Servcorp Limited (SRV) Earnings Call Transcript

Good afternoon, ladies and gentlemen. My name is Mark Vaile, and I'm Servcorp's Chairman. On behalf of the Board, it is my pleasure to welcome members and other interested parties to the 21st Annual General Meeting of Servcorp Limited. Although we are not able to meet in person, I'm pleased that we have been able to meet online to update you on your company, conduct formal business and answer your questions. Those of us in the same room are practicing appropriate social distancing, in line with government health guidelines. I'd like to remind all those present that this is a public meeting. Members will be given ample opportunity to ask questions or make comments using the online platform, and I ask that any questions be confined to matters of relevance for a meeting of this nature. As it is now 4:30 p.m. and the Company Secretary has confirmed that a quorum is present, I formally declare the meeting open. In addition to those participants online, a high proportion of the holders of the issued capital are represented by proxy. Proxies have been inspected, and all those validly lodged have been accepted. I propose that the notice of meeting, as mailed to all registered members and lodged with the ASX on the 1st of October 2020, be taken as read. The minutes of the 20th Annual General Meeting of the members held on the 30th of November 2019 have been signed as a correct record of that meeting. A copy is available upon request from the Company Secretary. Before commencing formal proceedings, allow me to introduce your other directors. Firstly, your nonexecutive directors, Wallis Graham, who is the Chair of the Remuneration Committee; and Tony McGrath, Chair of the Audit and Risk Committee; and Servcorp's CEO and Managing Director, Mr. Alf Moufarrige. Also in attendance is Greg Pearce, Company Secretary. The company's auditor is also available online. Shortly, I will present my report on Servcorp's operations for the 2020 financial year and provide an outlook for our business for the 2021 financial year. I will then hand over to our Managing Director and CEO, Alf Moufarrige, who will give us his more detailed operational presentation. Following Alf's presentation, I will then address the items of business as they appear on the notice paper. Although this meeting is being conducted online, please let me assure you, there will be ample opportunity for you to ask questions. You are free to send in your questions via the Lumi platform at any time, and they will be answered at the conclusion of the items of business. [Operator Instructions] To allow everyone attending our online meeting an opportunity to vote, I'm opening the polls now in respect of all motions that members will vote on today. Members and proxy holders participating can vote online via the Lumi platform by clicking on the bar chart icon. Select the option corresponding to the way you wish to vote. Once the option has been selected, the vote you selected will appear in color. To change your vote, press a different option to override. Votes can be changed up until the time I close the polls. Proxy holders with directed votes will have these -- those votes automatically voted as directed. All open votes held by a members or proxy holder will be voted in accordance with the option you selected via Lumi. In the spirit of good corporate governance, the screen now discloses details of the proxy votes received in advance of the meeting on items 2 to 5. These will be disclosed in the minutes and notified to the ASX following the meeting. It is my duty as Chairman to ensure that members, as a whole, have had reasonable opportunity to ask questions about or comment on the management of the company, the remuneration report and other items of business before the meeting today. As previously mentioned, questions may be submitted at any time on any item of business, and they will be answered later in the meeting. I will now turn to my Chairman's address, which was released to the ASX this afternoon. Ladies and gentlemen, as I shared in the annual report, the 2020 financial year has seen unprecedented challenges for the world, and the flexible workspace industry is not exempt from the associated economic disruption. With the onset of the COVID-19 pandemic, we focused on maintaining strong cost control discipline and unfortunately took the decision to stand down or make redundant more than 100 team members globally. The majority of remaining team members also agreed to reduce their salary, although as a result of being eligible to receive the JobKeeper subsidy from the Australian government, we were able to reinstate many salaries. The CEO, senior executive and nonexecutive directors accepted reduced salaries as well. Servcorp has rapidly adapted to the present environment across our global footprint, with our priority being the health and safety of our people and that of our clients who utilize our locations globally. We continue to work closely with our clients who have been genuinely impacted to provide them with the necessary support to manage through the pandemic and beyond. The first 3 quarters of the 2020 financial year delivered a solid start. However, the subsequent spread of COVID-19 significantly impacted trading conditions from late March. Revenue for the year was $352.9 million, an increase of 5% on 2019 and a Servcorp record. Net profit before tax for the year was $15.6 million, an increase of 25% on 2019. And net profit after tax was $6.9 million with earnings per share of $0.072. Net profit before tax was impacted by a $2 million one-off restructure costs and write-offs and $19.4 million of deconsolidation losses and a $0.5 million of restricted losses. Excluding these significant items, which do not reflect the real operating performance of our business, underlying net profit before tax was $37.5 million. During the 2020 financial year, the business generated underlying free cash of $66.1 million, an increase of 3% on 2019. Cash and investment balances as at the 30th of June 2020, were $109.1 million, an increase of 49% on 2019. And the company has no external debt. Having strong cash balances provide Servcorp a buffer in handling the liquidity pressures resulting from COVID-19. In October, the company paid a final dividend of $0.09 per share, unfranked. Due to the current economic climate stemming from COVID-19, it was considered prudent to reduce the dividend per share. This final dividend brings total dividends for the 2020 financial year to $0.20 per share, resulting in a payout to members of approximately $19.3 million. During the 2020 financial year, directors and management completed a detailed review of our business. Leading up to the COVID-19 pandemic, Servcorp had already committed to and executed a global footprint consolidation. The pandemic forced further footprint reduction, and in June, we announced the closure of 12 locations in the United States by way of reorganization. Our remaining footprint in the U.S.A constitutes Chicago, Houston, New York and Washington, D.C. Servcorp still operates 125 floors in 43 cities across 21 countries. This takes me to the outlook for the 2021 financial year. For the 2021 financial year, we anticipate that even at a low case, Servcorp will remain profitable. Consequently, we expect the underlying business to continue to generate substantial underlying free cash. We expect COVID-19 to continue to significantly impact the way we live and work for the foreseeable future. When we emerge from the COVID-19 pandemic, we anticipate that flexible workspace solutions will be more important than ever, so we will continue to tailor our offering to serve those ever-evolving trends. Market research indicates potential strong growth in the future, as businesses evolve in the new normal. Our focus is on navigating this challenging environment and taking advantage of opportunities as they arise. We are determined to stay ahead in this changing competitive landscape using our unparalleled technology platform, which provides the capability to adapt to the challenges with which the world is faced. We have absolute confidence that our product is better, and our team is highly motivated to provide everything our clients need to help make their businesses succeed. I now turn to dividends. Dividend amounts to be paid in the 2021 financial year are uncertain. However, we would expect to make dividend payments consistent with our long-term history and commitment to members. Payment of future dividends is subject to currencies remaining constant and the mitigation of the impacts of the COVID-19 pandemic on our operations. Whilst always ensuring we retain strong net cash balances, we will continue to reward members with a healthy dividend flow when prudently possible. This financial year, we also witnessed a major change to the Board membership, with long-serving nonexecutive directors Bruce Corlett and Rick Holliday-Smith retiring from the Board. I wish to take this opportunity to sincerely thank both Bruce and Rick for their contribution to making Servcorp the successful business it is today. Servcorp was privileged to have 2 businessmen of such high caliber on its Board for over 20 years since its IPO. Following these departures, Tony McGrath has assumed the role as Chair of the Audit and Risk Committee; and Wallis Graham as Chair of the Remuneration Committee. Ladies and gentlemen, on behalf of the Board, I want to acknowledge the outstanding efforts of our CEO, Alf Moufarrige, our leadership group and all the Servcorp team members for their dedication and commitment during the past year of unprecedented challenges. Servcorp has proven over the more than 40 years of its existence to be a robust business, and this remains the circumstance today. We are confident that Servcorp will emerge from the COVID-19 crisis in a financially sound position and full of determination. And we look forward to the future with optimism, and I'd like to thank you, our members, for your continuing support. Thank you. I will now hand over to our CEO, Alf, to make his operational presentation. Following his presentation, we will conduct the formal part of our meeting.

Okay. My name is Alf Moufarrige, and as most of you know, I'm Servcorp's Chief Executive. And as I stop and reflect on Servcorp's history, I think the world is just a little tiresome. When we first listed Servcorp, they said that Servcorp will never work, long leases and short-term tenant leases, and they just have to go broke. Well, we seem to have survived that. Then Regus raised $4 billion, and everybody thought Servcorp will be crushed. They will never compete. That was 20 years ago. The global financial crisis came and everybody thought this would be the end of Servcorp, sold stock, price dropped to a $1, still here. Global financial crisis finished, and low and behold along came WeWork with $40 billion. This has got to be the end of Servcorp, or we -- predictions were. Well, we're still here. And WeWork had $40 billion in value, and Servcorp still rolls on. Well, now we're up to the virus. And so I talked to an analyst, and the first question he asked is, "How much money are you losing? And will the virus kill you? Or will Servcorp survive?" It becomes boring. But last year, we paid a $0.20 dividend, which was about an 8% yield. This year, we are paying $0.09 in the first half and I would hope $0.09 in the second half, which would be a 7.5% yield. We've still got $100 million in cash. We're cash positive. Many of the landlords that we deal with have given us relief. Many haven't. But the game is changing. And so, we'll remember those who just demanded rent even when operations were locked down, and Servcorp had made them a most generous rental offer and had only asked for relief for a period of 6 months. So this year, I think we'll have no less than $30 million in free cash. And I'd never pay more than 50% of the free cash in dividends, so that I hope we'll get past $36 million. I think real opportunities will arise as -- and will arise, and we'll be able to expand in the next little while. We've disbanded many of the locations in the U.S., and I will not tolerate any further losing centers for more than a 6-month period. So I then have a look at it and go, what happened in the last 20 years since we've listed? Well, we raised $150 million net, and we paid $301 million in dividends, and as I said, we've got $100 million in cash. As a 50% shareholder in a corporation that's still cash positive, I'm a very happy shareholder. I hope you, if you are a shareholder, are happy, too.

Following those remarks, I once again wish to thank Alf and all of our worldwide team for their dedication and commitment during the past year of unprecedented challenges. We'll now turn to the formal business of the meeting. Before we move into the first item of business, I would like to clarify that only Servcorp members are permitted to ask questions via the online platform today. I will endeavor to answer all relevant questions from members during today's meeting. However, as Chairman, I reserve the right to rule out of order any question or questions I consider to be outside the scope of the meeting. Please note that matters not pertaining to the meeting will not be covered today. So Item 1, the annual financial report, director's report and auditor's report. The first item of business is to receive and consider the annual financial report of the company, the director's report and the auditor's report in respect to the financial year ended 30th of June 2020. These were incorporated in the annual report mailed to members on the 1st of October 2020, and also made available on the ASX and Servcorp websites. No formal resolution is required on this matter. Members may have raised questions about or make comments on the financial statements and reports and the management of Servcorp. Members may also ask questions of the company's auditor. A representative of Deloitte is available online to answer members questions and comments relevant to the conduct of the audit, the preparation and content of the auditor's report, the accounting policies adopted by the company in relation to the preparation of the financial statements and the independence of the auditor in relation to the conduct of the audit. Ladies and gentlemen, the remaining items on the agenda require a resolution from the meeting, and voting on each item will be determined by means of a poll. As noted earlier, you may submit your vote at any time in case you need to leave the meeting, but I encourage all of you to stay for the discussion and to ask any questions. I will also give you a final opportunity to cast your votes if you have not already done so before I close the poll towards the end of the meeting. [indiscernible], the company's share registrar, will be the returning officer for the purposes of the poll. The persons who are entitled to vote on this poll are all members, representatives and attorneys of members and proxy holders, except those precluded by operation of law or listing rule as set out in the notice of meeting and explanatory notes. I advise that subject to the voting exclusions set out in the notice of meeting, on a poll, every member who is participating themselves or by proxy, attorney or representative, will have 1 vote for each share held by him or her. I am holding open proxies in my capacity as Chair, and it is my intention to vote all available proxies in favor of all items. We move on to Item 2, the adoption of the remuneration report. The second item of business is to vote upon the adoption of the remuneration report of the company for the financial year ended 30th of June 2020. The remuneration report was included at Pages 40 to 51 of the annual report. It is important to point out to members that the vote on the proposed item is advisory only and will not bind the directors of the company. However, as we have in prior years, the Board will take the outcome of the vote and comments made by members into consideration when reviewing the remuneration practices and policies of the company. The screen now discloses details of the proxy votes received in advance of the meeting on Item 2. I now put the motion that the remuneration report be adopted. As indicated earlier, voting on this item will be by means of a poll. And if you have not already done so, please now complete your voting via the Lumi platform. The poll will remain open until after the Q&A session later in the meeting. [Voting]

The next item of business is the reelection of director. Rules 6.1(f) of the company's constitution requires that 1/3 of all directors must retire annually by rotation and, if eligible, may offer themselves for reelection by members. This year, I am standing for reelection as a director of the company. The notice of meeting provides an overview of my professional experience and contribution to the Board. However, I wish to take a moment to address the meeting regarding my reelection. Good afternoon, ladies and gentlemen. It's Mark Vaile here. As I'm up for reelection this year, I thought I should give you a bit of my background. I've had the honor of being a nonexecutive director on the Board of Servcorp for the past 9 years and have also served as Chair of the Remuneration Committee and for the past 12 months have served as your Chairman. Prior to joining the Board of Servcorp, I had a very diverse and fulfilling professional career firstly in the property industry, owning and operating our own real estate business. Then following a 5-year stint in local government, I was elected to the Federal Parliament of Australia, where I served for 15 years. During this time, I had the honor of serving as a Senior Minister and Deputy Prime Minister in the Howard government. Since leaving politics in 2008, I've had the privilege of a very fulfilling career back in the private sector. Along with my role here at Servcorp, I have served on the Board of Virgin Australia for 10 years up to December 2018. I've been a Board member and Chairman of Whitehaven Coal Limited since 2012, and I've also been a Board member on the Singapore Stock Exchange-listed Stamford Land limited since 2009. Stamford is a Singapore-listed property company. Ladies and gentlemen, here at Servcorp, we appreciate your commitment and understanding through what has been a very challenging year. To the credit of the management and staff, they have made our business fit-for-purpose to support our clients going forward. With your support today, I look forward to continuing my role as Chairman, looking after your interests and supporting the efforts of our staff and management. Thank you. Ladies and gentlemen, the screen now discloses details of the proxy votes received in advance of the meeting on Item 3. As indicated earlier, voting on this item will be by means of a poll. If you have not already done so, please now complete your voting via the Lumi platform. And the poll will remain open until after the Q&A session later in the meeting. [Voting]

The fourth item of business is the appointment of KPMG as auditor of the company. Deloitte Touche Tohmatsu have agreed to resign as the company's auditor, and the resignation has received to the consent of ASIC. KPMG have provided their consent to act as the company's auditor, and they were duly appointed at a meeting of the directors held on the 4th of November 2020. We are seeking the approval of members for the appointment of KPMG as the company's auditor in place of Deloitte Touche Tohmatsu. The screen now discloses details of the proxy votes received in advance of the meeting on Item 4. As indicated earlier, voting on this item will be by means of a poll. If you have not already done so, please now complete your voting via the Lumi platform. The poll will remain open until after the Q&A session later in the meeting. [Voting]

The fifth item of business is the approval of options to be issued as a deferred short-term incentive to our CEO, Alf Moufarrige. Details of the issue have been provided in the notice of meeting and the explanatory memorandum. The directors, without abstaining, unanimously support this item. The screen now discloses details of the proxy votes received in advance of the meeting on Item 5. As indicated earlier, voting on this item will be by means of a poll. If you have not already done so, please now complete your voting via the Lumi platform. The poll will remain open until after the Q&A session later in the meeting. [Voting]

Item 6, other business. There is no other business of which due notice has been given. So I will now move to the Q&A section of the meeting. As explained earlier, questions can be submitted online via the Lumi platform. Thank you to those members who have already submitted questions. We will now move to the first question.

Thanks, ladies and gentlemen. We'll go into the Q&A session now, and I'm going to get the Company Secretary to read out the questions that have been submitted via the online platform. Over to you Greg.

Thank you, Mr. Chairman. We've received 7 questions so far. The first question is from Mr. [ Leslie Sheppard ]. Mr. [ Sheppard ] asks, the adoption of AASB 16 has produced financial statements which appear puzzling and lopsided. How our shareholders supposed to make sense of them and form meaningful judgments on the company's financial position?

Thanks, Greg. I'll just hand it over to our company's CFO, Anton, to answer.

Thank you. The new leases standard encompasses a whole new set of accounting principles, and I'd encourage you to review the notice to the financial statements and the adoption principles implied in relation to the new accounting standard, and they are set out on Pages 59, 60 and 61 of the annual report.

Thanks, Anton. Great. Next question.

Second question...

[ The new one ] confuses us all.

Thanks, Alf.

It does. So we work on cash and the positioning of your company. And it's got $100 million in cash. If you listen to my talk, it's going to produce a minimum $30 million. We have substantially more than that this year. And it's got no debt. So it's in pretty good shape.

Thanks, Alf. We'll move to question number 2.

Question 2 comes from Mr. [ John Field ], who asks, will next year a hybrid AGM with public and online options be available?

Well, I suppose the answer to that is we are online this year because of COVID-19 and the restrictions that we've all been operating under for most of the year. It remains to be seen what the circumstances are going to be next year, so it's hard to predict. But prior to this COVID year, this year, I think that we've had open public meetings, but we've also -- there has also been an online element to it in the past. I might just get Greg to explain what has been the case in the past and presumably, that will be the case in the future.

In the past, we have had a webinar as well. So that people can log on and watch and listen to the meeting virtually and lodge questions through that platform. So we, hopefully, will be able to go back to that in future years.

Thanks. Alf?

I believe that it should be that, in person. So I hope that a year from now, we'll be able to do it in person. But today, it was an all-time record number of coronavirus cases across the globe. Australia is in pretty good shape and as is Japan, but who knows. We'll try.

Yes, we will. Okay. We'll move on to question 3.

Question 3 is from Mr. [ Jeffrey Faye Poon ]. Mr. [ Poon ] is asking in relation to Item 5, the issue of options, why the base EPS for the STI options vesting condition is set at the stat 2020 earnings per share, which, as we know, contains numerous one-off write-downs. He asks, that would seem such a target doesn't reflect the underlying performance of the business. It seems a rather low bar. The earnings per share term level is set by the deed, the options deed. It is no discretion on setting that amount. It must be the earnings per share as per the audited accounts, which have been lodged with the ASX. It is a low amount this year that also caused the currently options, which are out there are ready to lapse and not be -- not vest because it was so low. So I guess it's -- it goes both ways. In this case, it will be lower for starting, but it caused the other ones to fail.

Okay. Thanks, Greg. Okay. We'll go on to the next question.