IWG Plc

LSE:IWG

Earnings Call Transcript 2020-Q3

[Operator]

Hello and welcome to the IWG plc Third Quarter Trading Update. [Operator Instructions] Just to remind you, this is being recorded.So today, I'm pleased to present Mark Dixon, Chief Executive Officer; and Eric Hageman, Chief Financial Officer. Please begin.

[Mark Dixon, CEO & Executive Director]

Thank you very much, operator, and good morning, everyone, and thank you for joining us this morning to discuss our third quarter trading update. I'm joined on the call today by Eric Hageman, our CFO.We continue to live through unprecedented times. One thing I am certain about is that 2020 will be the toughest challenge this business has faced in over 30 years since its inception. And it's required decisive and immediate action to combat the effects of the pandemic and stay the course.Our first priorities through this very difficult period have been for our team members, our customers and our partners, and our buildings are meeting the highest standards of cleanliness and distancing. Our teams are now fully experienced in all aspects of management and operating through the crisis.An important item to note is the significant support that we've given to our customers with deferments and other support measures. This has reached GBP 80 million so far and is likely to be higher by the end of the year with more lockdowns occurring. The impact of the pandemic has been greater than we imagined at the beginning, but there are some very strong positives in the actions we've taken and continue to take.Our laser focus on cash, unrelenting attention to cash preservation, cash generation and cash management, as previously reported, we moved quickly to take decisive action to protect liquidity and achieve early cost savings. This work continues at pace through November, and I'm pleased to report that cash inflow in the trading -- at the trading level was positive throughout this period. In fact, the cash position moved forward even after finishing off the investment in new centers.We also have good headroom to capitalize on opportunities that may come along in the future. We closed the quarter in a net cash position of GBP 10.9 million, with over GBP 860 million of available liquidity headroom. This is an excellent position to be in.We've made progress in respect to cost savings and are on track to achieve approximately GBP 200 million of savings, but we hope to do better. As I've said, we took immediate action, as we previously discussed, to achieve this through looking at salaries, headcount, procurement, all types of overhead, all types of costs and throughout the business, no stone left unturned, and we still continue to do this to this day.More important, however, is the network rationalization program. Network rationalization is ongoing. Our focus is to continue to work with landlords to negotiate solutions that make centers significantly impacted by COVID-19 sustainable for both parties. Unfortunately, this is not always possible, and we must close centers. We have now rationalized approximately 3% of the network. Whilst we've made good progress in line with our expectations of potentially rationalizing around 4% of the network, there is still much work to be done, and it is too early to predict with certainty the eventual outcome in these unprecedented times.We've achieved remarkably good sales during Q3 and into October, with more companies moving towards a flexible work platform. In fact, interest in what we are doing is at an all-time high. The real challenge for us has been greater customer churn due to clients either closing their operations, exercising their normal right to leave or being affected by other COVID-19-related challenges. This and the ongoing significant impact on service revenue, which, as you know, is normally historically, around 28% of total revenues, mean that 2020 overall will not be pleasant reading.That being said, I believe our revenue performance has been robust in the circumstances, and our platform has once again shown to be resilient through this -- its greatest test so far. There is clear and growing structural demand in the flexible work market, and we're well positioned at the heart of this growth.We're seeing more customers coming into the market as a result of the profound change to the company and worker expectations. Our offer of significant cost savings and flexibility through our hybrid work offer with its attendant environmental benefits is resonating with companies globally.Significant progress has been made in our strategic pivot in network growth towards capital-light -- towards a capital-light model. Despite the pandemic, we've signed 4 multisite franchise deals in the third quarter and a further 2 so far in the fourth quarter. Interest in franchising is strong and has been helped by the growing realization by investors in the prospects for flexible real estate, which more and more are convinced is the new direction for real estate and are investing with this in mind.Importantly, in addition, we are seeing more and more opportunities to secure management agreements and joint ventures with property partners. Numerous deals have been signed in the past month with many more contracts currently under discussion. This is an important milestone in our development and will move us even further away from the balance sheet cash-heavy model that we've used in previous years.In addition, we continue to see increasing opportunities to grow inorganically through M&A. As we've said today, we're close to deploying the first tranche of capital raised in May. We continue, though, to adopt a patient and cautious approach, but we do expect to complete some deals in Q4, which are currently in due diligence.We have opened 121 locations in the 9 months to the 30th of September, and our net investment has been GBP 170.5 million. There will be a small amount left in Q4 as we finish off the investment program of centers pre-committed pre-COVID. We are confident that our pivot in network growth will allow us to grow more quickly and consume substantially less cash as we do so. This is an exciting and a key strategic program that we're confident will build momentum into next year.The pandemic has accelerated the change that was already happening in the way people are working. Digitalization and new technologies are transforming the world of work. Our research shows that these changes are here to stay. The research we conducted reveals that commuting is one of the biggest barriers to the return to the office post COVID-19 as people have enjoyed working from home and have tasted the relative luxury of not having to commute.It's worth noting that all our products support these new ways of working. In particular, it's worth singling out our home support product, which have seen very significant growth over the past months. Although they're only 8% of revenue, they've experienced strong double-digit growth throughout the period and we've signed deals in the past 30 days, 1 with Nestlé in China for 1,500 memberships, and in the past few days, 1 for 10,000 memberships from a world-leading technology company. And there's quite a few more coming through in this area.We can see that more companies are moving to flexible space to manage their work space requirements. We've experienced a threefold increase in the conversations we're having with larger concerns and companies.We have given an example in today's trading statement of Ernst & Young in Norway, which is moving their headquarters into a new Spaces in Oslo. It's a multiyear deal, and it not only gives them the space in Oslo, but they use our network across the whole of Norway, and so they become -- they're actually taking part in this move towards a much more flexible, low-cost, accessible platform rather than having fixed space all over the country.Once through the pandemic, we are certain that the trend towards flexible workspace will continue and grow and gives us an exciting macro change for us to grow into. There are quite definitely light shining at the other end of the tunnel.And with that, I will hand over to Eric to discuss the performance in more detail.

[Eric Hageman, CFO & Executive Director]

Thank you, Mark, and good morning, everyone. Now, as Mark said, we'll take you through some of the details of our Q3 and also our year-to-date financial performance. However, the first point to make is to reiterate what we said on the 4th of August as part of our first half update, which is that every month, our business generates cash. With our continued focus on cash flow and amongst other things, actively managing our working capital, we were able to go from GBP 15.9 million net debt at the half year to a positive net cash position at the end of the third quarter of GBP 10.9 million, and this, whilst we continue to invest in our business.We will continue to be laser-focused on managing this also in the current quarter. In all, we are in a strong financial position with nearly GBP 900 million of liquidity headroom, which is the combination of cash at hand plus the unused part of our revolving credit facility. Second point to make is that we are firmly on track to achieve the targeted annualized cost savings of approximately GBP 200 million with a clear ambition to do more. All this in order to enter 2021 as a stronger and more profitable business, capable of increased cash flow generation. We will greatly benefit from the comprehensive actions taken.Thirdly, as we continue to accelerate our pivot towards capital-light network growth via partnerships, management agreements, JVs and franchising, we can continue to build out our network, drive top line growth but retain cash. To give you a sense of scale, in the first 9 months, we've been able to reduce CapEx by GBP 165 million compared to the same period last year in using this model.Our current estimate for the total net growth capital investment for the whole of 2020 is approximately GBP 190 million. And as Mark said, this investment is on finishing off committed projects. Our pivot to capital-light growth will see this cash expense reduced significantly in 2021 and beyond.Now on to the numbers, which we believe show our resilience. For the first 9 months of the year, our top line performance looks robust and reflects the strong start we had to the year. Open center revenue in the first 3 quarters of the year increased by over GBP 60 million or up 5% compared to the same period last year to GBP 1.85 billion. Group revenue was just over GBP 1.9 billion and only slightly down by 1.2% year-on-year.There's more good news to report when we look at our year-to-date pre-2019 occupancy number, which totaled 74.2%, an improvement of 140 basis points compared to 2019. Again, here we see reflected the strong result we reported for the first quarter, i.e., pre-COVID.As already pointed out at the half year results, Q3 was going to be challenging and as challenging as Q2. Notwithstanding the good sales activity levels in the third quarter, which continued in October, with increased churn, open center revenue in Q3 decreased by 5.5% to GBP 573.9 million, and group revenue declined 10.2% to GBP 583.3 million.Our EMEA region remained in positive year-on-year growth territory as we continue to benefit from acquisitions made last year. In our other regions, there were mid double-digit revenue declines in the quarter.Still on Q3. Pre-2019 revenue, which is a true like-for-like measure, declined 13.2% to GBP 505.1 million. Pre-'19, occupancy declined 350 basis points to 70.5% compared to the end of the second quarter. This is actually quite an encouraging result as the sequential quarter-on-quarter occupancy decline is smaller in the third than in the second quarter.Equally positive is the direction of travel of the sequential monthly occupancy as the decline is also reducing. For example, the decline in occupancy of the group from July to August was 104 basis points. And from August to September, it was only 17 basis points.To give you a bit more color, pressure on revenue was particularly noticeable in major cities, especially those more reliant on public transportation systems. On a positive note regarding the third quarter performance, the sequential decline in absolute quarterly revenue has again reduced, and revenue in September was actually higher than in August, and this across all our 4 regions and all our year groups. This demonstrates that we are moving in the right direction, but it is for the moment, a little too early to call the turn of our top line, given the lockdowns the world is facing as we speak.Thank you, all, and I will now hand back to Mark.

[Mark Dixon, CEO & Executive Director]

Thanks, Eric. So in conclusion, as I said at the beginning, this has been the toughest challenge the group has ever experienced since it started. But I think it's from these difficult times, there could come great opportunity for the business.There's been an unprecedented change in the way people work, and what started as the forced adoption of new work practices will, we believe, become the norm for many. Work will never be the same again. This bodes well for us in the future. And I'm confident that we will emerge from this crisis stronger and as a leading player in an exciting and structurally growing industry. But it is imperative that, for now, we remain laser-focused on cash, maintaining our strong financial position and discipline as we cannot predict when the crisis will recede.We also need to continue to build on the good progress that we've made with cost savings. There's still a lot of work to be done. And just to note, we appreciate and thank the way others are working with us to secure the future for all parties.We are seeing unprecedented cooperation, that will and is leading to more opportunities in the future. Here, many of the property owners that we are negotiating with are coming forward with other opportunities that they'd like us to manage for them, and that's opening up completely new avenues for us.We continue to further our strategic pivot of achieving growth without major capital investment. Franchise is growing as is the growing interest in property sector, and both of these initiatives are our #1 priority.More and more large corporates are coming to us to help them better manage their future working requirements and companies are also increasingly looking much more at the quality of the provider, and in particular, the provider's ability to supply wide coverage for their people.So our aim is to enter 2021 as a stronger, more profitable business capable of increased cash flow generation, which we hope will be supplemented by revenue recovery as the year progresses. There is still much work to do, but we have the groundwork in place with a platform that repeatedly shows its resilience and a strategy that will transform the company as the world gets back to its new normal.And with that, I'll hand back to the operator, who will explain the procedure for asking questions.

[Operator]

[Operator Instructions] Our first question is over the line of Andy Grobler at Crédit Suisse.

[Andrew Charles Grobler, Analyst]

I've got a few, if I may. Firstly, just on pricing, you talked about the occupancy headwinds. What's the pricing environment like? And what action have you taken? Secondly, you talked about service revenues kind of understandably under pressure. Where is that 28% of revenues from last year? Where is that now and kind of in the context of that, remote revenues are up double digit. And lastly, for now, I've got a few more maybe later. You mentioned a couple of big membership deals, so with Nestlé and a big tech company. From a revenue perspective, what does that really mean? The numbers are very high in terms of individuals, but from a revenue contribution, how big could that be?

[Mark Dixon, CEO & Executive Director]

Okay. Thanks, Andy. Now just to deal with pricing, now, in a post -- in a COVID world and we believe a post-COVID world, pricing is going to be affected. So in terms of when we're trying to create sustainable deals on the property side, we're having in mind that it's going to be a difficult market into '21, '22 and possibly even beyond that. So we are being more competitive on pricing in downtown markets.Actually, pricing is improving in suburban markets, where we're running out of space. So -- but overall, just the effect of price and the overall revenues we get from city centers, there is an effect on price. But some of it's mitigated, if not all of it, by getting different deals that allow us to get through the worst of what's to come in the future. In terms of -- but what I'm saying is definite headwinds in downtown city centers. And...

[Andrew Charles Grobler, Analyst]

Can I just ask on that point? As you -- I mean, no one knows exactly where we're going to end up. But as you look at some of those big cities for next year, do you think that you -- the deals you've struck and the renegotiations that have gone on, that you can go through in cities like New York and London with similar kind of margins maybe at slightly lower revenue base than you had before? Or is kind of profitability in those areas permanently lower?

[Mark Dixon, CEO & Executive Director]

That's a very hard thing to answer. As you can imagine, so even I cannot -- I can't predict future. But look, I believe that margins will be overall lower but I just can't say how much lower. I mean, it really depends. We think -- what we have seen in some markets has been a sort of kick back where more people are looking for flexible so it can come back quite quickly. We had seen some of that during October, but that -- with new lockdowns and then you've got the election in the States and so on, that sort of put a -- that slowed some of that down. So it is very hard to tell what the margins will be. We've done everything we can do to protect -- to keep centers open and then participate with the partners in terms of basically sharing upside with them as we go through. So that also will affect margins. But we don't have to write-off those centers and they can live to fight another day.So we'll probably be able to answer that more clearly when we do the full year, we'll have a much better picture of what next year will look like. So too early to say. But we are pricing in, let's say, a much more difficult market afterwards in city centers, that's what we -- that's what we're underwriting, and that's what we're doing. If it's better than that, that's good news for us and good news for our landlords.The second question, on the services, it is true that service revenues from things like the home work or anything to do with memberships, home work and so on are up. But we have sort of more or less wiped out on leasing rooms, and there's less people in the center, so less coffee and so on and so forth. So I have not got an accurate view on that. I don't think you have either. Do you, Wayne or Eric, on services where we actually are overall?

[Eric Hageman, CFO & Executive Director]

No. But I think if you try to perhaps think it through, 28% of GBP 2.5 billion last year is roughly GBP 700 million. And if we just look at how much revenue we think we're losing this year, let's call it, GBP 150 million to GBP 200 million because of COVID. That then gives you a sense of -- and if we would say, a big portion of that is service revenues, you would imagine that, as I imagine, it's GBP 500 million rather than the GBP 700 million divided by the GBP 2.45 billion that we think we'll do probably this year, you're looking at about 20%, which then your service revenue would be of total revenue compared to where we were at 28% last year and 27% the year before. Just to give you an idea of absolute numbers, Andy.

[Mark Dixon, CEO & Executive Director]

I guess, to translate, I think you said 1/3 less, but I'm not sure.

[Eric Hageman, CFO & Executive Director]

Exactly. Exactly. Yes.

[Mark Dixon, CEO & Executive Director]

Yes. Okay. So then if you look at the membership deals, if you look at these -- there's 2 aspects to it, Andy. First of all, there's a straightforward cost of the membership but on top of that is what then -- if you have 10,000 people using you, it's what they spend in addition to that, that is important. And so that will help us rebuild the service revenues because people won't just use the membership.The membership alone though were about 10,000 people will -- it takes time to build them up, by the way. They don't all come on day 1 but that would be about $5 million, $6 million baseline, and then it's what they spend on top. So that account could be -- maybe that single account could be worth about $20 million in overall revenue. The Nestlé deal is only for China, by the way, that's just a single country.And -- but there are numerous other ones coming through. We just launched our home to work product in the past week and things like that. So this whole area we'll be majoring on and it's going to be an important growing part of the business. On these calls, we will be talking, of course, as always, about occupancy and price on offices but these ancillary products are going to greatly enlarge the number of people we're supporting and give us a whole different revenue stream and profit stream.

[Andrew Charles Grobler, Analyst]

And I assume they're very incrementally, from a margin perspective, very incrementally profitable?

[Mark Dixon, CEO & Executive Director]

Yes.

[Operator]

So we now go to the line of Steve Woolf of Numis Securities.

[Steven John Woolf, Analyst]

Just a couple for me to follow-on from bits of Andy. Just thoughts on how much of the estate is metropolitan versus suburban now? Secondly, just in terms of the dynamics of a management deal that you're sort of exploring now more with landlords versus if you do -- struck a traditional rental deal with landlords. And then thirdly, just the thoughts on the network for 2021. You're on track for the 4%. You've obviously had a very good look at the network. What sort of percentage now do you think are borderline that you could go for in the early parts of next year, assuming the elongated, prolonged period of COVID lockdown at this point?

[Mark Dixon, CEO & Executive Director]

Okay. So metropolitan versus suburban, it's -- there are more sites in the suburb than the metropolitan but revenue is more -- it's sort of more metropolitan because they're just much higher pricing. But we haven't got a split. Eric, can we just note that down? And let's deliver them -- have that answer in future. We'll come back to you, Steve, but my guess is it's probably around 50-50, but it just depends how you define metropolitan. Yes.In terms of management deals, look, management deal, you should think off as the franchise that we manage, so there's typically little or no investment. We operate it, and we make a margin from operating it. So we get a fee and a carry. That's it. And then we get the -- so it's the same fee as a franchise but there's a carry because we're managing it, and the owner wants to incentivize us.

[Steven John Woolf, Analyst]

Okay. So is that then dependent on occupancy as well? Or is it just a flat fee essentially?

[Mark Dixon, CEO & Executive Director]

There's flat fees and variable fees. But it's pure income. There's no -- it just takes all the noise away about...

[Steven John Woolf, Analyst]

Okay. And then finally, just the thoughts on the network for next year, what you might have had as borderline as it were?

[Mark Dixon, CEO & Executive Director]

And it's sort of -- we -- in some cases, we may share some of the risk, but it's a very small amount of the risk. So it just changes the entire profile of the company. We're not talking endlessly about IFRS 16 and associated projects. It moves it more to franchise and management platform and a services platform. That's what the pivot is, that is what we're focused on doing.So in terms of the network, is there -- your question is, is there more to come? And how much more to come? As I've said in my notes and in here, in the announcement, it is too early to call it. We are well progressed through the negotiations or were until this latest spate of lockdowns. We're now dialing up again and just making sure that nothing's left behind.And we are thinking into the future, just to be clear. We're not thinking about just getting to the other side of the valley. We've got to get to the other side of the valley and have a sustainable business beyond that. So it is too early to call, but we will update as we get further towards the end of the program to give a better shape, and that could possibly happen between the 2 results if we've got something to say.

[Operator]

We now go to the line of Michael Donnelly at Investec.

[Michael Donnelly, Research Analyst]

2 quick ones from me. First one, on the home support example you gave us with Nestlé in China. Given the growth in that market, can you just give us a bit more color on precisely what the product is and what it is that you're doing for Nestlé? And the second question is, on the GBP 100 million of support measures for FY '20. Can you give us some guidance on where that number might be for FY '21? And also, how much of it roughly is deferrals?

[Mark Dixon, CEO & Executive Director]

Okay. So on Nestlé, they haven't bought the home product. They bought membership. So this is -- and so is the other one I mentioned. So they are using all of our centers in China as drop-in and you pay a subscription for that. And you -- from there, and then you have extras if you use something. So that is not home support. That is, in fact, in somewhere like China, quite difficult for quite a lot of people to work from home, therefore, drop-in is what they're after.And interestingly, the other one was this tech company, same thing, they're trying to supplement people that they're asking to work from home. So home support is something different and that supplies home insurance, that supplies ergonomic furniture, that supplies secretarial support service, phone answering, basic, a lot of virtual service that fires into someone's home to make sure they're not going to get back problems, they're not going to get insurance problems and they're properly supported and productive when they're working at home.Support in '21. Well, look, we hope it doesn't continue into '21. And in terms of what's deferment, a large proportion probably is deferment of one kind or another. Eric, probably 2/3 of that number?

[Eric Hageman, CFO & Executive Director]

That seems the right [Audio Gap]. Yes. Correct. And also, if we get to that GBP 100 million number, it's still that same percentage, 2/3.

[Mark Dixon, CEO & Executive Director]

And there is a risk -- there's -- just to be clear, there's a risk in collecting some of that. So -- but overall, it's deferred. And then we've got to collect. Next?

[Operator]

The next question is from the line Daniel Cowan at HSBC.

[Daniel Thomas Samuel Cowan, UK MidCap Equity Analyst]

Just 2 for me, please. One is on investment. You're talking about accelerating the pivot to the capital-light model and you give us some quite useful color on how that's happening. GBP 190 million growth CapEx for 2020, how does 2021 look for you, roughly, very, very roughly? And then the other question was on your larger enterprise segment. Clearly, inquiries are up very substantially. What kind of investment are you [Audio Gap] for that segment right now and then how should that look going into next year as well for you?

[Mark Dixon, CEO & Executive Director]

Okay. I'll grab that one, Eric.

[Eric Hageman, CFO & Executive Director]

Yes. [Technical Difficulty].

[Mark Dixon, CEO & Executive Director]

Yes, investment [Audio Gap] next year is like one cannot tell at the moment, but it's likely to be a substantially smaller number than the number of this year. There's a few centers that have been committed, pre-COVID, that we want to open. But the vast majority here are going to be franchise management is what we see today.And we have a big program here. We are -- if you look at my words and in the announcement, we are investing behind this. Even though we're saving costs everywhere, this, we are investing. We keep -- we're building up a team. We're spending more money on marketing to -- because this is the time to actually get on and get the network expanded. So -- and similarly, Daniel, we're putting more investment into marketing to midsized and large-sized corporates. We have the people, we've been adding people, but we're also putting a lot more into direct marketing to actually get the message out to these companies about what is possible. We want more of the Nestlés and this tech and we want more of those and we want more people using the system. They're very receptive to messaging at the moment because it's right at the top of most companies sort of to-do list of what they need to be thinking about post-COVID into '21 and beyond.

[Operator]

Our next question is over to the line of Calum Battersby at Berenberg.

[Calum Battersby, Analyst]

2 questions from me. Firstly, H1, the messaging is that the cost savings you're announcing aim to be able to return to pre-COVID levels of profits by next year. I was wondering if that's still the case? Or do you need to see occupancy recover a bit from that 70% level before that's possible? And then secondly, in terms of those management deals with landlords, as you say, Mark, that's a much less volatile, less capital-intensive way for you to grow the business. But do you think landlords are going to be happy for that to be how the industry moves going forward? Or are they overall still going to want to kind of get the security of a pure leasehold, kind of long-term leasehold model?

[Mark Dixon, CEO & Executive Director]

Let me deal with the second question, and then I'll hand over to you, Eric, just to talk to return to profitability. But -- so that's a very good question, Calum. The whole of property market is sort of constructed around leases, unfortunately. So that is the way properties are generally financed, and it's a very sort of ingrained system that's there. And that needs to change in order for us to have substantial growth in management now and that's in the medium term. In the short term, property companies have no choice because there are no tenants. There were just -- there's no one going to be taking long-term leases for some while because what follows -- what we're in now is a worldwide hiatus where people do nothing and certainly don't start going out. Very few will go out to start signing up long-term leases after what's happened. So they'll have space. They'll need to do something with it. Our system works. More will come in with us to convert some of their space into flexible space to get cash flow.And they are doing that already. People you would never expect to do it are doing it. Once more do it, we have a chance that it becomes part of the property industry, just like hotel to finance not on the leases from the people that occupy hotel rooms, but on historic cash flows and how do they do it through the cycle. We have a chance to actually start getting there to get into a world of much, much higher growth as we become the partner-of-choice for the world's landlords to actually get into this growing market. That is where we're positioning. That is what changes everything.We think it's better for them. It's most certainly better for us. Certainly, I don't think anyone on my senior team would ever want to go through another round of renegotiations such as we have been doing for the past 6, 7 months. It has been one of the most painful times for us as well as the other side. So we've got to move it to a new totally different way of doing things in the future, which I think benefits everyone. Eric?

[Eric Hageman, CFO & Executive Director]

Yes. On the first question...

[Mark Dixon, CEO & Executive Director]

Profit next year.

[Eric Hageman, CFO & Executive Director]

Yes. On the first question, we anchored it indeed at the half year to the EBIT number we saw in 2019. And just as a reminder, that it was GBP 137.7 million. And as we said in the statement today, we are tracking this GBP 200 million of year-on-year cost savings with -- we added that as well, with a clear ambition to do more.If our business is challenged in the next quarter and maybe even into 2021 with everything that's happening, we can and will do more cost savings. Even at the half year, we already referred into the Q&As too, we can push this to GBP 250 million and maybe even more if we continue to make progress on procurement, on FTEs and on rents, as we have done so far. So yes, we feel comfortable with that EBIT number for 2021.

[Mark Dixon, CEO & Executive Director]

I think that this book is worth. The critical point, if I may just add, Eric, here is if we're successful in the pivot, it's a totally different business. We're talking here about EBIT, but the cash flow is what counts. So that -- everything we've done with cost savings, although we will share some of the upside with landlords, we also have a much lower cost business model. And as I said in my comments, we're running on at the moment producing a small amount of cash each month, ticking the box. If we can get the revenue moving, that cash starts to flow again properly. And then if we have a new model of growth we -- the key objective and the #1 strategic objective, apart from obviously getting through this and keeping the cost low, is can we grow without capital. If we can grow without capital, the business is a totally different one. And remember, in previous years, we may have produced GBP 500 million of cash, GBP 400 million of cash, GBP 300 million of cash, whatever, but we spent that cash on growth. And if we can reduce that down in the future, it's a different business. If we can continue to sell our existing operations to franchisees and partners, it's a different business. We've shown our ability to do that. That will come back in the future.We continue to sell small parts of the business that don't need announcing, very small parts, but that move towards a future where a lot less of the centers are on the balance sheet and they have been converted to cash and the growth is coming through partnering with the industry and with franchisees as opposed to us taking the risk as we have done in the past, it's a totally different business. And that is the thing -- that is the strategy. It's not to just go back to where we were. We will never go back to where we were. It will be a new business in '21.

[Operator]

We now go to the line of Andrew Shepherd-Barron at Peel Hunt.

[Andrew Shepherd-Barron]

Question for me, which -- on the master franchise agreements, obviously, nothing recently. But you mentioned, I think, that sort of discussions are ongoing. Can you just say what the potential partners are reflecting back to you and perhaps what do you think or when do you think that might get going again? I mean is it going to need people to see how you get through COVID? Or can something happen quicker than that?

[Mark Dixon, CEO & Executive Director]

I think it's in our interest. I mean, look, it depends where it is, Andrew. Some of our businesses, a lot of businesses are largely unaffected by COVID. There are some parts of the world where there are other problems. Therefore, COVID is third on the list. It's not the top of the list. So -- but it's not in our interest to be selling businesses. We, in no way, want to sell anything less than its long-term value.And so we want to see the business stabilize before we enter into discussion. It's okay having communication, it's another thing entirely about selling parts of the business to a partner when the -- when you've got affected numbers, which we clearly has in many places. So the sales that are being done tend to be in sort of suburban locations that are -- it's part of the bigger block.I signed one up this morning in suburban India. No, it's not suburb, it's a smaller city in India, certainly not a suburb. But that's the sale of a center in a block of 10 that a potential franchisee is taking. They're a big property owner in that city. So look, over time, it will happen, whether it's a master or whether it's selling them in groups of 2, 3, 10, it's just -- the key is the strategy and the strategic move and making sure that we get the right value for shareholders as we do it. And timing in that is important.

[Operator]

Before going on to the next question, which is Edward Donahue at One Investments, [Operator Instructions].

[Edward Donahue]

A few from my side, if you don't mind. Could you just give us an idea on the renewal rate and the revenue change in those renewals as they come through? And then staying on that same sort of topic. If you look at the pipeline of inquiries and the conversion rate of those and the average revenues you're contracting versus the churn out of revenues being lost and if you could sort of wrap all that up into an idea of the sort of exit rate of revenues for '21, so we can have a sort of base level?

[Mark Dixon, CEO & Executive Director]

That's a quite difficult -- some of that is quite difficult to answer as this is the third quarter. We don't have some of that base. But what I think -- again, to confirm on this, Eric, the renewals, generally, we're renewing at about flat. Normally, renewals would be up by about 5% in terms of price. But we're renewing at about a flat rate.

[Eric Hageman, CFO & Executive Director]

That's correct.

[Mark Dixon, CEO & Executive Director]

We're not pushing for price, okay? So in terms of conversion, what we've got is less inquiries, this is overall, inquiries from large corporation up, inquiries overall slightly down, and the conversion rate is good. It's better than normal because you're getting more serious interest, less shoppers. The contracts that we've signed have very slight [Audio Gap] in the quarter. Normally, the average first contract we've had 11 months. It's down to 10 months. That's a reflection of people wanting more flexibility.And in terms of churn and new sales, I mean, basically, the result of that is occupancy and we're expecting -- from where we are now, we're forecasting pretty flat to maybe slightly better occupancy by the end of -- we have stabilized. So we're selling as much as we're losing and that stabilization we expect to continue through the balance of the year and into Q1. And it's a question of how much can we sell better than that? That's the forward look without selling more. If we can sell more, we can improve it.But clearly, as Eric and I have said, this is just a moving piece. With lockdowns, we don't stop selling, but it slows it down. And we'll see where this goes in the coming months. It's certainly not as bad as the first lockdown. It's much mild for people. I think people are much more used to it now.

[Edward Donahue]

Great, gentlemen. That's very helpful. And if I could just have 1 follow-up, if you don't mind. You talked about greater-than-expected impact of COVID. Is that captured fully in the 4% network rationalization, and therefore, the provision that you put in place sized correctly as well? Or should we expect maybe more on the provision front?

[Mark Dixon, CEO & Executive Director]

Yes. I think it's a good question. We don't know that today. So that is why we're saying that we still got more to do. And we're just -- we're going back around for just any shop and make sure that we're not losing any center out there that could cause us problems in the future. Now will that mean an increase in provisions? It is too early to say. Will that lead to greater network rationalization? It's too early to say. But it's certainly -- the impact is not greater. It's just gone on for longer. And it looks like we're expecting this to continue into Q1, so we have to put that into all of our numbers.The provisions -- if there are additional provisions, Edward, they are, in the vast majority, noncash, we're writing off assets. We're not -- it's not costing us cash mostly. So it's a proven thing to do. We want to have our business in tip-top condition to get back to business when things get back to whatever the new normal is.

[Edward Donahue]

And if I may ask a final question? If going back to the whole pivot and the future focus of the group and the emphasis on the cash flow generation, what is the priority use of the cash flow that's going to be generated going forward?

[Mark Dixon, CEO & Executive Director]

Well, first of all, when we -- that we would decide, I think, nearer the time. But clearly, if we haven't got anything to invest in, then at some point, we will be able to reinstate the dividend and find ways to get money back to shareholders. And then that will be a good day once we arrive there. So that is where we're heading to. It's going to take some time to get there clearly from where we are, but we're set up to achieve that.

[Operator]

The final question we have time for today is over the line of Sam Dindol at Stifel.

[Samuel Frost Dindol, Associate]

2 questions from me. Firstly, on the GBP 200 million cash savings. Can you say how much of that is likely to be permanent? And then secondly, on the M&A, are any of the deals in due diligence significant? And have you seen the pipeline increase as the pandemic has dragged on?

[Mark Dixon, CEO & Executive Director]

I think, in answer to the first one, pretty permanent, the GBP 200 million. There's some variability in it. So some of them are tied to the revenues coming up, the sort of rents go up. But sort of in a worst-case scenario, they are permanent. In a best-case scenario, they become less. And we tied a lot of them to variable so the -- and made them for long periods of time, extremely long periods of time.So this isn't about trying to get through the next 3 months or 6 months. And you'd be foolish to expect that things will get back to normal in that time. So we have to underwrite a much higher period of volatility. Overall in the market could be -- in the real estate market in general, so -- but -- so yes, permanent, absolutely. Otherwise, it's not -- in my view, short-term is not the place to be at the moment.In terms of M&A, Sam, here, yes, look, we -- there's a lot of opportunities. And have they built up more? I would say, yes, they have built up more, and we're being selective in terms of what we do. We're very clear again on our strategy here. And we have to be careful that we're not sort of -- what we're taking on is, we don't want to be taking on falling knives until they're quite near to the bottom. So we're being patient. The deals coming through are strategic, they are worth more than the cash flow we get from them, and that's where we are at the moment. But it's -- and again, let me just add, it's not the first priority for us. The first priority, management franchise. That's it. The rest is -- we have to think long and hard about whether we want to do them.

[Operator]

Okay. As that was the final question we've got time for on today's call, gentlemen, can I please pass it back to you for any closing comments at this stage?

[Mark Dixon, CEO & Executive Director]

Thank you. Thank you very much, operator, and thank you very much, everyone, for joining us today. As usual, Eric, Wayne and myself will be available if anyone has any -- have any follow-up questions, and thank you all for your time this morning. Thanks.

[Operator]

This now concludes today's call. So thank you all very much for attending, and you can now disconnect your lines.