Good morning, and welcome to the International Workplace Group PLC third quarter trading update. This call is being recorded. Today's call is hosted by Mark Dixon, CEO. I will now turn the call over to Mark. Please go ahead.
Thank you very much, and good morning to everyone. Thank you for joining us for our 2024 third quarter trading statement. We remain the clear global leader in the dynamic and fast-growing hybrid work industry and are poised to continue to capitalize on the positive market dynamics and further growth. Q3 has seen continued positive momentum for the group. We're executing on our plan and delivering, as we said we would, on the following things: first, revenue growth, second, margin development, third, cash flow production, and along with that, net debt reduction, and most of all, continued strong network coverage expansion, which all leads us to having good visibility and runway towards our 1 billion medium-term EBITDA target, which we first set out at our Investor Day in December 2023.
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 system revenue growth of 2%. That's to $1.1 billion in the quarter and $3.2 billion in 2024, so far to the end of September. Our strategy is to consistently deliver the results which move us towards that medium-term target that we set out, and we continue to sign new locations with minimal CapEx requirements or lease liabilities that continue to underpin our capital-light growth strategy. We're converting these signings into openings at pace. In management franchise, we opened a net 100 locations in Q3, which takes us to over 1,000 locations open and trading now. It's worth taking a step back at this point to look at how far we've come.
We started 2023 with less than 500 locations in management franchise, and you can see we've come a long way in our openings. But really, I want to emphasize that this is still just scratching the surface, and the growth runway ahead is very healthy. We have a great network development team, and they continue to sign up new partnerships throughout the network. The growth in the network is extremely healthy in the U.S., but importantly now broadening out. So in Q3, we signed up another 234 locations across the network. And in the first nine months, we signed 568 locations. This is about 10% higher than the same period in 2023. These signings are across management franchise and company-owned and leased. It's important to note that the majority of leases in the company-owned and leased are very similar to capital-light. We've explained this to you before.
They're both capital-light and asset-light. But because there's a lease, we've put them in the company-owned and leased. So you can see some movement in there, and that movement is picking up speed as well. Coming back to my point, coming back to my point of scratching the surface of growth, once we have over 1,000 locations opened in management franchise or 169,000 rooms open, we've got a further 173,000 rooms signed but not yet open. And this will underpin our accelerating growth in this division in the next quarter and into 2025. These locations are also filling up at very satisfying performance here for our partners and for ourselves. The management franchise system revenue growth here is 19%, and our fee growth 46% on the back of that in the quarter-on-quarter year-over-year basis.
In our other segments, company-owned and leased saw margin expansion to over 25%. So we set out that we expected to get to about 30% contribution margin, and we've now got from, I think the start point, Charlie, was about 20%, and we're now to 25%. So this is something to keep an eye on because this is showing a very consistent performance as well. And our outlook is healthy as we look into the company-owned and leased as well. Turning to Worka, as we've highlighted during the course of this year, it's been a slow rollout with delays on the implementation of the new digital platform. This will launch at the end of the year, so we'll start to see a pickup as we go into 2025. But that delay has cost us on the growth side during the course of this year.
Turning to costs, we're really highly focused on costs, and our team have done a great job in managing this. Although inflation has reduced, it's still there. And remember, we're operating in more than 120 countries, and some countries have got extremely high inflation. But we have managed to keep the cost pretty flat. And this, again, has helped us with higher revenue, especially on company-owned, up 4% on open centers. And holding the cost pretty flat is flowing through cleanly into margin pretty cleanly. Finally, look, again, just emphasizing our point one more time. At our Investor Day in New York last December, we laid out our plans to grow in a capital-light manner, increasing cash production substantially by growing fee income and by expanding the margin on company-owned and leased, and growing revenues at Worka.
And all of this together gave us confidence in our target of 1 billion in EBITDA in the medium term. I'm pleased to see that even though we've only got two of the three objectives working, they're working better than expected. So we're compensating for the slowness of the Worka performance increase. But just with two working well, we're very much on track for our medium-term target. And I think every quarter that goes by, where we notch up another pleasing set of results, that gets us one step closer and so on. So we are very much looking ahead into the next quarter and into 2025, each quarter, 2026, and so on, to ensure that we deliver and deliver comfortably to that number. So with that, I'll hand over to our CFO, Charlie Steel, to run through the numbers in more detail. Charlie.
Thanks, Mark. As Mark said, we delivered underlying quarterly system-wide revenue growth of 2% to $1.1 billion on a year-over-year constant currency basis, taking our September year-to-date system revenue to over $3.1 billion. Managed franchise, in particular, seems to see new rooms being signed and, importantly, converting into openings at pace. In the third quarter of 2024, we opened 52% more centers on a net basis than in Q3 2023, and we've now opened more locations in managed franchise in the nine months to the end of September than in the whole of 2023. System revenue for that segment grew by 19% in the quarter on a year-over-year basis to $157 million, delivering 2024 year-to-date system revenue of $444 million, representing a growth of 17%. This system revenue growth is translating into very healthy fee income for IWG.
Fee income for the quarter grew by 46% year-over-year and is increasingly becoming a meaningful contributor to the group and dampening operational leverage. RevPAR is evolving as expected, given the network growth, the management franchise segment should deliver more than $300 million of system revenue on a quarterly basis, i.e., double our current system revenue in this business, our corresponding fee income will show extremely healthy growth once all rooms currently open and signed reach maturity. Given the momentum in signings and the experience of our partners see when rooms are open, we are increasingly confident this division has years and years of growth ahead of it. Key to increasing our cash flow in company-owned and leased is expanding our margins.
Just as we are delivering what we said we would in management franchise, we are also delivering company-owned and leased, and margins are expanding in a very healthy manner. Our open centers saw revenue growth of 4% in the quarter on a year-over-year basis, and we remained committed to driving revenue whilst we remain active in managing our network to ensure maximum cost efficiency. This combination and focus results in the contribution margin in Q3 being over 25%, producing an absolute contribution of $204 million, growth of 13% on a constant currency basis year-over-year, and 12% growth in contribution to the nine months at the end of September versus the nine months in 2023. As we had previously guided, Worka's revenue remained flat, having been impacted by the rolloff of the legacy contract and digital product delays that Mark just spoke about.
The current platform investment will support revenue growth in the future, however. Moving to the balance sheet, we are pleased to complete our refinancing in June 2024. This gives the company an appropriate and sustainable capital structure from which to continue to deliver growth as we progress to our short-term one-time net debt to EBITDA target. We reduced net debt by $34 million in the quarter, and this was driven by improved cash flows from our revenue growth, cost control, and continued focus on our capital-light operating model, and this was partially offset by the FX impact of a weakening dollar versus euros, which increased the carrying value of the unhedged position of the corporate bond by EUR 8 million.
As a result, we are confident that both 2024 EBITDA and net financial debt will be in line with management's expectations, which have not changed at all during 2024, as previously confirmed in the interim results on the 5th of August 2024. With that, we'll hand over to questions.
Questions.
Thank you, Mark and Charlie. I would like to now open the system for questions. If you would like to ask a question, please click on the raise hand icon. When you hear your name, please unmute your microphone before asking your question. We will now take a few moments to collect your questions. Our first question is from Paul May. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Hi guys, thanks for taking my question. Hopefully, you can hear me okay. Just one question. Apologies, relatively new to these releases, looking at the name. I think you mentioned in line with expectations or management expectations on EBITDA and net financial debt as the previous quarter, and then if you look back on the previous quarters, I can't actually find a number. I just wondered if you have provided a number or you're willing to provide a number for both of those things or a range, just so we get a sense as to what the management expectations are. Thank you.
Paul, thanks. I think we haven't put an explicit number on that, but clearly, management expectations are very aligned with market expectations. So there's a broker consensus for that. Otherwise, we'd have to report a deviation from market expectations.
Thank you.
Thank you. Our next question is from Steve Woolf. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Hi, all. Just a couple from me. A couple from me on terms of the franchise agreements. Could you sort of give any commentary as to how those agreements are changing over time now, given sort of the 18 months they've really started growing momentum? What are sort of the learnings from that, the financial agreements that you've put into place? Has that changed? And also, who are the partners you're increasingly signing up these days? Has that changed at all? And then finally, continuing on that theme, just any regional comments you could make within the franchise business or even extending to the company-owned and leased at this point? Thanks.
That's great. So you're quite right in suggesting that there is an evolution, and there certainly has been an evolution. Just to put it in perspective, Steve, we've been doing managed and franchise for a good 30 years. So it's not something new. We changed the terms in terms of the way we would do it and invested a lot more money into a salesforce to go out and actively sell these things. So if we just look at the sort of demand side, because I've just come back from the United States, and I met with a lot of people there, both owners of property and investors. And the key question coming up is everyone's very confused over what is the future of commercial real estate?
And there's this sort of ongoing push-pull commentary and opinions sort of taking place in newspapers, which is the push-pull is heavy PR by the real estate industry saying it's all coming back and it's better. And what I can report is that the real estate is off its sort of it was lying down flat, now it's on its knees, and it is coming back, but very, very selectively selected places and so on. And this sort of back to what everyone coming back to the office and how does that affect us? So if we look at it, if we look at what's happening with our partners in real life, as opposed to what's being sort of what the commentators are saying and what the PR is saying, people have a lot of vacancy.
And people break into institutional owners and into sort of entrepreneurial owners, I would call them. We are growing both of these groups. And again, on the basis of my trip to America, we were growing even more because both groups and the entrepreneurial groups find it much easier. But now the institutional groups are also understanding that this is a valid activity that creates cash flow in buildings. It's not just a solution to a problem of vacancy. It's a solution to a problem of cash flow in the long term. We're also starting to get key breakthroughs we need that value will start to value the cash flow so that owners, institutional or entrepreneurial, can sort of take a valuation to their bank. Property is heavily leveraged and requires that. But we are starting to get breakthroughs.
As Charlie said, or I said, we've got 1,000 of these open and trading. And you're starting to get a body of customers for valuers who need to value this. We can supply the data to support it and so on. So I expect in 2025, on the basis of my meetings in the U.S., certainly in the U.S., we will break through on valuation, one. Two, the main obstacle to doing more, whether it's institutional or entrepreneurial, is their ability to fund. And we have evolved our offering to continue to reduce the cost of opening whilst maintaining quality. So by working supply chain, we also introduced a rentalized furniture offer, things like this. These things are helping lower the cost of opening, which is a major obstacle to opening with cash-strapped institutions or entrepreneurial owners. So the contract itself has remained consistent.
We will add more brands next year. Some of those brands will command a higher, let's call it, management fee because they're more complex in their nature, and you'll see those starting in January. There's a series of them, and these produce higher revenues, higher margin for an owner, but require a higher input from us in order to get there, so you'll see those, so we're evolving the brands that we're doing. We're evolving the way we're financing. We're evolving valuation. What we're seeing very clearly, and I'm sorry to talk about this at length, but it is very important. We're seeing more and more repeat business from the same owners, and that's what we're looking for. One-offs are good. We're very happy to do them, but the real sort of success story in this, in sustaining it, is that owners come back.
They do one, two, three, four, five, or more. And whether they're entrepreneurial or institutional, I'm happy to see that is happening. And again, I met with our entire management team from every state in the U.S. We had a conference in Los Angeles. And hearing it from the grassroots, these are the people that interact with the partners in each state. We're getting very good feedback, and they are getting more from those same owners. So we're getting true partnership at every level. That's the U.S. Rest of the world, as I said and Charlie said, we're starting. We've got traction in more countries. We haven't yet opened up all countries simply because there are obstacles in valuation and/or financing that are slightly higher, and that tends to slow things down. The demand's everywhere. It's a question of, can we get a deal that works in those countries?
But look, overall, this is very important to us. And we are spending a lot of time, resource, and money on this to make sure it's right. But it has evolved. It is robust. You will see it evolve further as we go into 2025. I don't know if you've got any questions on that, Steve, because I'm sure this is an area that everyone on this call should be interested in.
Thanks, Mark. I mean, it's a great discussion point. I mean, what proportion of the business you're doing at the moment with those openings and the pipeline, what proportion of that portfolio is in the U.S.? Just trying to get a scale of sort of the acceptance levels, as you've just sort of outlining in the U.S. versus rest of the world. Can you sort of give any points? It's about half and half. Okay.
It's about half and half. I mean, but the U.S. has got the biggest pipeline. But the financing obstacle's higher in the U.S. That's what's slowing it. So we're working hard to say, how can we narrow that gap? And we've had several discussions about how we can help people without using our balance sheet. We can't move to capital more heavy.
No.
So it's a question of getting the right balance there. But certainly, the pipeline's very strong. Financing is the issue for them, not for us.
Perfect. That's great. Thanks, Mark.
Thank you.
Thank you. Our next question is from Dan Cohen. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Morning, gents. Dan Cohen here from HSBC. I've got some questions here. One is just in relation to what you were just talking about earlier, Mark. Is there a country or which countries would you say that have the significant potential, but you're not yet present in? Are there any sort of examples that you could mention today where you see sort of big potential, but are still very much in the early stages? Second question is on the Managed and Franchise signings in Q3. An unusual dip year on year in the number of signings there. I was just wondering if you could give us a bit more color on that. Appreciate there might be some lumpiness, but just wondering what your commentary on that would be. And the third question is on Worka, please, on the platform investment there and just what's going on there.
If you could give us a bit more color, that would be much appreciated. Thank you.
All right. So look, first of all, just dealing with this number difference, it's nine centers difference. And that's small. And it is lumpiness. That's all. So measure that on the full year, not on the quarter. It's got good momentum. And that would have been probably a lumpiness last year in that particular quarter. But we're not worried about that, Dan, in terms of there being any change to our momentum. In fact, as I said, the pipeline's stronger than it's ever been on signings. In terms of I'm not sure what your question was, but in terms of countries, we're in about 121, 122. There's another 50 countries to do. None of those countries are unsanctioned, by the way. So you've got a few countries that are sanctioned and therefore that have big potential, but we can't do.
But apart from those, there's no countries that have large potential. It is worth noting, and I should have said it in response to the previous question. Also, if you look at our franchise partners, they're also growing substantially. And I think the standout is Japan with Mitsubishi. They are growing very quickly as well and at very good fee levels. So that, I think, is a good watchword. Coming back to sort of the countries where we're, let's put it in inverted commas, underperforming, it'd be places like Germany where you've got a very, very institutionalized, very formal setup on real estate that is hard. So the deals we're doing are more there with entrepreneurial owners, less with institutions. We have to break through on that. So we are putting more resources. That would be the biggest underperformer in growth, as an example.
And there's a number of other countries that sort of fall into that gap. Interestingly, places like Latin America, we've got quite good growth in managed and franchise. And that is surprising in that things are hard to finance there. But because you've got more entrepreneurial owners, you've got more people that can raise the finance to sort of do the centers and add them on. So that's looking much stronger. That's performing better as we end this year. And then you've got sort of standouts in Continental Europe. Again, if we could get every country going like the best country in Europe, we'd blast through all of these numbers quickly. And that is what we're working on. We just have to deal with the issues, evolve the model to break through to higher growth. The demand's certainly there. That's the key question.
I think Charlie's brought out in the numbers. The key thing here is, one, are you signing them? Two, are you opening them? Three, are you filling them up? And we absolutely are. So owners are happy. Partners are happy. They do more. And clearly, it's good also for increasing our fee income as a result of the increased revenue and so on. But there's a lot more to do. We're certainly not anywhere close to the finish line yet. So a lot more to go there. On Worka, what we've got is that we've got a new platform, which was supposed to be delivered early in the year. It is, I'm assured, going to be delivered at the end of the year. So it's extremely late in its delivery. The underlying growth is okay.
It's being masked, of course, by the loss of the contract that we've talked about many times. But we expect, if we look forward to 2025, that both we'll have the platform and we have other things that we're adding in that business that will grow. And we're confident there that that will start to get back to its proper position. But really, for us, when we look at the business, that's the icing on the cake. The cake itself is the company-owned and franchised. That's the icing on the cherry if we can get that right and pick up the growth into 2025, 2026. So we're doing everything we need to do there. And it has our maximum focus. Rest assured of that.
Fantastic. Thank you, Mark. And just if I can ask one quick follow-up to Charlie, please, on US GAAP. You've confirmed that you're going to make the change next year. Can you perhaps give us some background on that, please, and talk about timing as well, please?
Sure. So Dan, it will be implemented for 2025. We're going to be doing some workshops at the start of the year to help everybody understand what those changes mean. So what we'll show is basically the historic numbers at the start of next year, in particular for 2022 and 2023, with the historic IFRS numbers and the translation through to the US GAAP numbers and what's changed. I think sort of the way that people have done that before has been quite well-trailed. And so that will then sort of precipitate the full year 2024 numbers coming probably just shortly after the full year 2024 announcement in March. The one other thing I'd also just add is that we've added a data book with all the historic numbers in US dollars onto the investor relations website today in Excel format.
So for people who want to be able to go and model the business, that should make life a little bit easier for them.
Thank you.
Thank you. Our next question is from Michael Donnelly. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Thank you. Can I just check? You can hear me?
Yes, we can.
Oh, great. Thanks. Just one quick one from me. Mark, in the interim, I think you were guiding to about a one percentage point margin progression annually on company-owned. Does that still remain the case given the huge step up that we've seen in this quarter in the margin?
Charlie, how do you want to answer that?
So, Michael, I think what we guided to is one percentage point annually over the medium term as we get towards our $1 billion EBITDA target. What I would say with that is that doesn't need to be linear. We've made a little bit more progress this year than I think we were initially expecting to. We still see, though, the total being five percentage points over that medium term.
That takes us up to the 30, doesn't it?
Yes, it does. Yeah, exactly.
That's great. Thank you.
Thank you. As a reminder, if you would like to ask a question, please click on the raise hand icon. Our next question is from Frédéric Cotic. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Frédéric, are you ready? Frédéric, can we move to next, perhaps? Richard, I think.
So our next question is from Paul May. Please unmute your microphone before asking your question. Your line is now open. Please go ahead.
Hi, guys. Sorry, just a quick follow-up on the comment you made around Germany being difficult to break into currently just because of the institutional situation. I think sort of from my side, on a real estate perspective, German offices is probably one of the most difficult markets. At what point do you think that the institutional owners will realize that and realize that the world has changed and the move to hybrid working is the future and start to adopt your type of model and other sort of hybrid working solutions? Do you think it's just a matter of time, or do you think that there's a?
It's a matter of time. Look, what's very interesting, Paul, is that Germany is one of the standout countries in Europe for hybrid working. Now, at the moment, you have to look at this. People are working from home in Germany. The German infrastructure is good. The internet's good. And the German workers, and I'm sort of giving you a sort of big picture view here, in general, German workers have a lot of power. It's sort of they have a lot of bargaining power because of the way German industry is set up. And commuting can be equally difficult in places like Germany, even though the public transport system is slightly better than, say, the U.K. From a practical point of view, more people are hybrid working.
Now, what we can see a lot of companies doing, and they're doing it with us, and we can see it, is they're sort of doing a back-to-the-office policy but saying, "You can use any location. We've got a contract with IWG. Go to one of those." That is what's happening in America. And it's providing us with more and more revenue and significant companies doing it. And in America, we've got just a totally different level of both margin and usage because of this. But it's because our network's so much bigger, and there's so much more coverage. And as we add more coverage, it becomes more and more useful. In Germany, we do have growth. We have got owners working with us, just not enough. But we're redoubling our efforts. This is a question of people. It's a question of getting the pitch right. We will break through.
So it will change because Germany is the place that this is changing more than perhaps anywhere else. But if you know German real estate, you know that it's a very, very slow-to-change, very structured thing. It's a different real estate market. And by the way, we're working in 120 countries. There are lots of outliers in that. So you have to adjust it to the different countries. But our standout country in Europe is Italy. And if we could get Germany, Germany on its own would do a couple of hundred a year if you were doing it on the same scale as Italy. That's the scale difference. So we have to find a way to break through in somewhere like Germany. We have a good trading business there. We have decent coverage, but we're undersized there. We've got to pick that up.
But there's a lot to play for in places like that.
No, I'd agree. It's a market where it has changed much more than real estate owners would. It's, as you say, it's the reported versus the actual. It's changed a lot more than they'd report. And it's just a question of owners coming round to the idea or accepting. There's a cultural shift that's happened, and you're in a good position to take advantage.
Paul, look, if you look at it in sort of summary terms, owners have to do more. The ownership of real estate historically has been a very passive thing. You buy the real estate. You outsource the letting of it to CBRE or JLL, and you stand back and check the credits of whoever wants it. Now, the situation's changed where owners are more and more starting to become more entrepreneurial. They're having to add more amenities in their building. You go to New York now, pretty much every large building's got two, three amenity floors. And we're part of that. And that's happening in London and all major cities. So they're having to invest more to make their buildings more attractive. They're having to do more to create cash flow. And so real estate is moving to be more of a business than just an investment business.
It's more active, more proactive, more operational. We help in that. And again, coming back to our—we're adding more brands next year, which will help further investors to sort of use us tactically to create cash flow in different parts of their estates. But over time, this is what will happen. And even with larger space, the more sort of conventional, eventually, it will move to being a sort of packaged product rather than just you go out and rent square feet or square meters, and you do everything. That will change. And we can see that also changing what we do in one of our businesses, which is managed space. That we see significant growth now and into next year because all companies pretty much are looking to be asset-light, less CapEx, more OpEx. That's what people are looking for.
That's what we can provide and help owners to provide that and get more margin in the process.
Sounds good. And couldn't agree more. So it's a revolution, not an evolution, I think, on the use of office space. Thank you very much.
Thank you. Frédéric, are you got your speaker on now?
Good morning. Can you hear me?
Yes, we can. Yeah.
Hi. This is Frédéric from SGCM. Would it be possible to please provide more color on the contribution margin in the quarter for the owned and leased segment, and sort of what are sort of the key drivers to get back to the 30% range? Thank you.
So that has basically come from, as you see, this 4% increase in revenue from open centers combined with the cost control that goes with that. So that's not only rent reductions but also other levels of cost control and being smarter about some of our key costs that go into the centers.
And you've got a 4% open center as well. So you've got revenue growth, and that's flowing through. And don't forget, in these groups, I mean, we're reporting them to you. They are moving, especially that group, because these comprise of centers that some of them are 40 years old and making big margins, and some have opened in the last month. So you've got a vast range of, how many centers are in that group, John? Do you have any idea?
Just close to 3,000.
Yeah. So you've got movement in there. But overall, Charlie and I are looking forward to tracking that margin improvement. And we can clearly see that if we just keep on in a highly disciplined way, managing the costs, growing the revenues, we can squeeze this additional 5% out that we've talked about. And we'll do that as soon as possible. But it will take time. But we're in good shape as we end this year with that margin, taking that into next year, which sets us up well for next year.
Thank you very much.
Thank you. That brings us to the end of the questions and answers session. Any further questions may be sent to the investor relations team. I will now hand back to Mark for final remarks.
Okay. Thank you very much for all of your questions. And as our friend said here, if you have any questions, we're open to answer those. And if you can just get in touch with Richard Manning, head of investor relations, that would be great. So thanks for your time, everyone. And we'll speak to you very soon. Thank you.