Trading Update

RNS Number : 1235O

IWG PLC

27 May 2020

 

TRADING UPDATE - 27 May 2020

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

Swift action taken to preserve liquidity and mitigate impact of COVID-19 pandemic

Key Financial Highlights for the period 1 January to 31 March 2020

· Open centre revenue up 17.7% (17.8% at actual rates), all regions contributing

· Pre-2019 revenue up 7.6% (7.7% at actual rates)

· Pre-2019 occupancy up 6.6 percentage points to 78.8% from 72.2% for same period in 2019

Key Financial Highlights for April 2020

· Open centre revenue up 6.5% (7.5% at actual rates)

· Pre-2019 revenue down 2.9% (down 1.9% at actual rates)

· Pre-2019 occupancy up 4.2 percentage points to 77.4% from 73.2% in April 2019

· Cash on balance sheet at 30 April 2020 of £387.7m; committed undrawn headroom of £131.3m available

· Net debt, on a pre-IFRS 16 basis, at 30 April 2020 of £320.8m; Net Debt to LTM EBITDA of 0.8x

Other Business Highlights for the four-month period to 30 April 2020

· Continuing interest from enterprise customers increasingly looking at more dispersed working

· Comprehensive set of actions taken to reduce costs and improve cash flow and liquidity

· 64 locations and 2.1m sq. ft. added in the period, taking total to 3,405 locations and 63.8m sq. ft.

· 47 closures in the period; further network rationalisation anticipated in remainder of 2020

· Continued commitment to franchising; eight small agreements signed spanning multiple geographies

· 31 franchise partners across 29 countries, with a combined commitment of over 430 locations

Health and Safety

We continue to prioritise actions to protect the health and safety of our customers and our colleagues globally. We would like to thank our colleagues for their enormous efforts and ability to adapt under unprecedented challenges to enable our customers to continue to work during the pandemic. We have implemented new precautions across the business. Cleaning protocols at all sites have been enhanced and we have implemented actions to facilitate the practicing of social distancing at our locations. We have also created a range of professional services to support our customers' remote and home workers.

Current trading

We came into the year with strong momentum in the business which contributed to the Group's Q1 revenue performance. This performance would have been stronger but for the emergence of the COVID-19 pandemic which started to affect the business from March, particularly in Asia.

As a result of the Group's contracted revenue model, occupancy held up well during April, although, as anticipated, the Group's overall revenue performance was impacted by reduced revenue from ancillary services and lower new sales activity as a direct result of COVID-19. Accordingly, we are anticipating a greater impact in the second quarter compared with the first quarter given the increased number of lockdowns across the world and the lower levels of new sales activity across the Group during March and April. Lower new sales activity will inevitably reduce the pace at which we will reach targeted occupancy of our newer centres. The recovery of the Group's revenues performance in the third and fourth quarters will be largely determined by how lockdown measures are progressively lifted across the world and the resultant impact on new sales activity.

m	March 2020 YTD	March 2019 YTD	% change constant currency	% change actual currency	April 2020	April 2019	% change constant currency	% change actual currency
Total revenue	692.6	619.9	11.7%	11.7%	214.4	209.8	1.2%	2.2%
Open centre revenue	684.8	581.4	17.7%	17.8%	213.2	198.3	6.5%	7.5%
Pre-2019 revenue	622.5	578.1	7.6%	7.7%	191.6	195.3	(2.9)%	(1.9)%
Pre-2019 occupancy	78.8%	72.2%		660bps	77.4%	73.2%		420bps
Net Debt	307.2	534.1		(42.5)%	320.8	521.2		(38.4)%
Number of locations	3,403	3,311		2.8%	3,405	3,315		2.7%
Space added (m. sq. ft.)	1.8	1.5		20.0%	2.1	1.9		10.5%

The impact of COVID-19 has varied across our regions. We first experienced the business impact in our Asia Pacific region, particularly during February and March, and this region provides the greatest visibility on the potential future impact. Whilst enquiry levels in the region remained strong throughout February and March, there was a short-term effect on new sales activity during the lockdown period which has impacted future revenue. Since this period, sales activity in Asia Pacific has continually improved through April and into May. With activity returning to near normal levels, future revenue levels are now looking healthier.  

We have also seen the pandemic impact our markets in Europe, the UK and the Americas, with similarly sharp declines in new sales activity having a definite effect on business during the lockdown phase. With the pandemic in these markets trailing Asia, and with the UK and the Americas behind Europe, we are in a more formative stage of the cycle. Our experience in Asia shows that as countries move out of lockdown, new sales activity increases, and we start to see a gradual recovery. However, this recovery is early stage and from a reduced base, therefore it remains too early to judge its potential shape or sustainability. During this period, we anticipate a higher level of delayed customer payments and a moderate increase in delinquencies, which we are monitoring daily. Encouragingly however, we have recently seen several enterprise deals signed with customers seeking flexible and distributed workplaces.

Mitigating actions

From early March we started to take prompt actions to reduce operating costs and overheads across the business in anticipation of a more suppressed revenue environment and to optimise cash flow and further strengthen our liquidity position. As previously announced, the Board also decided to take a voluntary 50% reduction in fees and base salaries during this challenging period.

In addition, we have taken further steps to conserve cash, including withdrawing our final dividend for 2019, suspending the share repurchase programme, engaging in government support schemes, including the furlough of employees where required, dialling back growth and maintenance capital expenditure, deferring or cancelling new centre openings and a strengthened focus on the network rationalisation programme. We are also actively managing working capital.

In aggregate, the Group has so far secured cash savings from operations of approximately £150m.

These actions will ensure the Group's financial position remains strong, whilst also allowing the Company to maintain its leading position within the global flexible workspace market.

Network development and franchising

During the four months to April we added 64 new locations and 2.1m sq. ft. of additional space to our global network. The investment into these 64 locations will be £46.7m, net of partner contributions.

We anticipate that the additional capital investment into centres opening during the remainder of the year will be approximately £100m, net of partner contributions, in line with our previous guidance on pipeline visibility.

During this period, the cash outflow on net growth capital investment was £97.1m, ahead of the £75.9m in the first four months of 2019. This reflects the expected timing differences on the receipt of partner contributions and the inclusion of expenditure on locations opened in 2019 and still to be opened in 2020. The current challenging environment has caused delays to the construction of some new centres, thereby affecting the timing of achieving applicable milestones for billing partner contributions.

Net maintenance capital investment in the four months to 30 April 2020 was £58.4m.

The pandemic has accelerated the need for further network rationalisation. Accordingly, we have closed 47 locations in the four months to 30 April 2020 and expect this to increase over the remainder of the year which will impact profitability in the short term. This will primarily reflect the write down of assets not yet fully depreciated with a limited impact on cash.

As expected, the current situation has caused a pause in activity in relation to large master franchise agreements but there remains good interest in smaller franchising transactions. Since the start of the year, eight such agreements have been signed, spanning the UK, Europe, Asia and the Caribbean.

Financial position

As at 30 April 2020 net debt was £320.8m, on a bank covenant IAS 17 basis, representing a net debt to LTM EBITDA ratio of 0.8x, well within our covenant. This is marginally up on the 31 December 2019 position of net debt of £294.1m and net debt to EBITDA of 0.7x.

On 9 March 2020, the Group extended the maturity profile of the £950m Revolving Credit Facility until March 2025. The Group had cash on the balance sheet at 30 April 2020 of £387.7m, in addition to committed undrawn headroom of £131.3m available under the facility.

The Group has modelled the impact of various COVID-19 scenarios on the business and tested these against the Group's existing facilities. Occupancy represents the key revenue driver of the Group and the Company has modelled various illustrative scenarios for 2020 and 2021 based on a number of forward-looking assumptions which are dependent on, amongst other things, the speed and extent with which lockdown restrictions are lifted. All of the scenarios assume the weakest occupancy levels across the global network are in Summer 2020 and show growth in occupancy during Q4 2020 and 2021, with the pace of growth varying from scenario to scenario. All scenarios reflect the mitigating actions and cost savings to be realised during 2020.  If the downturn is prolonged, the Company would intend to implement additional savings in 2021. Taking into account the proactive measures to reduce costs, improve cash flow and liquidity, the Board is confident that the Group has appropriate headroom in relation to its covenants.

Outlook

Our first consideration throughout this crisis has been for our customers and our people. We continue to make this our highest priority. We thank our colleagues for their enormous efforts and ability to adapt to the pandemic to deliver services to our customers under unprecedented conditions.

This has been a strong first quarter performance despite COVID-19 starting to affect our business in Asia in February and March. Even the result for April, when the crisis was spreading across our other regions, is commendable, with open centre revenue up 6.5% (7.5% at actual rates) but clearly showing the initial impact of the pandemic on our business. We are reviewing all aspects of our business to prepare for success in a post COVID-19 world which includes the accelerated network rationalisation discussed above. This will lead to an increase in primarily non-cash charges during the course of this year. While the impact of the COVID-19 crisis remains highly uncertain, we continue to expect it to have a significant impact on our performance in the second quarter, partly offset by the mitigating actions taken. With the future easing of lockdown measures across the world, we anticipate a gradual improvement in the second half of the year, although it is not currently possible to predict the quantum of the improvement.

IWG is a strong and resilient business. We have taken swift and appropriate actions to manage costs and to protect cash flow in what will remain a challenging operating environment in the near-term. Our robust financial position will help us navigate this period of uncertainty.

The unprecedented global crisis we are currently facing has more than ever brought into sharp focus how companies will work in the future. Distributed workforces will be the new normal as businesses reduce risk and benefit from remote working. With our decentralised portfolio of workplace locations in over 1,100 towns and cities, together with our growing home office products, we are uniquely positioned to help businesses get back to work quickly and adapt to the new future.

We remain confident in the long-term structural growth drivers of the global flexible work market and our strategy to strengthen our leading position within it. We have not wavered from our commitment to move to a franchise model to accelerate growth and unlock significant shareholder value.

Appointment of Joint Corporate Brokers

The Company announces that it has appointed Barclays Bank plc and HSBC plc as joint corporate brokers, alongside the Company's existing joint corporate broker, Investec Bank plc. The Company's financial adviser is Rothschild & Co.

Conference call details

IWG plc will be hosting a call for analysts and investors at 08.30 BST on 28 May 2020. Details are set out below:

Dial in number:  [phone]

Conference ID:  6588576

There will also be a replay facility available from 1.30pm, 28 May, until 1.30pm BST on 4 June 2020:

Dial in number:  [phone]

Playback ID:  6588576

This announcement contains inside information.

The results are presented on a constant currency pre-IFRS 16 basis and exclude discontinued operations in the comparative period.

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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