Third Quarter Trading Statement

RNS Number : 0164E

IWG PLC

03 November 2020

 

THIRD QUARTER TRADING STATEMENT - 3 November 2020

IWG plc, the leading global operator of workspace brands, today issues its trading update for the period ended 30 September 2020.

Strong cash performance in the quarter; continuing increased interest in flexible working

Key Highlights

· The health and wellbeing of our customers, partners and team members remains our highest priority

· Continued strong cash performance:

-  £26.8m of net cash generation in the third quarter

-  Positive net cash position of £10.9m at 30 September 2020

-  Liquidity headroom of £863.2m at 30 September 2020

· Significant customer support provided, with measures worth approximately £80m year to date

· On track to achieve targeted annualised cost savings of approximately £200m

· Increasing demand from corporates, three-fold increase in conversations with large companies

· Number of large management agreements signed, attractive pipeline of opportunities

· Continuing good momentum in franchising, with a further four multi-location deals signed in Q3

· Close to first deployment of capital raised in Q2, with deals in final stages of due diligence

· COVID-19 related network rationalisation programme currently tracking in line with expectations

· Net reduction of 33 locations in Q3, taking worldwide network total to 3,359 locations

£m	Q3 2020	Q3 2019	% change constant currency	% change actual currency	YTD 2020	YTD 2019	% change constant currency	% change actual currency
Open centre revenue	573.9	636.0	(5.5)%	(9.8)%	1,852.9	1,790.7	5.0%	3.5%
Group revenue	583.3	680.3	(10.2)%	(14.3)%	1,904.8	1,955.3	(1.2)%	(2.6)%
Pre-20191 revenue	505.1	610.5	(13.2)%	(17.3)%	1,650.5	1,749.3	(4.2)%	(5.6)%
Pre-20191 occupancy	70.5%	74.6%		(4.1)ppts	74.2%	72.8%		1.4ppts
Net cash / (debt)	10.9	(301.2)
Liquidity headroom	863.2	561.6		53.7%
Number of locations	3,359	3,348		0.3%

Third quarter performance

As anticipated, the third quarter has been a challenging environment for the Group as a result of the COVID-19 pandemic. This has also created difficulties for many of our customers whom we have supported with measures worth approximately £80m so far this year, including rent deferrals. This support will continue during the fourth quarter and could rise to approximately £100m for the full year.  

The impact of the pandemic has been greater than we imagined, and we remain in the eye of this global crisis. Throughout this period our platform has been resilient, and we have benefitted from the comprehensive actions taken to reduce costs and improve cash flow and liquidity. These actions have resulted in continued monthly cash generation in the quarter and moved the Group into a positive net cash position of £10.9m with substantial liquidity headroom of £863.2m at 30 September 2020.

We have experienced good sales activity levels in July, August and September but this is being offset by customer churn and the significant impact the pandemic has on service revenue, which historically accounts for approximately 28% of our revenue.

In the three months to 30 September 2020, revenue across our open centres decreased 5.5% at constant currency. Total revenue for the Group (including closed centres) declined to £583.3m compared with £680.3m in the same period last year, a decrease of 10.2% at constant currency. Mid double-digit declines were recorded across all regions except for EMEA which remained in positive territory as its performance continued to benefit from acquisitions completed in the second half of 2019.  

Pre-2019 revenue in the three months to 30 September 2020 decreased to £505.1m from £610.5m in the same period last year. This represents a constant currency decline of 13.2%. All regions experienced a year-on-year decline in revenue but the absolute quarterly sequential decline in revenue is reducing even though the pandemic impacted some of our larger markets later. Pressure on revenue was more significant in major cities, particularly those with greater reliance on public transportation.

Pre-2019 occupancy declined year-on-year by 4.1 percentage points on a like-for-like basis to 70.5%. Given the pandemic's impact on sales activity which affected the forward order book, this is a robust performance.

Year-to-date performance

For the nine months to 30 September 2020, revenue across all our open centres increased 5.0% at constant currency, reflecting the 17.7% pre-COVID-19 revenue growth in the first quarter. Total Group revenue decreased to £1,904.8m compared with £1,955.3m for the same period last year, a decrease of 1.2% at constant currency.

Pre-2019 revenue for the nine months to 30 September 2020 decreased to £1,650.5m from £1,749.3m, a decline at constant currency of 4.2%. Pre-2019 occupancy improved 1.4 percentage points on a like-for-like basis to 74.2%, again reflecting the improvement reported for the first quarter.

Strong financial position driven by monthly cash generation

The Group remains in a strong financial position. With continued monthly net cash generation, the Group is now in a net cash position of £10.9m at 30 September 2020 compared to a net debt position of £15.9m at 30 June 2020. This improvement over the third quarter is a strong testament to the cash generation capabilities of the Group even in challenging market conditions.

Cash plus unused revolving credit facility provides liquidity headroom of £863.2m at 30 September 2020.

COVID-19 related network rationalisation

During the third quarter 66 locations were rationalised. This represents approximately 50% of the planned 4% additional COVID-19 related network rationalisation highlighted in the Group interim results on 4 August 2020. This brings the total COVID-19 related closures to 30 September 2020 to approximately 3% of the network. Whilst we have made good progress, in line with our expectations and the £126.7m provision set out with our interim results, it is too early to predict with certainty the eventual outcome in these unprecedented times.

As previously communicated, rationalisation is always a last resort. Whilst the pandemic has necessitated rationalising parts of the network, the Group's priority remains to work with landlords and to negotiate solutions that make centres, significantly impacted by COVID-19 sustainable for both parties. We have made good progress with these negotiations with many successful outcomes for both parties, but there is still much work to be done in the coming months.

Pivot in network growth continues

We continue to make good progress in reducing the capital investment in the Group's network development programme. Our pivot towards capital-light growth through management agreements, franchising and joint ventures is rapidly furthering our growth strategy. Through linking up with partners and the property industry we can open more centres, at greater speed and with less capital to meet the increasing structural demand in the market. Over the last quarter, we have entered into numerous management agreements and we have an attractive pipeline of opportunities building so we expect to do more in the future.

The investments we have made in strengthening the regional franchise teams is delivering a good pipeline of franchise deals. The increased interest in hybrid and remote working is driving more opportunities with potential franchise partners and we continue to do franchising deals. During the quarter four franchise agreements were signed in Asia Pacific, EMEA and the UK, with commitments to open 18 locations. Since 30 September 2020 a further two franchise agreements have been signed: one in Germany and one in Honduras, which adds a new country and a further 8 committed locations to our network.

Notwithstanding our clear pivot to capital-light growth and franchising, we are still completing some centres in the pipeline that were already underway and nearing completion. Once these historic development programmes are completed, we expect the move to more capital-light growth, consistent with our strategy, to accelerate in 2021 and beyond. This will reduce net growth investment significantly. During the third quarter we have added 33 new locations and 0.8m sq. ft. of additional space to our global network, with net growth capital investment² of £54.3m. In the nine months to 30 September 2020 the Group has added 121 new locations, of which 55 were added in the first quarter, and 3.5m sq. ft. The Group's total network at 30 September 2020 was 63.4m sq. ft. and 3,359 locations worldwide. Net growth capital investment in the nine months to 30 September 2020 was £170.5m. Net growth investment for the whole of 2020 is anticipated to be approximately £190.0m.

In addition to the organic development of the network, we are seeing increasing opportunities to grow inorganically through M&A. We are close to deploying the first tranche of capital raised in May, with deals in the final stages of due diligence. However, we continue to adopt a patient and cautious approach when evaluating all inorganic opportunities.

To help mitigate the impact of COVID-19, maintenance capital expenditure has been reduced in the second and third quarters and amounted to £101.8m for the nine months to 30 September 2020. After partner contributions received, net maintenance capital expenditure was £87.1m.

Favourable industry evolution

We are optimistic for our industry. The way people work has changed permanently in our view. In today's digital world people have been able to quickly adapt to home working or working closer to home, alongside the significant environmental and cost benefits this brings. Head offices will still have an important role to play in the world of work. We therefore believe that the future will be hybrid working, utilising a combination of all these ways of working. Hybrid working will gain momentum and requires flexible workspace solutions to deliver this successfully.

We are now seeing these changes impact our business positively. We have experienced good demand for our products supporting home and remote working, driving strong double-digit growth, with September being our best ever sales month. These products represent approximately 8% of Group revenue.

Also reflective of the increased hybrid working, we are experiencing a strong pick-up in demand for space in our suburban locations, in contrast to lower demand in major cities, particularly those reliant on public transportation. For example, office deals in downtown New York are down approximately 30% compared to pre-COVID-19 activity, whereas Southern Connecticut is up over 40%. This is a trend we are monitoring in many of our markets. With our decentralised portfolio of flexible workplace locations in over 1,100 towns and cities, both urban and suburban, we are uniquely positioned to help companies to adapt to this new world of working.

There has also been a 19% increase in the sale of small offices, accommodating one to two people, compared to pre-COVID-19 levels. Our research shows these trends are being driven by the growing demand for distributed working and working closer to home. This is also evidence of increased demand from larger customers and enterprise clients, which has led to new business opportunities, some of which are a multiple of our largest existing contract in terms of employees being supported by our distributed network, products and services. In recent weeks we have signed a 1,500-membership deal with Nestlé China and a 10,000-membership deal with a technology company.

We have very recently signed an agreement with EY, a leading professional services firm, in Norway whereby they will move their employees in Oslo into a new Spaces which will be ready in 2023. They will occupy the top four floors and have access to meeting rooms and further workstations in the centre enabling them to flex their space needs. Their employees will also have membership access to the global IWG network. This is a multi-year agreement and a further example of how large enterprises are increasingly looking to flexible working to meet their evolving real estate needs.

Outlook

Our highest priority remains the health and wellbeing of our customers, partners and team members during this global crisis. We are proud of our colleagues and their enormous efforts to continue to deliver services to our customers under unprecedented conditions.

We understand how difficult it has been for our customers who are facing significant economic disruption globally. We will continue to support our customers with measures worth approximately £100m by the year end.

Whilst market conditions remain very challenging, the future of flexible working looks very positive. There is clear evidence of increasing interest in flexible working as companies address how their employees will work in the future, the advent of further potential pandemics and the need to preserve liquidity by limiting capital and operating expense. As a result, we are now starting to see some improvement in our sales activity. This is pleasing after the resilient revenue performance in the nine months to 30 September 2020 and provides the basis for starting 2021 in a stronger position.

We will continue to keep a laser focus on cash to maintain the Group's strong financial position. Equally important have been the COVID-19 related actions where we have made good progress to generate significant cost savings to deliver a much-improved profitability performance in 2021 and beyond. There is still much to be done and we appreciate people working with us to secure further cost savings in the fourth quarter.

2020 has presented the toughest challenge the Group has experienced since its formation 31 years ago. It is an unprecedented storm, but with the decisive actions we have taken across the business we are navigating its impact and look forward to entering 2021 as a stronger, more profitable business capable of increased cashflow generation supplemented with potential revenue recovery.

¹ Pre-2019 refers to the performance in the reported period for all operations opened on or before 31 December 2018 and were open throughout the period. Previously referred to as the mature performance.

  ² Net capital expenditure in new locations equals gross capital expenditure less any contributions received towards fit-out costs.

Conference call details

IWG plc will be hosting a call for analysts and investors at 08.30 GMT this morning. Please register for the call via the following link to gain your unique dial in code:

https://www.speakservecloud.com/register-for-call/552cdba5-db50-4922-b19d-8a511a32920b

There will also be a replay facility available for 7 days after the call:

Replay dial-in number:  [phone]

Access PIN:                                       250851

This announcement contains inside information.

For further information, please contact:

IWG plc Tel: + 41 (0) 41 723 2353 Mark Dixon, Chief Executive Officer Eric Hageman, Chief Financial Officer Wayne Gerry, Group Investor Relations Director

Brunswick Tel: + 44 (0) 20 7404 5959 Nick Cosgrove Oli Sherwood

This trading update contains certain forward looking statements with respect to the operations of IWG plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast.

 

 

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