Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's IWG Q1 Trading Update 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 one on your telephone. I must also advise you that the conference is being recorded today, May 1st, 2019. I would now like to hand the conference over to your first speaker today, the CEO, Mr. Mark Dixon. Thank you. Please go ahead, sir.
Hello. Thank you, operator, and good morning, everyone. Thank you for joining us on this call this morning to discuss our first quarter trading update. As usual, I'm joined on today's call by Eric Hageman, 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 started 2019 strongly. 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 by 10.6%. The revenue improvement has been driven by double-digit growth in three of our regions, that's 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 U.K., we saw improvement in our like-for-like open center revenues, which is encouraging. Looking at our pre-2018 performance, we can see a similarly pleasing development with strong performances from the U.S., our largest market, and also in Canada. As I said, a good EMEA performance. Overall, we delivered a 6.3 constant currency revenue growth in this group. Pre-2018 occupancy increased by 4.2 percentage points to 75.4%. We also continued to grow our network. We added 55 new locations, taking our network at the 31st of March to 3,311 centers. These additions added about 1.5 million sq ft of space, taking the total to almost 58 million sq ft of space.
All of these new openings were organic and about a third were various forms of partnering deals. With partnering and franchise increasingly a key element of our growth strategy, we're particularly pleased to announce on the 15th of April, a landmark strategic partnership with TKP, which involved the divestment of our Japan business for GBP 320 million in cash and the 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 return for the exclusive use of our brands and our support services, IWG receives an ongoing platform fee linked to the system-wide revenues in Japan. We see this as the first of more to come over time. With that, I'll hand over to Eric to discuss the performance in more detail.
Thank you, Mark. Good morning to everyone on today's call. Looking to the performance in some more detail. With tailwind from prevailing exchange rates, group revenues at actual rates increased 12.7% to GBP 658.3 million. As Mark already said, on a constant currency basis, revenue was up a pleasing 10.6%. A better indication of the health of the ongoing business, 15.1% constant currency increased revenue from all open centers in the first quarter. Coming back to group revenues. The waterfall of first quarter revenue development highlights a significant improvement in the underlying business performance. The pre-'18 revenue contributed a 6.3% increase to group constant currency revenue. The new '18 and new '19 centers 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% Forex tailwind already mentioned, delivered the reported 12.7% increase in group revenue at actual rates in our first quarter. In the first quarter, we invested GBP 43.3 million of net CapEx and opened 55 new locations. Although this is more locations than the 46 we opened in the comparable period in 2018, the amount of investment is lower than the GBP 63.4 invested in Q1 '18. 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 GBP 534.1 million from an opening position as at the 31st of December of GBP 46.8 million. This does not take any account of the GBP 320 million cash proceeds anticipated this month from the divestment of our business in Japan.
Just to remind you, we also have approximately GBP 150 million of freehold property investment on our balance sheet. Looking to the network development pipeline at the end of April, it stood at approximately GBP 230 million for 220 locations and 6 million sq ft. Slightly higher than we observed at the end of February. Back to Mark for concluding remarks.
Thank you, Eric. 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 pre-'18 revenue growth, and of course, running through into 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. To ask a question, please press star and one on your telephone and please wait for your name to be announced. To cancel the request, you may press the hash key. We now have your first question from the line of Alexander Meads. Your line is now open.
Thank you. Good morning, Mark and Eric. Two questions. Firstly, with regard to the franchise opportunity, I am wondering if you can comment on the level of interest from potential franchise partners, what you would be looking for in a franchise partner for future deals. Secondly, with regard to the higher partner contributions in the quarter, Eric, you mentioned it was to do with timing differences. I just wonder if you could explain how that works, whether there is any reason that we should expect a lower level of partner contributions going forward. Thank you.
Eric, do you want to go first?
Yeah, perfect. We saw a higher level of net growth CapEx at the end of last year. It was just over GBP 320 million. At the time we said, a part of the partner contribution will come in the fourth and in Q1. That is exactly what we have seen developing. What we see on the deals that we do, whether they are for Regus or for Spaces, a very good continuing relationship with all our partners. There is no change whatsoever if we think about the openings that we have done at the 299 last year and at the 220 that we expect this year, any change in the level of partner contribution. The only thing that you sometimes see quarter-to-quarter is a different change in the influx that you have.
That's just you see some pluses and minuses when it comes to quarterly cash inflows, if you will. In the absolute terms, there is no difference in how keen partners are to work with us and to contribute to the cash flow that we spend when we open new centers.
I think just to add to that, Alexander, just to emphasize this. What actually happens here is the partner agrees to fund the CapEx. We've been successful in achieving that in more cases. There is a timing difference caused by the fact that we are generally paying, not always, but we are paying for the cash contribution ourselves, and then we receive either stage payments or bullet payments from our partner when the job or during the course of the job being done. That's where this timing difference comes from. You can see it on the balance sheet. You don't think they can see the balance sheet on the quarter, but you can see it on the full year and the half year. Eric can go through with you where that turns up. That is correct, isn't it, Eric?
Absolutely. I think you can see them cash positive, and it's very simple. I think the answer is clear, is you open centers during weeks, months, and year, and sometimes the payment that you get related to an opening falls in a different quarter. That's exactly what happens.
I think the key thing, just to emphasize Eric's point, is we're getting more growth for less capital. That's the important takeaway, which over time, you can see in the first quarter that all of the centers were organically grown, so there were no acquisitions. Generally, when you get organic growth, you will make a higher return on capital than acquisitions. You do have a higher level of contribution, and you do get this timing difference, all of which you don't sort of get when you do acquisitions. That's the first question. I think the second question. Look, there's a very good level of interest. There's no question. Here, the timing's good. Some of you may have seen the news yesterday of our friends at WeWork, potentially, still not sure, but potentially looking for an IPO.
There's several other people around in the market looking to raise finance. What's common in all of those people, all of these competitors, is they have businesses that are 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. What is clear is there's a lot of interest in this sector, and 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 is more capital effective than we have been doing previously, and to release value back to shareholders in the form of cash in the short to medium term. Timing is very good, and it's helped by conditions out in the market. We're getting a good level of interest.
Since we've done the Japan deal, our problem is, and I don't want you to think we're going to be doing deals immediately, but we've got no problem with the level of interest. It's our ability to engage on that interest that's more of an issue. Moving on to the second part of this question, which was, what do we look for? What we look for is a partner like TKP that will accelerate the growth. What we're not looking for are partners that just have money and want the business. We want partners that have a real capability of accelerating growth. In this industry, the winners will be the ones with greatest coverage. This is similar to the beginnings of the mobile phone industry, where those that got country coverage, the best coverage, were the winners.
It is not about being the biggest in a city or the biggest in a couple of cities. It's about full national multi-brand coverage. We're looking for partners that can help us achieve that, who have the capital to do it, who have the entrepreneurial skills to do it, who we can partner with and make it happen. What I can tell you is we are most definitely having the right sort of discussions. Were doing before Japan, are doing it more afterwards. 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 a very exciting point of your development. Thank you for giving color. Thank you.
Thank you. We now have your next question from the line of Andy Grobler. Your line is now open.
Hi, good morning. Just three, if I may, just on operational performance through the quarter. In the U.K., you mentioned that the open centers grew revenues in Q1. Do you expect that to continue? Maybe a bit more granularity about what's going on in the U.K. at this point. Secondly, with the rising occupancy in mature, which was very chartable, which is great. You mentioned gross margins were going up. What is the drop through of that incremental gross profit to EBIT? Lastly, just on Spaces with the new center openings during the quarter, how many of those were Spaces, and what are your expectations for Spaces openings through 2019? Thank you very much.
Okay. Thanks, Andy. I'll just hit this first one. On the U.K., again, I'll give you big picture without it being a forecast. We talked on several occasions about just repositioning the U.K. We did a lot of work last year. We continued that work this year. What we are doing is working. You can see a good turnaround, actually, from a poor position to a better position. Overall, we would expect the second half, the second quarter better than the first quarter, third, all the way through the year, to get this business back to somewhere close to its former glory, if you like. Notwithstanding what's happening with Brexit, the economy, and everything else. We continue to open centers. We continue to just reposition it and get it so that it's very competitive. The medicine's working is all I can say.
There's still more to do, there's less to do now than six months ago. I think, Eric, I don't know if you want to comment. Rising occupancy in mature, drop in growth.
Listen, the real question is how is this impacting EBIT because of the comment on gross margin. It is an interim quarter, we don't mention anything other than in the P&L than anything on top line, actual constant, et cetera. I can't comment on it other than to say that we are very pleased to see this 420 basis point increase. Obviously, that will have a positive impact on the performance of the business. 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&L items.
I think then, I'm searching for the numbers here. Wayne, if you're there, have you got them, or Eric?
Of Spaces?
Yeah, no. We did 55 openings in Q1. Of those, 27 are Spaces. I think if you think about the other guidance that we've given, which is 220 locations for the year, if you sort of play at 27 as a percentage of 55, you would do the same on the 220, you get a good sense of what we plan to open in 2019 for Spaces.
Okay. You mentioned that the year-end revenue run rate for Spaces was GBP 281.5. Where would it be now with those extra 27 openings, more or less?
Well, we don't break that out. You've got two things happening here. Maybe Wayne or Eric can come back to you on this, and it's important. You've got a rapid ramp-up of revenue in the Spaces locations. Because you've got sort of cons-- By the way, you would have the same on the new Regus locations. The shape is, you've got pretty fast fill times, and then you've got more centers added. It's all about fill time with new centers of any kind. With the Spaces, it's slightly different because they're larger. The ramp-ups look different. A Regus will fill up quicker than a Spaces, simply because they're smaller. What numbers are you trying to get, Andy? Just so as we can understand.
No.
12-month revenue, I guess, Andy, right?
Yeah.
If you feel comfortable, Mark, we can share it because we have it.
You can share it.
Andy, the figure based on March compared to what we were using based on January figure is up 16%. The simplistic run rate is now getting close to GBP 330 million.
That's brilliant. Thank you very much.
Welcome.
Thank you. We now have your next question from the line of Steve Wolf. Your line is now open.
Morning, guys. Just a couple from me. Just in terms of the closures we've seen in getting back to the net 331, just wondering whether you could give a bit of color on where they are, if that's possible. Secondly, going back to the U.K. business and its repositioning, can you give an idea that the CapEx that's gone back into the reinvestment is now largely over?
CapEx on the U.K. is not over. It's largely over. I'd say we're maybe, best guess would be about 75%-80% through. There's just a few more. Everything takes a long time to negotiate. In terms of refurbishment CapEx, I'd say 75%-80%. There's not much left. I don't think, Eric, correct me if I'm wrong here, but they're not significant sums here in the U.K.
No.
Generally, we're renegotiating. In many cases, we're getting it paid for the building owner.
Yeah. Certainly on refurbs, it's not a massive-
Yeah.
It's not a massive number.
I think on closures, we like to call it repositioning. A lot of it is repositioning overall because this is just a cycling through. Basically, when you have an estate of 3,300 sites, there are always a percentage that sort of come to end of life, or your 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. Some of these places we either close to then reopen in a newer building with better terms. There are very few. I can't really think of any where we have an outright market closure. They're pretty much all either consolidations or close to open with better terms. In terms of, your question is, what are we likely to see this year?
Yeah.
You're going to have a continuing program, probably the majority in the first half. Yeah. A few in the third quarter, because we're looking ahead for opportunities to maximize performance. 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. Basically, we changed management and really got focused on maximizing profitability. When you do, it just takes time. We are well ahead of the program now. We know what the future holds. We're very focused on doing it, that gives us some confidence that we can continue to maintain what sort of translates into better performance, because basically those consolidations and/or repositioning of centers adds to performance.
Okay.
You can see it actually coming through quite strongly in this first report of this year.
One follow on. In terms of the improved occupancy, is it possible then to, there's obviously a small impact there from the closures themselves, but is there a sense from the 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?
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. It takes time to build the forward order book. I think I mentioned actually on one of these calls that our outlook, if we looked out, we can normally look out and see a shape that was sort of downwards as the order book empties. We started to see the line of the forward order book moving up, and that has continued.
As the forward order book, we sold well third quarter, fourth quarter, first quarter order book filling. You're starting to move that forward line upwards. That's now translating into much better occupancies. It's as simple as that. We sold more, we retained more, and we have better occupancy. I know it's basic, but that's our business. It takes work. You can't turn it. You have to keep focusing every day to make that happen.
The second part to that was really in terms of those end customers. Do you sense it's coming from any particular industry, whether it's SME-led or whether there is the larger corporates that you've mentioned before in the sort of the enterprise accounts?
It's most definitely enterprise-led. I would say that if anything, SME has faded. The world of crazily financed startups, basically the money tap turned off third quarter, fourth quarter last year. Everyone, it was sort of risk on. The people were much more careful. Therefore, less of that, much more corporates. That's my view. My view is, because I saw it happening. In our numbers, what we've been doing is a lot more corporate business, to a large degree. Now, why am I confident that will continue? Well, we've ramped up what we call our enterprise sales force, considerably during the third quarter, fourth quarter. The biggest rise of numbers of people in the enterprise sales force first quarter of this year. This is a question, we have 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. That plus IFRS 16 has made companies that would have never looked at this look at this. What we needed was more people to just simply get in front of customers and explain how it works and how it could benefit them. That we have been doing, and we continue to add more people as we go.
Perfect. That's great. Thanks, Mark.
Thank you, Steve.
Thank you. Thank you, once again, if you wish to ask a question, please press star and one. To cancel the request, you may press the hash key. The next question is from the line of Callum McCarthy. Your line is now open.
Morning, guys. Two questions from me. Just kind of to follow up from the last question on occupancy. Wondering if you could touch on which regions specifically you've seen occupancy growth, and if outside the U.K., you can get back towards the kind of 80% level you were at three or four years ago, if kind of a target like that could now be discussed. Then secondly, on franchising, could please understand how you think about valuation versus ability to expand with franchisee. Is it the position still that future deals are going to come at valuations at broadly similar levels to that achieved in Japan? Or is the focus, as Mark has already said, kind of more on ability and willingness to expand? Thanks.
Okay. I think, Eric, how are we going to answer this first one about occupancy?
Yeah, on occupancy, all regions contributing. If you look at the strong top-line growth where we called out those three regions, America, which is mainly U.S. and Canada, EMEA plus Asia Pacific, I think we can categorically say that it is driven by all those regions.
Yeah, I think just secondly, I don't want to go too far on here.
Okay.
On the occupancy sort of level, let me just explain about occupancy. It's one of these. The chief effect, actually, on occupancy is growth. What you will find is, you're seeing here the average occupancy. 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. In spite of that, because we're going to grow this year, we would expect certainly our internal target would be to, 80% would be good to get to. Really, our occupancy should be higher than that. If you were ever in a sort of zero-growth scenario, you would expect, this is a business that really should operate in the sort of low eighties, mid-eighties of occupancy.
Certainly, we'd be disappointed if we weren't, even with growth, getting to the sort of number you mentioned.
Absolutely. I think if you look at some of the regions where we are, we give that color typically only at full year and at a half year. For some of the big regions, the three that I just mentioned, you're not that far off if you look at where we are. On the U.K., there is a bit to go, 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 within the organization, because obviously that's where the performance there will come from. For every 100 basis point mark, you could see at some point, certainly when you get to 80% levels, is when the business really, really starts to throw off a lot of profit. That's obviously what we're working for in 2019.
It's a two-sided thing, guys, as well, obviously. It's occupancy and price and services. Remember, big difference with us compared to anyone else, 29% service revenues. WeWork as an example, 7% service revenues, and we see lots of other businesses, almost all of them have low service, so that all the ancillaries, then this is just not getting them. If you really want, you've got to have all three of those working to get the margin up and to remain both competitive and get the right return on capital. In terms of franchise, look, we weigh it up. It's a weighing up between the two. Clearly, we need to get the best valuation for shareholders. Your question, what are the prices going to be in the future? Look, we've got to make here 100 or so sales, and they're all going to be different.
They all have different growth possibilities. They have different businesses and so on. What is uniform is simply picking out the very best partner we can find. We're running a process in every market to see who are the best people out there rather than just the first person that comes along. This is a process that will take time, but that is absolutely critical if we're serious about getting full global coverage well before anyone else.
Great. Thank you both.
Thank you. At this time, sir, there are no further questions.
Okay. If there's no more questions, I'd just like to thank you once again for joining us this morning, We look forward to updating you again in a few months' time. Thank you very much.
Thank you very much. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.