Trading Update

May 1, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's IWG Q1 Trading Outrace analyst and investor conference. Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. At which time if you wish to ask a question, you will need to press star 1 on your telephone. I must also advise you that the conference is being recorded today 31 2019. I would now like to have the conference over to your first speaker today, the CEO, Mister Mark Dixon. Thank you. Please go ahead, sir. Hello. Thank you, operator, and good morning, everyone. Thank you for joining us on on this call this morning to discuss our first quarter coding update. As usual, I'm joined on today's call by Eric Hagerman, our group CFO. Firstly, I'd like to make some brief remarks and then hand the call over to Eric to comment on the financial performance, and then we'll be open for any questions. The momentum we saw building through 2018 has continued and we've started 2019 strongly, and this is clearly reflected in our constant currency revenue growth. Revenue from our open centers increased over 15% with all regions contributing to this. Also continuing the positive trend is the group revenue, which is up 10.6%. Revenue improved has been driven by double digit growth in 3 of our regions. Once the Americas, Asia Pacific, and EMEA. I'm particularly pleased to report that we've seen strong performances from many of the larger countries within EMEA, including France, Germany, and Spain. In the UK, we saw improvement in our like for like open center revenues, which is encouraging. Looking at our pre 18 performance, we can see a similarly pleasing development with strong performances from the US, our largest market, and also in in in Canada. And as I said, in their performance, And overall, we delivered a 6.3 constant currency revenue growth in the in this group. Pre 2018 occupancy increased by 4.2 percentage points to 74 75.4 percent. We also continue to grow our network. We added 55 new locations, taking our network at the 31st March to 3000 311 sensors. These additions added about 1,500,000 square feet of space, taking the total to almost 58,000,000 square feet of space. All of these new openings were organic and then a third of various forms of partnering deals. With partnering a franchise increasingly a key element of our growth strategy, we're particularly pleased to announce on 15th April, a landmark strategic partnership with EKP, which involved the divestment of that and business for £320,000,000 in cash and simultaneous entering into an exclusive master franchise agreement. TKP are a great partner and they're going to significantly help us develop our network in Japan. In in return for the exclusive use of our brands, and our support services, IW receives an ongoing platform fee into the system wide revenues in Japan. You see this is the first of more to come over time. And with that, I'll hand over to Eric to discuss the performance in more detail. Thank you, Mark, and good morning to everyone on today's call. Now looking to the performance in some more detail, with the tailwind from prevailing change rates, group revenues at actual rates increased 12.7 percent to 658,300,000 As Mark already said, on a constant currency basis, revenue was up increasing 10.6%. A better indication of the health of the ongoing interest 15.1 percent constant currency increase revenue from all open centers in the first quarter. So coming back to group revenues, the waterfall of 1st quarter revenue development highlights a significant improvement in the underlying business performance. The pre-'eighteen revenue contributed 6.3 percent increase to group constant currency revenue. The new 'eighteen and new 'nineteen census added a further 8.7% to group constant currency revenue. The impact of our network rationalization reduced revenue by 4%. These movements together with the modest 1.7% for tailwind already mentioned, delivered a reported 12.7% increase in group revenue at actual rates in our first quarter. In the first quarter, we invested $43,300,000 of net CapEx and opened 55 new locations. Although this is more efficient than the 46 we opened in the comparable period in 2018, the amount of investment is lower than the 63.4 invested in Q1 twenty eighteen. The main reason for this is the receipt of a higher level of partner contribution in the first quarter due to timing differences. Group net debt increased to 534,100,000 from an opening position as at the 31st December of CHF 46,800,000. However, this does not take any account of the CHF 320,000,000 cash proceeds anticipated this month from the divestment of a business in Japan. Just to remind you, we also have approximately 150,000,000 of freehold profit investments on the balance sheet. Looking to the network development pipeline, at the end of April, it stood at approximately 230,000,000 for 220 locations and 6,000,000 square feet, slightly higher than we observed at the end of February. Now back to Mark for concluding remarks. Thank you, Eric. So in conclusion, we've started 2019 strongly. It's very much in line with our expectations. We've got strong sales activity, and that's translated into improved occupancy, which in turn is driving good, creating revenue growth. And of course, running through to the improved gross profit margin. The strategic partnership with TKP landmark development and an important aspect of our strategy to deliver capital efficient growth. We anticipate further deals in the future that will continue to unlock further shareholder value. With that, I'll hand back to the operator who will explain the procedure for asking questions. Thank you. Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. And please wait for your name to be from the line of Alexander Mead. Opportunity. I'm wondering if you can comment on the level of interest from potential franchise partners and what you're looking for at a franchise partner for future deals And secondly, with regard to the higher contributions in the quarter, Eric, you mentioned it was to do with timing differences. I just wonder if you could explain, how that works and whether there's any reason that we should expect a lower level of partner contribution going forward. Eric, do you want to go first? Yeah. Perfect. So, we saw a higher level of net growth CapEx at the end of last year. It's just over 320,000,000. And at the time, we said, a policy partner contribution will come in the 4th and in Q1. And that's exactly what we have seen developing. And what we see on the deals we do, whether they are for regions or for spaces, a very good, continued relationship with all our partners. So there is no change whatsoever. If we think about the openings that we've done at the $2.99 last year and the $220,000,000 that we expect this year any change in the level of partner contribution. The only thing that you sometimes see quarter to quarter is, you know, a different change in the influx that you have. And I think you see some and pluses and minuses when it comes to quarterly cash inflows, if you will. But in absolute terms, there is no different you know, how keen partners are, to, to work with us and to contribute to the the cash flow that we spend when we open new centers. I think just to add to that, some of the, just to emphasize this, So what actually happens here is the partner agrees to fund the CapEx we've been successful in achieving that in more cases. The there's a timing difference caused by the fact that we generally paying not always, but we are paying for the the the cash contribution ourselves And then we've received either stage payments or bullet payments from our partner when the job during the course of the job being done. So that's where this timing difference comes from. And, I mean, you can see it on the balance sheet. The only thing they can see on the balance sheet on the quarter that you can see it on the full year and and and the half year. And then Eric can go through with you there. That turns up, but that that that is correct, isn't it, Eric? Absolutely. I mean, I mean, you can see them. It's very it's very simple. And then, you know, I think the the answer is clear. Is you open centers, you know, during, you know, weeks, months, and the year and sometimes the payment that you get related to an opening falls in a different quarter That's exactly what happened. I think the key thing that just to emphasize, Eric's point, is we're getting more growth for less capital that that's the important takeaway. Which over time, and you can see in the first quarter, all of the centers were organically grown. So there wasn't there were no acquisitions. Generally, with when you get organic growth, you will make a higher return on capital, the acquisitions, and, but but you do have a high level of contribution and you do get this timing difference, all of which you don't sort of get when should your acquisitions. So that's the first question. I think the second question, the the look, there's a very good level of interest. There's no question. Here here, the timing's good. You know, that, you know, some of you may have seen the news yesterday of our friends that we work, potentially. So we're not sure, but potentially looking for an IPO. There's there's several other people around in the market looking to raise finance, but what's common in all of those people all of these competitors is they have businesses that have vastly, either vastly underperforming where we are where we have sight of these numbers, or they are valued at very, very high multiples compared to where we are. So what what is clear is there's a lot of interest in this sector. And so it is a good time for us to be, going out ourselves to find high quality partners, to complete our endeavor here, which is to get faster growth that that that is more capital effective than we have been doing previously and to release it, you know, release value back to shareholders in the form of cash in the in a short to medium term. So timing is very good and it's held by conditions out in the market. We are so we're getting a good level of interest, you know, so so far, since it's on the Japan deal, we've got you know, our our problem is and I don't I don't want you to think we're gonna be doing deals, like, immediately, but we, you know, we got no problem with the level of interest. It's our ability to engage on that interest, but that's that's more of an issue. So, moving on to the second part of this question, which was, what do we look for? Well, what we look for is a partner like TKP that will accelerate the growth. So you know, we're not looking for a partners that just have money and want a business. We we want partners that have a a a real capability of accelerating growth. This this business, this industry, in this industry, the winners will be the ones with greatest coverage is this is them similar to the beginning of the mobile phone industry, where those that got country coverage, the best coverage were the winners. It is not about cleaning, the biggest in a city or, the biggest in a couple of cities, it's about full national multi brand coverage. And so we're looking for partners that can help us achieve that, who have to cater them to do it, who have the entrepreneurial skills to do it, who we can partner with and make it happen. And what I can tell you is we, you know, we are most definitely having the right sort of discussions, and we're doing before Japan. We're doing it more afterwards. So I'm sure we'll have more questions on this, but hopefully that gives you some overall picture. It does. It's very clear, and, it's very exciting point of your development. So thank you for giving color. Thank you. Thank you. And we now have your next question from the line of Andy Drobler. Your line is now open. Hi. Good morning. Just three, if if I may, I just took an operational performance through the quarter. In the UK, you mentioned that the open, open jackets, grew to run through revenues in Q1. Please do set that to continue, and I made a bit more granularity about what's what's going on in the in the UK at this point. Secondly, with the, clothing occupancy and material, which is which was very sharp to do, which is great. And you mentioned gross margins were going up. What what is the the drop through of that incremental for us to to eat it. And then lastly, just on spaces with the the new center openings during the quarter, how many of those were were spoken and and what are your expectations for specific openings? Through 2019. I've I've just hit this first one. On on the UK, again, I'll give you a big picture without it being a forecast. Now if you've we talked on several occasions about just repositioning the UK. We did a lot of work last year. We continued that work this year. What we are doing is working. So you can see, you know, a good a good turnaround, actually. From from a poor position to a better position. Overall, we would expect the the the second half you know, 2nd quarter best in the 1st quarter, 3rd, that's all the way through the year, to to get this business back to you know, it's it's somewhere close to its former glory if you like, not understanding what's happening with grab some of the economy and everything else. We continue to open centers. We continue to just reposition it and get it so that it's it's it's very, very competitive. And and and and and the, you know, the the medicine's working is is is all I can say. It's still still more to do, but there's less to do now than than 6 months ago. I think then Eric, I don't know if you you want to comment? I mean, rising occupancy, mature, dropping through. Yeah. No. So so listen. The real question is, how is this impacting EBS because of the common on gross margin. I mean, it is an interim per quarter, so we don't mention anything other than in the female than anything on top line, actual constant, etcetera. So I can't comment on it. Other than to say that we are very pleased to see this 420 basis points increase. Obviously, that will have a positive impact on performance of the business. So directionally, I think that gives you a sense of what the impact is, but I think we should refrain to say more other than at the half year results, we give the usual details when it comes to P and L, P and L ligands. And I think then just just I think the, I haven't just looked on searching for the numbers yet. Wayne, if you're there, you've got some more, Eric? Yeah. No. So so we did 55 openings in Q1 of those 27 hour off spaces. And I think if you think about the, other guidance that we've given, which is 2 twenty locations, for the year, if you sort of play at 27 as a percentage of 55 and you would do that the same on the 220, you get a good sense of what we plan to open in the in 2019 post basis. Okay. And you mentioned that the full year that year end revenue run rate disposes is 281a half. Where would it be now with those extra 27 openings more or less? But we can't break that out, but but you've got 2 things happening here. So, I mean, maybe maybe Wayne or Eric can come back to you on this, miss important, but the you've you've got a rapid ramp up of revenue. In the space's locations. So, you know, they they will be because you've got sort of con and by the way, you could have the same on the new Regis location. So the shape is, you know, you've got, you know, pretty, pretty fast fill times. And then you've got more centers added that, you know, you so it's all about full time with new centers of any kind. With the spaces, it's slightly different because they're larger. You know, the the ramp ups look different. You know, a regus will fill up quicker than the spaces. Simply because they're smaller. What what numbers are you trying to get to handy? That's just so as we can understand. 12 month revenue, I guess, Randy, right? Yes. Yes. If you feel comfortable, Mark, we can share it because we have it. We can share it. Yes, Andy, the figure based on March compared to what we were using based on January figure is up 16%. So, the simplistic run rate is now getting close to 330,000,000 Okay. That's brilliant. Thank you very much. Welcome. Thank you. And we now have your next question from the line of Steve Wolf. A couple for me. Just in terms of the closures we've seen in getting back to the net threethirty 1, just wondering whether you could give a bit of color on where they are, if that's possible. And then secondly, going back to the UK business and it's repositioning, sort of, you know, give an idea that the CapEx that's gone back into the reinvestment is now largely over. CapEx on the UK is not over it's largely over. I'd say we have maybe, best guess would be about, like, a 75, 80% through. There's just a few more, you know, even it takes a long time to negotiate. But in terms of sort of refurbishment CapEx, I'd say 7580 percent. There's not much left. And it's not I don't think Eric, correct me if I'm wrong here, but they're not significant students here in the UK. Because, generally, we're renegotiating and we're either getting a it's something, you know, in many cases, we're getting it paid for the ticket owners. Yep. No. Absolutely. On on refurbed, it's not a massive, it's not a massive, it's not a massive, I think then on closures, we'd like to call it repositioning. I mean, a lot of it is repositioning. Overall because this is just a cycling through. You know, basically when you have an estate of 3000, 300 sites. There are always a percentage to sort of come to. They come to end of life or you're building owner makes it end of life simply because he wants to push the economics more than we feel is acceptable and we can do better. So some of these places, some of these places where you are close to them would be open in a newer building with better terms. The some there's a there are very few that sort of they're not I can I can't really think of any where we'd an outright market closure, they're pretty much all either consolidations or closed or open at the terms? In terms of, your question is, you know, what are you likely to see this year? You know, that you're gonna have a continuing program, probably the majority in the first half Yeah. And then a few in the third quarter because, you know, we're always we're looking ahead for opportunities to maximize performance. So but it's a, you know, there was a period during which we did not do this in the way that we should have been, and this would have been sort of the beginning of last year. And basically, you know, we we changed management and really got focused on maximizing profitability. And when you do, it just takes time. But we're well ahead of the program now so we know what the future holds. We're very focused on doing it. And so we, you know, that gives us some confidence that we can can continue to maintain, what sort of translates into better performance because you're you know, basically that could those consolidations and or repositioning of centers adds to performance. Okay. And you can see it actually coming through quite strongly, in this first, this this first report of this year. One follow on then, in terms of the improved occupancy, Is it possible then to, you know, there's obviously a a small impact there from the closures themselves. But is there, you know, a sense from different regions as to what's driving the demand for the fill ups during that period rather than just a timing issue on that year to year. You know, what we've been saying for a while, I think since the middle of last year, we've been talking about, look, we're very happy with sales. Now, so what it takes time to build the forward order book? So I think I mentioned actually on one of these calls, right, our outlook, if we looked out, our, you know, we we we had a we can normally look out and see a shape that was sort of downwards as the order book entries, but we started to see the line of the forward order book moving up, and that has continued. So as the full order book, you know, we sold well, 3rd quarter, 4th quarter, 1st quarter order book filling, you start to to move that forward line upwards. And that that's now translating into much better occupancies And it's it's as simple as that. We sold more. We retained more, and we have better occupancy. I know it's basic, but that that's our business, but it takes work. You can't turn it. You have to keep focusing every day to make that happen. The second part of that was really, you know, in in terms of those end customers, do you do you sense it's coming from any particular industry, whether it's, you know, SME led or whether there is a larger corporates that you've mentioned before in the sort of the enterprise accounts? It's most definitely enterprise led. I mean, the I would say that if anything, SME has phase of the the world accredited finance startups, you know, basically the the money cap turned off third quarter, 4th quarter last year. You know, sort of, you know, every everyone, it was sort of, risk on, you know, that peep people were much more careful, therefore, less of that, much more corporate. I mean, that's my view. I mean, I haven't got that. My view is because I saw it happening. You know, but in our numbers, what we've been doing is a lot more corporate business, I mean, to a to a last degree. Now why am I confident that will continue? Well, we've ramped up what we call that enterprise Salesforce. Considerably during 3rd quarter, 4th quarter, but my the biggest rise of numbers of people in the enterprise Salesforce first quarter of this year. So this is a question. You have a quite a lot of interest. You have to sort of try and picture the industry if you like. Thanks to what's going on. There's a lot of publicity. A lot of larger companies have sort of accepted. This is now mainstream. Right? Plus IFRS 16 has made, companies that would have never looked at this, look at this, what we needed was more people to get you know, to just simply get in front of customers and explain how it works and how it could benefit them. What we have been doing when we continue to add more people as we go. Thank you. And to cancel the request, you may press the hash key. Your next question is from the line of Calum Badersey. Your line is now open. Good morning, guys. Two questions for me. Just kind of to follow-up from the last session on occupancy. Wondering if you could touch on which reason specifically, you've seen occupancy growth. And if outside the UK, you can get back towards kind of 80% level you're at 3 or 4 years ago. If it's kind of a target like that, now be discussed. And then, typically, on franchising, could you concern how you think about valuation versus ability to expand on franchisee? Is it still that future deals are going to come at valuations at broadly similar levels to that issue that you plan or is the focus as markers or you said kind of more on ability and willingness to expand? Thanks. Okay. I think Mary, how are we gonna answer this first one about all regions contributing? So if you look at the strong top line growth where we called out those 3 regions, Americas, which is mainly US and Canada. EMEA plus Asia Pacific, I think we can categorically say that this is driven by all those by all those regions. Yeah. I think just secondly, and I I don't wanna go too far on hand. Okay. On the on the occupancy, a sort of level, let me just explain about occupancy. It's one of these what the chief effect actually on occupancy is growth. And so what you will find is, I mean, you're seeing here the average occupancy, what what we would see is where we have cities with no growth, we would have higher occupancy than cities with more growth. High growth because of just simple cannibalization. Now, in spite of that, because, you know, we're going to grow this year And, the, you know, so we expect, certainly, our internal target would be to, you know, a 80% would be good to get to but, you know, really our occupancy should be higher than that. So if you were ever in a a sort of 0 growth scenario, you would expect, you know, this is a business that really should operate in the, you know, sort of low eighties, mid eighties of occupancy. So, you know, certainly, you know, we'd be disappointed if you weren't even with growth getting to the sort of number you may Absolutely. I think if you look at some of the regions where we are, when we, you know, we give that color, typically only at full year and at the half year, for some of the big regions, the 3 that I just mentioned, you're not that far off if you look at where we are. On the UK, there is a bit to go, but there's no reason why you wouldn't be able to get to such a percentage. If anything, Mark and I and the team spend a huge amount of time talking about this and driving this and within the organization because obviously that's where the other performance that will come from, for every 100 basis point market at some point, certainly when you get to 80% levels is when the business really, really start to throw off a lot of a lot of profit. And that's obviously what, you know, what we're working 4 in 2019. And it's a 2 sided thing, guys, as well, obviously. It's all competing price and services. Remember, big difference could ask and prove to anyone else, 29% service revenues. We work as an example of 7% service revenues and we see lots of other businesses. Almost all of them have low service. So that all the ancillaries in this is just not getting them. So if you really want, you've gotta have all three of those working to get the margin up to remain super, you know, remain both competitive and get the right return on capital. In terms of franchise, you know, look, we weigh it up. I mean, I you know, k. We but but it's it's it's it's it's a it's a weighing up between the 2. Now clearly, we need to get the best valuation for shareholders are are, you know, you're a question whether the price is going to be in the future. Well, you know, we've got some make here 100 of those sales. And, you know, they're all gonna be different. They all have different growth possibilities that have different businesses and so on. But what is uniform is simply picking out the very best partner we can find. So we're running a process in every market to to see who are the best people out there rather than, you know, just the first person that comes along. So it's this is a process that will take time That is absolutely critical if we're serious about getting full global coverage well before anyone else. Great. Thank you, guys. Thank you. And at this time, sir, there are no further questions. Okay. If there are no more questions, I'd just like to thank you once again for joining us this morning. And, we look forward to updating you again in a few months' time. Thank you very much. Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect. And speakers, please standby.