Earnings Call: H2 2018

Mar 6, 2019

Okay. Well, good morning, everyone, and, welcome to our 2018 annual results. Overall, 2018 was a good year on many counts. Firstly, the results are absolutely in line with where we told you that they would be. Open center revenue growth rate 13.3 percent, which we're very pleased with. Strong sequential improvements in revenues continued really throughout the second half of the year. And this is both overall and immature. We've got very good underlying performance improvements. Pre growth EBITDA, so that's without the cost, the cost in the year of growth reached 147,000,000 number, we're we're happy with. It's about 20% improvement, about 7 70,000,000 improvement. And we grew the network substantially during the year. So growing industry, lots of opportunity. We found lots of excellent investments. I think the 2018 vintage will be an excellent one overall. It was just the right mix. Almost all of it came through organic growth, which has a much greater short term effect on EBITDA. But conversely, it will show much higher returns on capital. Acquisitions bring immediate impacts of positive impacts on EBITDA, but have a lower, generally, lower return on capital. So this this vintage will have a very good return on capital because it's almost all organic. The reason it's almost all organic, there's no acquisitions because There are high price expectations out there, and it's not a sort of an area that we like to play. And so we'd much rather be patient and wait for prices to become more normalized. So the overall cost to us, of negative EBITDA from the new growth in 2018 was 40.5 1,000,000 and 332,000,000 of actual capital, net capital investment to open those centers. Another highlight for us was cash generation. You know, it's a positive feature in our results. Every time. And again, excellent growth in the actual capital the actual cash produced in the business before growth investment. And of course, before returns to shareholders. So we generated about £44,000,000 of additional cash and underlying cash flow up to 259,000,000. Overall, that's up about 20%. And with this, were able to return 93,900,000 to shareholders through a combination of repurchasing 40,000,000 of shares and continuing our progressive dividend policy with an annual increase of 11% to 6.3p. The balance sheet remains strong with a net debt to EBITDA ratio of 1.2 times net debt overall totaled 461,000,000. I think the important thing to pick up from these results and, my comments today is that the business has very good momentum. So we saw it, in the second half of last year, and that's continued into the beginning of this year. You can see it from the development of our revenue. And I think you also better see in Eric's comments how it's picked up through the year. And a strong end to the year gives us an excellent starting point for 2019. And we intend to build on this overall, but we still remain cautious in our sights. The world today is I would say, a slightly more uncertain place than a year ago. And, you know, we're very, very aware of this, so we're cautious in Although it's a growing industry, although our cash flow is improving, we are absolutely aware and a little more cautious this year in everything that we are doing. There's still going to be quite a bit of growth, but we're very much on the cautious end of growth from what we see at the moment. So, again, just looking at 2018 and the sort of good momentum points that we had. One of them was, our partnering ambitions being more fulfilled in 2018. And we expect that partnering will become a much, much bigger part of our overall growth in 2019. In 2019, we expect to have much more to talk about as we go through the year as we, number 1, do a lot more franchising. We had excellent results in the second half of last year. Many, many franchise partners being signed up. Those same partners start to open centers this year. So it's, you know, becomes more meaningful. We haven't got numbers in here in this announcement, actual numbers because they're still quite small. In terms of what's actually been opened. But certainly, we have a lot of sign ups last year. We will get openings this year. And and we have excellent interest in both franchising for individual territories And you should expect to have quite a bit of corporate activity as we start to do larger franchising agreements on larger territories. All of this is so that we can have a higher rate of growth This is a business that benefits greatly from national and global coverage. National coverage, super important, where you see national coverage, look at the United States, you have an excellent business. You have a great offer to customers is what customers, especially large corporates, are looking for. The more extended we can get the network in a country, the more successful it is. For us to do all of that from our own balance sheet and with the same hits to, in year EBITDA that you can see last year, if we want to do this at real scale, we have to partner it. So the effort was put in last year, the team was put in place, We got the results last year. There will be a lot more this year. So about a third of the growth last year was partnered Over time, we expect to have a complete inversion where I'll be standing here saying, that a third of the business was company owned and 2 thirds were partnered. You know, it's going to invert. It's starting to happen now. I think another key point if you look at momentum is enterprise customers. I'm gonna talk to you in a moment a little more about this, but What we are doing is becoming more and more mainstream. It's the way companies want to takes place to support their workforce. And as that, we we have the biggest platforms that we can offer it in more places So we are getting more and more of these customers. This is also being helped, of course, by IFRS 16. This is the flip side for us IFRS 16 puts it right up to the top of every CFO's list of every major company. And we have a solution to part of that problem. So it's another thing that I think provides momentum second half of last year and into the beginning of this year. So and finally, if I look at momentum as I as we end 18 and coming to 19, better management, more investment in better people so that we're more able to execute at speed and at scale. So quite a few changes throughout the organization. We made changes in the middle of last year that you'll be aware of. A lot more changes since as we've strengthened the management, built up the franchising support, as an example, built up the partnering support built up the corporate finance support that we need as we start to move the business to a different strategy and a different growth outlook. So just looking regionally, outstanding performance in the Americas, in particular, the United States. Great performance in the United States and the Canada business, the US business, building momentum throughout the year, with over 10% constant currency revenue growth in and high single digit mature revenue growth, altogether, great performance. And remember, the U. S. Market is the most competitive many people talk about London. It's not London. It's the United States. More people doing it there. It's where our strongest business. So all of that competition, a lot more people talking about it, it's helping us. We have a lot of demand. We got the biggest network. 1200 sites in the US, every state except Alaska where we will open this year. Our Canadian business also finished 2017. Here, we have very, very good coverage. It's another national business And you can see good coverage, national business, platform, with good management, very, very strong double digit growth there, and excellent improvement in profitability. Also, in the Americas, Latin America, it's been a a drag on us for many reasons, but during 'eighteen, much of this was resolved, better, again, better management there, our Brazilian business, which was a problem business, very, very bad economy. We completely repositioned it, doubled it in size. It's going to have an excellent 2019. So sometimes crises can give opportunity, and there's certainly was one in Brazil. And I think it gave with good management there, we will we have and will have an excellent business there, a great store of value for the future. Turning to EMEA, strong year, both in terms of revenue and profitability. Continental Europe has been the big driver behind this. And the annual growth rate reflects a very strong second half performance. Just picking out a few countries. France had a very strong second half as it benefited from new inventory that we added. Into the market in prior years. And the strength of the performance today is really based upon the investments that we made that weighed back, they held back performance in previous years, that all started to come together during 2018. Gained great platform, national coverage, all brands, lots of corporates, really, really is a good business in France. Italy, Germany, Switzerland, all pretty much the same. You're starting to get excellent coverage in those and great business. Russia restructured. You know, again, we took 2 ruble dollar hits. It there was a poor very, very difficult business, mainly from external pressure. But turned around starting to have quite a good business there. As we come into 2019. APAC, you know, here, Japan's outstanding performance, both in revenue growth, profitability, and growth of the network and partnering. So again, good management, really, really good performance there. Very exciting business there. Philippines similar, smaller, Hong Kong, similar, smaller. UK, Look, it's all about decisive action. UK was a problem. It's not necessarily a problem with the economy. It was a problem. That here, we had some of our older, older stock, older centers that needed to be repositioned. The and we did this in 2018. We continue to do it in 2019. So this is about people, 1st and foremost, improve the management, spend more money on the people. We did that. It's about closing locations, reserving locations, and opening new ones. So lots of new openings. And some closures and repositioning. That, we're going to have an excellent turnaround in it's still a very profitable business last year, but not as profitable as it had been. 2019, it is it won't get back to its former glory, but it won't be far away. There'll be a lot of good profitability growth in the UK. So building blocks. And this was just about intensive management, people, repositioning, 27 new openings, about 14 closures. But overall, looking through all of that, it took quite a long time to do this. Were completed in the first half of this year. We still had 5.2% revenue growth last year, in the UK business. It wasn't a complete write off. And certainly, the end of the year much better than the beginning So I think we're in good, we're in good shape there. And it is a market of opportunity in the UK, and it is a market where we have our strongest franchising activity all across the country. So very quickly, if I just you know, new locations. We added a lot of them. And as I commented earlier, you know, we added some really great great buildings last year. You can see a few of them here in a battersea power station for us. It's a completely understood served part of London, building's not quite finished yet, but it will be with the only occupier there along with Apple It's totally an iconic building. Obviously, great place to work with putting a number 18 in there. It will do very well. Very confident. Age, this, next one is La Defense. Now biggest center we've done so far in, in France, two hundred maybe two hundred thousand feet, right next to La Grande Dache in La De France. And, you know, it's so big a building. It's even got its own exit from the motorway, which so we've got a sign up on the motorway, which is is quite cool. Think it's the only one in the world like that. Much more importantly, if you just look at it, it's, center we opened this January but the costs mainly came last year. So the e we had EBITDA losses and costs in last year for center that opened this January. So and more importantly, it's filling very nicely. If you're not quick, you won't be able to get an office there. It's very, very popular. It's a spacious, super great design, and great positioning. You know, that's the center that we're gonna do very, very well on. If you then look to the United States, this is Hudson Yards, Look, it's this is in New York. It's an area of alleged high competition, but it's an expanding market this center also done very well. So and it's part of many launches we did last year in the United States, and we're getting very good pickup on new sensors that we're adding. Remember, the way we look at the world is return on capital. We, you know, we invest. We make a return. So looking forward, how what what will this vintage be like? I think it's going to be a very good vintage because we've got the right deals, the right places, the right financial conditions and, some centers that do very well quite quickly that's a recipe for for good, good return on capital. Enterprise accounts So, you know, I've been asked for many occasions to give a little bit more data on this, so here's some data. Now what's common in all of these case studies, it's companies that want that are interested in the network. So For us, an enterprise account is a company that's using us in significantly in lots of locations. It's not just a big deal. They've got to be doing it in in more than one place. It's gotta be part of their strategy. So if you look at IAG, International Airlines Group, you know, they've moved to the hub and space model in 40 cities, And, you know, for for them, it then we were the only choice because we covered everywhere they wanted to be. With our international networks, all international. If you look at Deloitte's clearly a huge employer globally, They did an RFP process, a very intensive one. And that covered managed space, flex space, and empty space monetization. We went on all three tenders, every one of them. And, again, it's network They wanted a counter party that was reliable in execution that was going to be there for the long term. All of those things helped us in getting into a very good position with Deloitte. And we're now opening things with them for them, the relationship builds. Third one on here is is is Telus. This is actually US government It it's backing up the census, and we're seeing a lot of this in in, in this world of cyber insecurity. More and more people, more and more companies are looking for regulated space. They want space that can be secure. They want internet and digital connectivity that can be secure. This cannot be achieved in people's houses. This cannot be achieved in just any location. So we have focused a lot on security both technology security and, of course, building security. This was a key thing for TELUS, which is part of the U. S. Census We were everywhere again that they needed to be. It started off with 100 sites. It will end up being more. And, and, and, clearly, you know, it's a contract that requires flexibility, a sense that it's not done every year. And then HSBC obviously, regulated entity. IFRS 16, very important to them. Again, here, flexible became a core building block on how they want to transition the bank, how they support people, into an element of the people being supported through flexible space. These are a few. There are many more We have significantly grown our enterprise team to meet the demands from these companies and it's becoming a much more significant part of the business, very significant growth, end of last year and into this year. So quite optimistic in that area. So Big picture. You've seen this slide before if you've been to one of our Capital Markets days. What's it all about? What are we what are we here for? What are we trying to do? This is what we're trying to do. This is what we're going for. It's the property industry. $29,000,000,000,000 of capital invested in this huge property industry, which is having trouble with, digital. They're not very good at dealing with it because It's a completely different thing. Customer service, flexibility to investment in very fixed things like buildings. So it it's being disrupted by us and others. And but it's a good sort of disruption. You know, we're not taking customers away, we're helping them service a new type of customer that's coming with the digital age that we live in. So what companies are looking for is flexibility. They're looking for a product. They're not looking for properties anymore. They want a product just like you'd go out and buy a car and you drive it, you don't put the pieces together, then drive it. In fact, you don't even buy them today. You lease them by the month, I think. So it's that's what companies want. They said we we don't need to be in the property industry. Someone give us a product, and we'll buy that product. And we don't mind if there's a company in the middle that makes a margin, and we don't mind if the property investor makes a decent return. That's okay. We're quite happy to pay for a service that works for us. We're in the middle helping that occur. Biggest platform It's digital, it's support services, and it's the properties themselves, putting those 3 things together, helps the property industry move into this new this new age that we're we're all going through. So look. It's a huge opportunity. It was when I put this slide up. It's even bigger today. IFRS stick IFRS 16 really has sort of changed things. And and it's only just come out in the last couple of months. It's still not affecting people's accounts. So there's quite a lot of of of of of wind behind us, and as we enter into 19. So I'm quite optimistic here about the future. So our strategy is really to just go out and capture this opportunity. So firstly, and I repeat it's an investment in people. Better management, tighter management. Better investment in both partnering franchising, more investment into enterprise service. Technology. It's the technology platform critical. So that is it's all about apps. We've introduced 3 new apps into the market and we continue every month to improve the general app that our customers use. Everything we do because we've got 2 and a half million customers. It's all digital these days. We don't have enough people to speak to 2a half million people. It's a digital conversation, which they're happy with. Most of the time, and it, you know, because it's on on on chat available all the time, it works for them and clearly helps us to to to manage them. We've also got a new partnership with Hewlett Packard that starts this year, which again is bringing their technology together with our centers, again, improves customer service, fantastic route to market for Hewlett Packard, We've got more partnership opportunities coming through. More people want to get into this market, and we we're a great conduit to get to those end users. Additional services. It's something that overlooks. So when we look at, you know, we're getting lots of acquisition opportunities, investment opportunities, lots of small guys out there, open some centers, run out of money, got to raise more money. You look at them. None of them have any service revenue. You look at the biggest. They have very small percentages. Biggest of all, I think, is 7% of service revenue. If you do not have service revenue in this industry, you won't you're not gonna make it in the long term because you can't do it just by repackaging rent. You've gotta have service, you gotta be good at it. You gotta be able to manage costs, you've got to be able to get this additional revenue. So our revenue and it's been we've been through a lot of hard times over the years. We know how important this is is at 29 percent of group revenue, and that's a multiple of what everyone else has. And it's a key differentiating factor. And we're very focused on growing it. So Workplace Recovery. Still quite small, but it's a very significant impact on our profits. Because, you know, it grew last year at 50% as well. So it's a very, very nice. It's just another layer of additional revenue that no one else has. And it works off the basis of the network. You need a network to actually do it because you give people recovery everywhere. It's becoming more and more popular. If you look at our membership business, again, what we've got here is more members and more members using, which is important. The 2 together gave us an 18% growth in that business last year. We're putting, again, better management on this more effort, more investment, we expect to be able to get more out of it going forward. So we're continuing to work on the on the platform. We're continuing to find new ways to grow and and pulling those together into, this slide and this discussion. This is all about, so what does it all look like in the future? So I think overall, we're pleased with performance. We're pleased with investments. We think there's huge opportunities in the marketplace overall, we're in a position at the moment where our marketplace is growing quickly. There's new entrants and there's existing players that continue to grow, although we think some of that growth is now starting to tail off. This growth is very helpful to us. Because we have many evangelists out there apart from us talking about why you would want to use flexible space, why you would want to use co working. And this has been a very, very helpful thing. Again, as I'm explaining about our business, I find it much easier to explain now than at any time in the past. Because people pretty much get it. So This is helpful today. Tomorrow, we may be helped if some of the competitors become available at more reasonable prices. There will be good consolidation opportunities. Remember, we've consolidated the industry twice so far in 30 years. Okay? So you have to do it the right time. The circumstances have to be right. And at the moment, organic growth outplays, it beats, acquisition. But that will invert at some point. And we've, you know, we we look forward to that opportunity. Balance approach, I think I've made it clear, but I'll say so once again. So it's really important. If you look at where we are today, if you look at our results today, we are being affected by the high level of organic growth that we have in the business. Good investments are not. It's affecting our profits. It's using our cash. So as partnering becomes a much bigger part of what we do, the need for cash reinvestment in the business will go down. The effect on profits will go down. Because it's clear that we're not winning that communication battle, looking at how people value us today. So that move to partnering of all kinds being the most significant part of how we're growing should give us both the opportunities grow more quickly, but also help in our investment communication, the overall message. The platform. It's 3 things: property. The digital layer that holds it all together and it's the support centers that give because, basically, you can't do it just with digital. So we've got a very effective support structure that operates globally in 42 languages 24 hours a day. That's what customers want. They really, really do appreciate that. And, so, you know, on that platform, lots of new opportunities will come. It works for any brand You can see what we've done, with spaces, which will come on to in a moment. But we will add more brands onto the same platform. Multi brand is most certainly helping us. It makes your marketing much more effective because we have different work styles, different prices available. It means that we can convert more customers. We have more choice. So we built the platform, not just for what we have, we've built the platform to add new concepts to pick out more segments in the market in the future. Spaces deserves it deserves a slide and a few comments because it's it's been a great success to it, and it sort of gives it it substantiates the the platform and its power. And we have been able to roll this out, into 38 countries. I think it goes this year to 62 countries. It's we'll catch up WeWork inside this year where they currently are. It's a It's done it profitably, which is even more amazing. And, you know, it's an excellent business. Cost a little more to open them. Return on capital the same as if we're opening an HQ Regus or a number 18. So returns on capital very much in line. But the centers themselves, this is a big format center. So the actual numbers are much bigger because One space is equal is equal to 4, 5 or 10 Regis. Regis is much smaller. H2s can be very large. So if we look at the revenue in 2018 from spaces, 182,000,000, If you look at the same business at a simple run rate based on multiplying the revenue in January by 12, you're at 2:80 minutes. So this is fast growth, fast opening, fast growth, lots of revenue increase here. Overall, you know, we're very excited about this, but we're not less excited. It's not Spaces only. Spaces only about half of the growth, all the other brands were also growing as well. We've got different brands for different markets. They all work very well. Otherwise, we'd only be opening up spaces, of course. So watch this space. It's a very exciting segment. You might have seen, you know, newspaper coverage. People are interested in it. And we believe a great store of value for the future. It's an excellent brand and, really, a hidden gem inside of IW. So with that, I will hand over to Eric. Thank you, Mark. Still thinking about this watch disc space. I like that. All right. Good morning. In the following slides, I want to discuss 3 topics with you. 1st and foremost, I will walk you through the 2 2018 highlights of our P and L balance sheet and cash flow statement. And after that, as I'm relatively new to some of you at least. Pat will set up some corporate finance principles that are fundamental to the way we operate and which we on the right today. I will then end my section. How could we note with a couple of pages on IFRS 16 before I hand back to Mark. So let us first have a look at the key points to make on the income statement. As Mark already mentioned, our 2018 revenue increased 9.7% at constant currency to just over 2,500,000,000 or up 183,000,000 compared to the same period last year. Reflecting the continued uplift in sales activity, revenue growth improved each quarter in 2018. Year on year, constant currency revenue growth was 6.7% in the first quarter, 7.6% in Q2, 10.32% in Q3, and we ended the year with 14.3 percent growth in the 4th quarter. It is also important to point out that all four regions contributed to this positive development certainly in the back end of the year. Margareti said, the best indicator of our earnings performance is by looking at our pre-18 estate EBITDA. In 2018, we generated $447,400,000 of EBITDA from this estate, an increase of 71.2 or up 19% on the EBITDA we generated in 2017. EBITDA sales increased $13,700,000, all up 4% to 389.9 as the depreciation and amortization of 22.8 more than offset the $9,000,000 reduction in our operating profit. This higher level of depreciation reflects the significant investments we've made in recent years to grow our business globally. It is also important to point out that a 4% EBITDA increase is impacted by the 40.5 $1,000,000 of EBITDA investment, we did a new 'eighteen and new 'nineteen census, and that also includes a wall of EBITDA closure cost of 16,000,000. Overheads was up $16,000,000 compared to 2017 as we invested in building strong foundations for the anticipated future growth of our business. As well as into various activities While the absolute levels of overhead increased in 2018 measured as a percentage of revenue, it actually was down 10 basis points to 10%. Operating profit was down by 9000000to154.1 and as we continue to invest in our business and in line with expectations. It reflects the combination of a slightly lower gross profit margin in 2018 and the absolute increase in overheads, as I just mentioned. On a regional basis, there were very strong operating profit improvements in both the Americas and EMEA as margins highlighted. Earnings per share for 2018 was 11.7p, And this lower level of earnings per share mainly reflects the slightly lower profitability, again, as we continue to build out our network in 2018. If we now look at our cash flow statements, we can see that cash generated before net investment in growth capital, dividends and share repurchases increased by 43,700,000 to 259.2 or up no less than 20%. This increase is driven by the positive impact from growth in the group's EBITDA and the strong working capital inflow we saw and is partly offset by the anticipated increase in investment in maintenance CapEx and higher cash outflows in respect of tax and finance costs. Benefiting from the share buybacks we did in 2018 the subsequent reduction in the number of shares outstanding, cash flow per share increased 22% to 28.6p. Our net growth CapEx was $332,000,000, up from $272,500,000 in 2017. And a bit higher than our original guidance. Why? Firstly, we opened 299 locations rather than 2 75 with a particularly strong end to the year with 95 locations opened in the fourth quarter. Secondly, this positive momentum at year end also resulted in a much stronger pipeline of openings scheduled for 2019. And thirdly, as these locations were in development and not yet opened, there was also a timing difference in relation to the receipt of partner contribution. What does it mean? It means that some of the CapEx that we invested in 2018 will only actually get the connected landlord contributions in 2019, I. E. This year. Net debt increased from $296,400,000 at year end last year to just over $460,000,000. This increase, by the way, also comes after paying dividends and share buybacks in total for 94,000,000. Whilst our debt is up compared to last year that represents a net debt to EBITDA ratio of 1.2 times, and we are quite comfortable with that also because we have approximately $140,000,000 of freehold property investment sitting on our balance sheet. All right. As I said in my opening statement, I felt it was important today to all, to briefly share with you some of our fundamental principles when it comes to corporate finance matters set out here on these six boxes. So we'll talk you through those 1 by 1. Alright. 1st and foremost, as an organization, we remain laser focused on returning very disciplined processes when it comes to allocating capital. As a business that invests significant sums into the build out of our global network, it is imperative we do this in a very disciplined way. Investment opportunities need to lead to profitable growth and have to yield a post cash, the post tax, cash return that materially outstripped our cost of capital. Secondly, based on the high return growth opportunities that we are seeing, both standalone and in cooperation with our partner and a healthy increase in cash flow that we generate. We feel comfortable with the net debt to EBITDA in the range of three quarters to 1.5 times. As I said, at the end of the calendar year, it was 1.2 So this gives us quite a bit of headroom within the range, if need be. Thirdly, on the top right, we continue to enjoy strong support from our banking partners and in January 2019, we further increased our revolving credit facility from 750,000,000 to 950,000,000. This facility provides adequate headroom to continue to execute a profitable growth strategy. We simultaneously improved the debt maturity profile of this facility by extending into 2024, and their options in place to extend it further to 2026. I think it's equally important at this moment in time to say that the financial covenants on the increase facility are unchanged and they will not be affected by the implementation of IFRS 16. When it comes to our dividend policy on the bottom left of this page, this remains firmly in place. As we continue to be committed of the business, but also our desire to reward shareholders for their loyalty. In addition to the dividend, returns to shareholders can further increase by buying back shares, which is in essence returning access cash to shareholders with the added benefits that it shrinks our share count. The latter, which added 2 percentage points to a year on year cash flow per share growth, as we just saw. Lastly, on the bottom right of this page, our principle when it comes to M And A are that we do it very selectively. That we do it to create value, which means it has to be the right asset at the right price and that it needs to compare favorably to the high returns we enjoy on investments in our own business and that a potential deal has to be accretive. A bit more of detail for you on this page on shareholder returns. And absent this sets out how the dividend and the total shareholder returns have developed over the last 5 years. And what we see is that in the last 5 years, our TSR has increased by 79% as you can see on the left hand side. And on top of that, we're recommending a 10% increase in the final dividend of 2018 to 4.35p, which is subject to approval, of course, by shareholders at the AGM. In May. This increase, of dividend for the full year by 11% to a total of 6.3p. Based on this in the last 5 years, our DPS has increased by 58%. Alright. Let's now turn the page and focus on IFRS 16. So Let me begin with a couple of key messages, that is to say if you take anything away from today's presentation on the new accounting standard, that is Let it be the following: one that there is no impact on cash flow or the cash generation per share and how we run our business. 2, that the new standard has significant impact on our financial reporting in that, a, leases are brought onto our balance sheet be my operating profit or EBIT increases and my profit before tax and EPS decreases. And 3, it also applies to all annual reporting periods beginning at the beginning of this year. So let me just share a bit of background, to this new standard. What it means to us in terms of bookkeeping. So it becomes effective as the 1st January replaces IS 17 on leases and a few other notes all leases attached to that. And in essence, IFRS 16 requires lessees like us to recognize most leases on their balance sheet. The exception being, as we already mentioned, at the Capital Markets Day in September 2017, are short leases and leases for another amount, a couple of grant. It is correct to say that the majority of IWG's leases fall within the scope of IFRS 16. It is also important to highlight that this change in accounting standard has no impact on the flexibility of our leases. Flexible meaning that they are terminable at our option. For the more it's important to point out that IWG plans to continue to internally manage the company, on the former standard. And in addition to adopting IFRS 16 for external reporting purposes, we will provide supplemental external reporting on the previous standard for your information and hopefully benefit. In preparing for the implementation of the new standard, we have several choices to make. One of which meant that we have adopted the so called modified retro perspective approach. We believe that this is the most comprehensive and representative view. The result of implementing the new standard on leases means that in our balance sheet, we see the creation of a so called right of use assets on the debit side of my balance sheet and a balancing item called lease liability on the other side, the credit side of my balance sheet. In the income statement, rent is now being replaced by a depreciation charge, which is non cash. And we are depreciating the right of use assets, and we have to recognize the finance cost of the lease liability. And now sits on my balance sheet as an expense. Again, this is also noncash. So ladies and gentlemen, what does all mean for us? And what impact does it have on the numbers that we published, today? So on the left hand side, on the head of KPIs, we see illustrated the impact on the balance sheet. In simple terms, what happens in the balance sheet is, we will see a lease liability appear on the credit side that is based on the present value of the future lease liability. And this lease liability has been estimated to be circa 6,200,000,000. As I said, what makes the balance sheet balance is a corresponding entry which is so called right of use asset because at the lessee, I'm actually using that asset. This has been estimated to be circa 5,600,000,000. In the middle of the header, IS 17, we show the impact of the new standard on the 2018 numbers. On the right hand side, we see then the KPIs. And if we compare and contrast the form of standard to the new standard. So what are we seeing? We can see that and hence our ability to invest in future growth is not impacted by IFRS 16. Secondly, our EBIT is up because the depreciation charge resulting from the new standard is actually lower than the rent charge and EBITDA is up because of the removal of rental expense in my P and L. As you can see, profit before tax will go down because of the finance cost of the now on balance sheet lease liability will run as an expense through my P and L. This also obviously impacts my earnings per share. Just to be crystal clear, our earnings per share is impacted simply because the earnings calculation has changed as finance costs associated with the lease liabilities lower our earnings from a pure accounting perspective. Lastly, as you can see, net debt increases as all of my future lease obligations are now shown on the balance sheet. So to summarize the topic of IFRS 16, customers will not be impacted by this transition. The may, however, as Mark already said, be prompted to review their own corporate real estate needs and look to use Workspace provide us more. There is therefore no negative impact on revenue. As I said, cash flows of the group and the cash generation per share are unaffected by this change in accounting standard. There is, again, therefore, no impact on our dividend policy. Our banking covenants are based on the pre IFRS 16 standard And as such, this has no impact on our funding via the revolver. In all, IFRS 16 will have no impact on the group strategy, our commercial negotiations on leases or investments in growth. With that, I would like to hand back to Mark. Thank thank you, Harris. So in conclusion, looking forward, common trading has provided an encouraging start for 2019. So strong end to last year, strong start to this year. We're very focused on margin improvement as well as growing our network and growing that network in a in a more even more disciplined way. And, again, that growth greatly helped this year with and excellent momentum in partnering. We're well placed to benefit from the strong structural growth trends in our industry, and we we look forward to this year overall with with great excitement. And with that, we'll open up for questions. Bye. Hi. It's Andy Grobler from Credit Suisse. I've got quite a few, but I'll just stick to 3 for now. Mark, you mentioned that market growth was trailing off. Which market market growth in terms of new entrants you said in your in your speech. Where is that trailing off and why do you think that is that is the case? Would be the first question Secondly, I know I've asked this before. And on the enterprise, solutions, you gave us some some interesting examples. Do you have any data in terms of how that has changed numbers to support that. And thirdly, on IFRS 16, slightly technical one, it it mentioned on the the slide that you included all leases that weren't stand alone legal entity or not fully cross guaranteed How does what view did you take on the SPVs where you have leases that are in SPVs, please? So enterprise first, let's just deal with that one. It's up about a third. If you look at overall sales, it's a 3rd up sort of in the as you went into the 4th quarter and into hinds this year. So it's becoming a much, much bigger part with the overall new new site. And that's because of IFRS 16, a lot more awareness, and we've got more people doing it. More people working on this thing. If you look at the marketplace competitors, So why is growth slowing down slowed down funding? Just funding? And the there's the overall funding for riskier noncash low producing, hockey stick type type businesses has dried up a little bit. People are more uncertain now. So that's not just in this industry. It's across many industries, anything with a hockey stick, as much, much more skepticism. The value of capital has gone up. So I think that's what's happening. I mean, we can see it because we there's a huge amount of people out there who are all fundraising. And not not all of them succeeding. So and we clearly see those as potentially future opportunities. Some Duke is not universal. Okay. And in the end, these are subscale businesses, they may be good businesses, by the way, but they have trouble covering overhead. And quite a lot of them don't make a contribution at the gross profit level pre overhead. So no barriers to entry. Very cheap capital going together. They're going apart again. I think it's just some markets moved on now. Is that the case in certain regions more than others? No. I think it's pretty yeah. We got stuff Asia. I'm just thinking, yeah, Asia, Europe, America definitely, yeah, UK. I mean, yes. And just on the enterprise, so it's up a third. Is that new sales or revenue? New sales. So it becomes revenue. Okay. It's significant. Yes. It's significant and it's stickier. You know, it's the sort of small guys that will come in go again, you know, get more churn. This is it's much stickier. It's much high quality revenue in our experience. And and as a pro because it's kind of better business longer term, how much of new sales is, is that kind of enterprise solution? Just trying to gauge on that. About half of it. Okay. About half. Look, it's what we've got, I suppose, you detect some confidence, but we're cautious, but at the same time, forward order book looks it's all about the forward order book, what have we got booked in? And that's good. That's looking good. So, and that is more enterprise accounts. Doing that. You know, are the leases. We take the whole liability. It doesn't matter if they're in a stand alone. Oh, that's right. Yeah. It's just it's a look through Well, no, it's almost you take what we call a holistic approach. I mean, we got all of them, which is why my sentence said you know, it's correct. You've assumed that all of all of our leases are, you know, are subject to, subject to the standard. So that would impact. Perspective of whether they're in a doesn't matter what they're in. The standard I mean, this is the surprising thing to me. Remember, I'm a non finance person. But you take all the liability, not just for your commitment, but even over if you've got a break, you have to decide whether you're going to be go past the break and take that as a liability. So it isn't real in terms of I have a commitment and I have to pay it. It's the potential total of all those commitments past break dates and not be saying it doesn't matter what the legal structure is, whether it's in a stand alone, is it guaranteed? No no takes no account of that. It's just the liability. And so should we assume that those leases in SPVs are fully cross guaranteed? No? No. It's all a different. It's a different question. Yeah. Okay. No. For the liability, it's important. So nothing changed in the way we've set things up. But if it if it's a lease, doesn't matter what the entity structure is, how it's guaranteed. It doesn't matter. It comes under it. That's it. It's pretty harsh judgment, but that's what it is. Okay. Thank you. Good morning, Steve Wool from Numis. Just a couple here. In terms of the CapEx, how much do you save by partnering or sort of the dynamics by franchising? I'm sort of trying to get a sense for the CapEx you've outlined so far of 200,000,000 Mhmm. A 190 sensors. How much of that portfolio plan is actually franchising or partnering and the CapEx then that you have to go with it Second one is of the planned additions you have for 2 2019, the the 190. How much of you already spent in q 4 for those openings or how many centers And then thirdly, because you mentioned sort of so much of the service, offering around things like IT, how much do you think the cost of opening a center is now relative to 5 years ago when there perhaps was less IT, less all of your cyber activity around that, if possible. Alright. So the good thing about franchising is there's no CapEx. I don't have to have that. Discussion. There's no CapEx, but there's no return on that capital investment because we haven't made it. The our franchise partner makes the capital investment. And one of the reasons they're very attracted to it is this is a business with very high returns on capital. They like that, okay, and they are managing the risk, but all the same discipline that we use We ask them to use because we want them to be in business for a long time. But it's is that included within the 190 sensors? It's not all. It's not totally different contribution. They're company owned. That's what you're looking at. Right. That's company owned, committed at this moment. And now I don't think we know, do we, what we spent already, Thomas. Yeah. But it's a rolling thing, Steve. So but at whatever time we're talking to you, we've already invested in some of the future growth, whether it's now, whether it's in 6 months' time. So there's it's not a until we do no company owned growth, you always have that effect. But you know, as franchising, you know, franchising helps us accelerate the growth. But, of course, we give up the returns and we give up the ability to invest our capital. So that's the trade off. The returns would be the same. We're just not getting And we're simply making, a fee from providing the platform. We're making a fee. It's the same as International Hotels Group, IHG. They used to have a lot of assets. They don't have any anymore. They just have fee income. That's it, which seems to be what the market wants. How much control do you have on what they they do once your franchisee and management you tell them how to open Everything. How to operate. They share your IT. Otherwise, everything. It's a liability for us, isn't it? So that our brands are really important to us. And by the way, very that's what they're buying. Very important to them. So the, you know, the deep the investment we're making in support here is all about making sure they open successfully, they operate successfully, and the standards are upheld. We cannot have brand damage through poor franchise choices or poor support. It's critically important. And and there will be many of them. So it's a really important thing to get it right. We've we've got a lot of focus on it. And again, I would rather report it to you as they start to open, but there's significant activity, really significant. Lots of things going on. And it's a major change because we're clearly not winning the battle of investing and making, you know, 20% plus returns on our capital unleveraged and post tax. That's not working. We only have to look at our share price to see that. So we have a different route to market now, and it will allow us to grow more quickly. We believe that the trade off is a good one because this is a business that will respond well to coverage. The reason the US is so successful, universal coverage. But still, only 1200 sites out of 12,000 sites to do, but still, it's got great coverage. As we get more coverage, the business becomes stronger and stronger. That's great news for franchisees, great news for us. And partners of all kinds, by the way. We've currently franchised people owning property, investors, people owning franchise, operations, or rental source of people really good partners, impressive people. They will accelerate our growth. I we very happy to be in business with them. Very good partners. It's going to give us a real step up. Another question, Mark, was Are they more expensive now than 5 years ago? No. Is the answer to that? So there's been a, I mean, the change between now it's like night and day difference what we're talking about here, most of everything is in the cloud. So what we used to do in the centers, we don't do in the centers anymore. There's been an increase in investment in security. So what we do do in the centers is super secure, we need there's lots of regulated industries that require a very, very high level of security of network, resilient whether that's voice or or or or data. So more investment there, that's in physical, actual physical security. But, you know, where we used to have a server room full of things running the center, all in the cloud now, it's all in data centers. So the cost is broadly the same, but security is much, much different. Sorry. Just the the answer to be clear on on the second question about the CapEx that you bought into Q4, don't think, you know, I don't know. I might give I might give the answer already. Okay. So you don't know how much CapEx you spend on or how much the openings you've got in Q1 don't know what you're saying. We could tell you. Right. But we don't know. Right. Well, how many sensors then raise it the other way? How many have been 190 open in Q1? Is you theoretically, you should have visibility on that. Of course, we do. We'll let you know. Andrew Scheibank. 2 questions. If I may, firstly, just a stat. Mentioned 29 percent of revenue coming from ancillary services. Can you say how much of that is is space related, I. E. Meeting rooms? And how much? And any kind of information on that? And the second one is when we last saw you, you were talking about obviously the move to franchising and you've given us the 1 third, 2 third, long term aspiration perhaps, clearly that card will be organic and just doing openings under franchise, it'll take us a long time to get there. Can you talk about, can you update us at all in how your thoughts are of actually finding partners take out some franchises and existing franchises, creating franchises from existing operations. Thanks. Okay. Sorry, first question. Okay. I think there are services. I'm space related of that Well, it's about 20% would be meeting rooms of that number. 25%, which was about would be space related, actually, of that number. So it would be about 7% of overall revenue. So 7% to 29%. That 22 would be non space related. Can you give a little bit more detail on that, 22? IT services, disaster recoveries in the middle it's more of a digital thing than a space thing because that is the service. It gives us additional revenue when disasters happen, it then becomes space, but that's not in the number. That's just people using space. So IT services, telephone, service secretarial services, call answering services. We have centralized call answering lots of digital function, stuff there. It's membership people that's sort of verging between space if people buy a membership, they may or may not use the space. It's, address services. You could say that space. It's not really because they don't use any space. So there's a whole list. Overall, and this is what people fail to understand because they look at it. So it's a simple business, cut the building up rent to space. There's 120 lines of revenue. It's not one thing. It's about small things that make up the whole and it's about being diligent about those things. Now some of them are tiny, Andrew, but they make a difference it's a 1,000,000 here and a 1,000,000 there in a business that makes 150,000,000. Aspirations to make more, you want all of those for me. They all count. So a good question on partnering. So how did we get there? Very large numbers of partners, number 1. Number 2, yes, there will be some partnering on larger parts of the business we expect. So if you hear sort of noise filtering up about banks and corporate activity, that is the beginnings of that where the significant interest in the industry, people like the space But they don't want to start up. They want to buy into an existing platform, and they want to invest their money in part of that platform to grow it more quickly, okay? It's not as difficult. If you look at our multiple of cash flow, matured cash flow, it's, you know, it's it's not a, you know, can we do better than that? Absolutely. So what we gain is the possible partnering with people of financial means that can give us more growth and some of that cashback. Okay. So, you know, it's, you know, some of the parts question. So we're very clear on that because we're not winning this argument where we're sort of every meeting we have, we're going back into backwards over CapEx cost of growth and so on, we are not focusing on return on capital, which is excellent in this business. Thank you very much. Hi guys. It's Cannon Bassett from Berenberg. 2 from me. So firstly, Mark, I think you mentioned that you're obviously seeing a more cautious macroeconomic backdrop and that you're positioning the business accordingly. Just wondered really what that meant in practice. Would we see, say, investment fall if you for to a a week and macro environment was forthcoming. Secondly, on spaces, you said that it's grown profitably. Wondering if spaces as a whole is profitable, just on the timings of the openings, I'd probably think it's loss making at the moment. And if there's any more, say, color on the kind of possibility of that business that you can give away? Cautious. What we mean is yeah. I mean, look, the world's a more uncertain place, and you guys are out there looking for lots of companies. So we we are cautious. So with that, what does that mean? We we don't do anything edgy. You know, we we surefire bets, and that's what we do. So that if there were, you know, we just tighten up our investment criteria, as Eric said, are very tight in the first place, we tightened them up 2 notches, we did that, by the way, last year. It's not something that happened now. That was happened something happened at the beginning of last year. We remain cautious. We, you know, there's nothing changed. No matter that this is a great industry and everything else we're very excited about here, it is not a it's not a race in the end, and it's very important to be there, you know, at all times. It's gonna be some excellent opportunities because others are not addressing the market with the same caution we would. And in answer to the second part of that question, you know, of course, if the macro or the real changed tomorrow, we would stop investing in that market immediately with immediate effect. And, you know, you focus on the business you have. And you wait, and, you know, that's then a growth opportunity. Example, Brazil, you know, we could have just, you know, so we stopped, addressed our business, doubled the size of it. All, they're pretty much one after the other because when you want to grow is when it when times are difficult. That's the timing of your growth as opposed to just growth for growth sake. In terms of spaces, is it profitable? Look, the early, you know, the census that we have opened have become crop and they're doing very well. I can't tell you whether it's profitable overall at this time. I think it is actually. Yeah. Someone's nodding at me. It is. So even with the new growth, it's profitable. So there's enough of the the sort of ones that we have opened that are coming through and and supporting the the one the new ones that, that we've just opened. Okay. And again, discipline in pricing. We're not just going for getting full at any price, as, as some others may do, we are, you know, openly senses, fitting them a very good price, good service with sticky customers. Good morning. It's Michael Doney from Investec. Just two two quick ones, one for Mark and one for Eric. Now just to check what you said on on spaces this year. I think you said it was it was gonna have the same area or number of locations as WeWork. Can you just confirm which of the Where they are now? So they are at about four hundred locations today Yep. About. And we will be at about four hundred locations at the end of this year. End of this year. That's helpful. Thank you. Yeah. We're at 182, 183 now, 182, 183? Look, it doesn't mean anything. Well, the only important thing going, it depends how much you believe in cash flow, you know, old fashioned things like profitability and cash flow. It's the same business. It's, it's, you know, it does work. They're doing very well, I'm sure. But, you know, again, growing from our platform, which is very efficient, we're able to grow these things fill them up and make very good returns on capital and good profit. So that that's the difference. What they're doing same. And they're filling them up. And there's I'm sure they're going to report excellent revenue growth just like we are, but the difference is is that established platform that makes it much more economical. Got it. Thanks. And second question, for Page 39 of the report accounts there shows provisions going up from $9,000,000 to $19,000,000 is quite a big year on year jump Can you just talk qualitatively behind what's behind that thing? Which number is it? So it's a 9,000,000 provisions last year. Jumps to 'nineteen this year. And I think that looking back over the past 8 years, that's quite a big delta. Yes. So, so, Bob, what I did when I joined and we all know, so what happened after the Capital Markets Day in 2017 is looking at what homework do we have to do as an organization? So one is around tax, which you've seen up and you see it less than the income statement more in the cash flow statement because there were a handful of, I think things that needed to be solved way or had to pay a bit of Latin America and mainly related. This is exactly the same thing where we feel as an organization, we need to make sure that We are ready for sort of risk that's going to be an eventualities that can happen, and we need to make sure we are promptly provided for those. So Again, if you think about the word cautious that at times it is in our outlook statement, that is linking that to the homework that I've been doing in the back end of last year. Great. Thank you. Hi. It's Andy from Credit Suisse again. Just, a bit of guidance, I guess, through 2019 in terms of some of the moving parts. What was the impact of the refurb and closure process in the UK in 'eighteen, what are your expectations for 'nineteen as of now and similar with SG And A, are you planning a bit more investments through this year as a percentage of sales? Kind of where are you thinking that's going to end up. Shall I do the second one? So if you think about overheads in general, as of today, we talked about how it is down as percentage of, of revenue, 10 basis points. It is up 60,000,000, in absolute terms, as you saw. And for us, that's quite normal because as we said on several occasions, we are a fast growing business double digit thing in what we call the building blocks of future profitable growth. If you think about enterprise account management, if you think about marketing, we've mentioned So there is a handful of vectors of growth that we are putting into place in 2018 that we had to pay for. So if I didn't think about 2019, will it go up? It will go up in absolute terms because of the growth of my business. But I think if you think about modeling it as a percentage of revenue, I wouldn't go more than where we currently are at 10%. We spent an awful lot of time talking about managing that, that number. Yes. And sort of refurbishment closure repositioning it's called. So, will there be, overall, we've done a lot more of that globally, not just in the UK. So middle of last year, hands on, intensive management of our business. So step change in the way we manage, and that causes, you know, you take you've got to get fast at decision making because our objective, driving margin and performance out of that existing business. And so you should expect to see that continuing because sometimes it takes time in some circumstances. You know, we don't we want to do this in the best possible way. And sometimes these require, you know, workout collaboration, things that take time. So there will be more closures there will be more repositioning, both in the UK and globally. They have a super beneficial effect on the result. Okay. And short term, if I can just 18 version. I'm just trying to think of the bridge from 18 to 19. Probably cost eric similar. Yeah. Something similar. Okay. That's perfect. Thank you. Hi, Sandeep from Stifel. Just one for me. The q 3 update you spoke about looking at strategic options in addition to Strategic options. The q 3 updates look like you're looking at strategic options as well as more advertising. I was wondering if you could give any color on your thoughts on the passing on from that, particularly with race to spaces? Strategic options. I mean, Andrew has already asked that in a different way. So I think what I said to Andrew, I'll just say again to you. As the chief executive of the business and with the board and with area, now we've got, at times, stand back and look at what we're doing, I think that the approaches we had last year made us think much more, not just about cash and return, but value, what's the value of this thing that we have. And so What we're doing now is based around the the work that occurred after. Those approaches, which said basically, look, there there's another way to do this. And let's move towards that other way to do it. We're not the first people to do it. It happens in the hotel industry. Pretty much universally now. I happened to be at CMDC this morning with Vodafone who is apparently partnering to with many people to roll out 5G more quickly. Vodafone is a big company, but the 5G is much bigger than Vodafone. So by partnering, they go more quickly. By partnering, we will go more quick, and I think we'll deliver a a simpler message to the market. I think that's critical. Because it is very clear to me that we just however simple we think the message is that's not getting over to investors and potential investors that it's a great business, something for the future So we have to, since I believe, simplify it further, and that is our objective. And we are well underway in doing that. So again, the read, I'm talking to you now about this because I believe it will happen. And, so watch the space. No more questions, Blake. Thank you all very much for coming along this morning. And as usual, Eric, myself and Wayne will be available if you've got any follow-up questions. Thank you.