in the first half. It will continue to fall in H2, and we expect to be minimal in 2024.
Worka continues to perform in line with management's expectations. To ensure we are best placed to fully capture the value chain from the structural growth market of hybrid working, we've been investing in the platform to best position Worka for the future. Further to the announcement regarding accounting standards, the board is continuing to evaluate the adoption of the U.S. GAAP, with a decision to be taken in H1 2024. On guidance, we do not see any change to management's expectations for either net debt or EBITDA for 2023. Thank you, and we'll now hand over to Q&A.
Thank you. If you wish to ask a question, please click or tap the Raise Hand button at the bottom of your screen... If you wish to withdraw your question, please tap, click, tap, or click the Lower Hand button. There will be a short pause while we compile the list of questions.
Steve, you've got a question, Steve Woolf?
Our first question comes from the line of Steve Woolf. Please go ahead. Your line is open.
Hi, can you hear me now?
Yes, can hear you now, Steve.
Perfect. No worries. Thanks. It was just regarding the one for me at the first to start with capital-light signings. Obviously, there's good momentum with those signings. Have you seen a change either in the type of person who's coming to you, type of entity, whether it be, you know, individuals, existing landlords, et cetera? Has that changed? And then secondly, as you're learning and moving through this, have the deal terms changed in any form in terms of what's being included, you know, packages around that? So just any thoughts on those changes. Thank you.
So I think, first of all, the deal terms haven't changed. We're getting more institutional investors, which is helpful. We're getting better at, sort of opening them. We've invested into better opening programs, and we're certainly doing well at filling them. So I think there has been a learning process, and as we the more we open, you know, the better we get at dealing with partners and issues that may come up. But overall, it continues to be positive, right up to and including the month of October. So yeah, lots of learning, Steve. But overall, the terms are the same, and you know, we're adding some excellent sites to the network and expanding it.
Are you seeing any particular demand take up in any particular region? Is it something that's being more embraced in the U.S. or parts of Europe?
I think it is definitely being embraced in the U.S., throughout the U.S. U.S. investors are just more entrepreneurial, less fixed, more focused on cash, and so, therefore, easier to deal with, one. Two, however, we have seen other countries starting to open up, and, you know, part of our issue to really get the numbers, you know, moving up, better, is to open up more countries to this type of arrangement. And as we do that, and we've seen some notable additions, you know, we can then start to create more national networks in more countries. But, you know, overall, U.S. leads the way, quite definitely.
Perfect. That's great. Thanks, Mark.
Thank you. Our next question comes from Kelvin Lo. Please go ahead. Your line is now open. Kelvin, your line is now open. Please go ahead.
I'll jump to Dan Cowan, if Kelvin can't get through.
We'll take our next question from the line of Daniel Cowan. Please go ahead. Your line is now open.
Good morning. Can you hear me okay?
Yes, we can hear you, Daniel.
Excellent. Thank you for the chance to ask some questions this morning. I've got a couple. The embedded price growth that you mentioned in the release of 6% looks pretty steady. I was wondering if you could comment on what you're seeing with sort of current sales prices, given the sort of broader developments in the market and the news on WeWork overnight. Just sort of wondering what, if any, pressures you're seeing externally there, and yeah, how things are developing with the sales price, prices, please.
I think, look, sales price is. And I mean, basically, we've got—we seem to have some inflation pressure coming off in various countries. And you know, we've got good momentum in new sales price, and importantly, renewals is as important as the new sales price. But you know, definitely the level of price increase, whilst it will still be there, will, you know, taper off over time. But the costs are also doing the same thing, Dan. So and then, you know, the influence of WeWork, you know, it's, you know, they've only filed yesterday.
Mm.
So, you know, we picked a few centers up last week. They're pre-filing. We'll no doubt pick up some more in the coming weeks and months, which is helpful. And clearly, there will be some customers that will avoid using them because they are gonna be closing quite a number of centers, and, you know, that's a difficulty if you're thinking of putting some people in space... So that should, all of that should be helpful in the short term. We haven't seen, there has been an effect with the rumors, but it's a small effect. It's not something that's going to meaningfully move the numbers.
Understood. Thank you. And just a quick question on the volume growth, sort of implied by the revenue growth numbers you've given today. And really about your own rate of, you know, managing the network. You're still taking out centers at a or closing centers, I should say, at a relatively high level. Can you just talk around those and how you'd expect that to sort of continue into Q4 and next year? How you're thinking about, you know, the closures you're making and the adjustments you're making to your own portfolio?
Look, I'd say, first of all, it's not at a high level there. It's when you look at those as a percentage of the overall estate, it's a small number. It's not a significant number. But in answer to your question, we will continue to rationalize the estate. We, you know, this is quite a lot of these are older centers, sort of end of life. Some of them are centers that are problematic in one way or another, but you should expect that to continue. Every one of them that we do is, you know, earnings positive. We're not doing things here that are earnings negative. And, so, and we, you know, we take a careful view of it, but that will continue. We are in a particularly difficult economic period, I think, going into 2024, 1.
Two, the property markets, you know, are weak, but it doesn't stop sometimes counterparties demanding terms that are not acceptable to us. So when we can't get the right terms, then we will. We don't renew these centers. You know, we can get better centers down the road, that's what we do.
Understood. Thank you, Mark.
Thank you. We'll take our next question from Sam Dindol. Please go ahead. Your line is now open.
Morning, guys. Can you hear me?
We can.
Brilliant. Two questions from me, please. Firstly, on occupancy, would you expect that to tick up next year with price moderating with wider inflation, or do you think it'll be more difficult to get that to progress given the tough macro backdrop? And then secondly, on WeWork, I'm just trying to understand what that means for you guys. If they are able to continue in some form and sort their sort of balance sheet out, could they actually be a better competitor going forward? Or do you think, given they're so free cash flow negative, they will have to price normally, and hence that should be a positive for you? Thank you.
Thanks. Yeah. I think you've answered your own question. So them pricing normally to make a margin would be helpful. So, you know, part of the problem, part of their problem is, you know, they have not been pricing to make a margin. In fact, they've been pricing, in some cases, to lose money. So, that will be overall helpful. I think in terms of occupancy, you know, You know, we're in a very good position on occupancy today. We're at, you know, sort of mid-seventies, on sort of mature occupancy. That's a good and with a decent margin, that's an excellent place to be.
So we've still got the, you know, plenty of leverage left in terms of both occupancy and price, you know, 'cause we, you know, there's a lot more stock that we have available to move. So I'm quite happy with our position. I'd be more concerned if we were at this occupancy with a low margin, but the margin's quite healthy and improving and, you know, we've got everything, and we will flex it. I think, you know, there's no doubt 2024 will be a difficult year economically, but it will be a year also that we'll see more and more companies adopt, you know, flex work, adopt hybrid working as a way of working, so there'll also be revenue growth, and with that, occupancy growth from there. So, and, and clearly, we're opening lots of new centers that we're also filling up as well.
So, you know, overall, I think we're well positioned as we go into next year from a margin perspective, and there are many things that play into that. I think, you know, we're confident that we're ready with a good start as we come to the end of this year. Charlie, do you wanna add anything to that?
No, I think that summarizes it pretty well, but I think as you say, Mark, we've got a lot of capacity as well going through to next year, which is also helpful.
Yeah. The other question, part of the question, Sam, sorry, was?
I think you've answered it on WeWork, but if I can have one follow-up. In terms of the capital-light growth, will the CMD provide us with some sort of data points or trajectory to sort of judge how that can go in the next few years? 'Cause it is a little bit difficult from the outside, given it's such a rapid growth area.
... Yeah, we—I think we are going to add some numbers on here, so you'll be able to look at the sort of pipeline as you would look at hotel company, Marriott, or one of the others that, you know? Because at the moment, you can't see what the potential revenue will be, and we're aware of that, and we will deal with it at the Capital Markets Day.
Brilliant.
So you know that it's good stuff. We need to explain it better, and we're clear about what we need to do.
Thank you very much.
Thank you.
Thank you. The next question comes from Andrew Shepherd-Barron. Please go ahead. Your line is now open.
Thank you very much. I'm assuming you can hear me. Two questions, if I may. One on US GAAP. Can you just talk through a little bit about what your sort of decision process is as to why or, or when or why not, adopt it? And the second one is on Worka. I'm optimistic that at the CMD, you'll be talking about that as well. Can you sort of talk about, I mean, is that the case, and what sort of things should we be looking out for at, at Worka in that CMD? Thanks.
Do you want to do U.S. GAAP, Charlie?
Yeah, I'll start with that, and then Mark can cover Worka. So, Andrew, basically, the evaluation around US GAAP is that we think that it will show the company's financial performance better than IFRS, in particular, better than IFRS 16. So, for example, the IFRS 16, as you know, puts all the operating leases as net financial debt. US GAAP still shows them on the balance sheet, but does not put it as net financial debt. And it sort of gives a better indication of the performance of the P&L in particular. Clearly, there's no difference to how we generate cash in the business. We're doing a great job of generating cash at the moment.
As we said, in these results, net debt almost down—net financial debt, almost down by GBP 100 million in the last 12 months, and we expect net financial debt to continue to reduce during the course of the year. So, the U.S. GAAP change will not make any difference around that cash flow production. But at the same time, we think it will show the P&L in a much better way, that investors can understand it more easily. And from investor soundings that we've made so far, it's been very well received. The decision-making process around that is we just need to work through that it's not going to produce any spurious results that we're not expecting it to do, sort of around things like financial covenants and the like.
We don't think that it will, but at the same time, we want to be certain that it won't before we announce that we will be making that transition with certainty.
Okay, thanks, Charlie. On Worka, you're absolutely right, Andrew, that we will, you know, enlarge upon it, this sort of division at the Capital Markets Day. And it's number one, basically, it's. There does seem to be some confusion as to what it is, but essentially it's a collection of services, lines, and digital businesses that provide services to the whole industry. That's what it is. And it's a sort of all of those things added together in a single store for the industry to go to, and to use.
You know, it's a 50% margin business that will continue to grow as we both add services and add geographies to it, which we are doing at the moment through, you know, regular M&A, pretty much each month, small additions that are building out the platform. So look, it will take time. We'll explain that more at the CMD, but we're overall, we're happy with this investment, and we're happy that it will produce an excellent return for our investors over time. But it needs more and more development. In the meantime, it makes great cash flow and, you know, it's a good third division. You know, we've got three divisions here producing great cash flows now. We've just got to grow each one of them and continue to do that as we go through 2024, 2025.
Okay, great. Thank you very much indeed.
Thank you.
Thank you. Our next question comes from Michael Donnelly. Please go ahead. Your line is now open.
Michael, can't hear you. Apologies for this tech, guys. It's... If you can hear me, 'cause it's not great. Okay, Michael, are you there? No. Okay.
We have a follow-up question from Steve Woolf. Steve, please go ahead. Your line is now open. Steve, please go ahead. Your line is now open.
There we go. I think at the H1 stage, you said you'd taken over about 50 WeWork locations during H1. I'm just wondering, you know, what terms and deals are you making on those locations? Is that back to sort of the core business, as it were, with the traditional leases that are being renegotiated with landlords? Or has there been a change in that and it's been shifted more to capital-light along those structures? Just thinking about it, that in the terms of the growth.
There's a whole variety of structures, but the majority are capital-light.
Okay.
If not, all of them are capital light. It's whether they're risk light. Most of them are risk light.
Okay, perfect. Thanks, Mark.
Okay, any more?
We have no further questions in queue, so I will hand back to Mark to conclude today's call.
Okay. Thank you all very much for joining us today. We, as usual, Charlie and I are available if you've got any follow-up questions.