Trading Update

Nov 6, 2018

Earnings release

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's IWG Q3 trading update analyst and investor call. At this time, and wait for your name to be announced. I must advise you that this conference is being recorded today on Tuesday, 6th November, 2018. I would now like to turn the conference over to your first presenter today, Mark Dixon. Please go ahead, sir. Thank you, operator, and good morning, everyone, and thank you for joining us this morning to discuss our third quarter trading update. I'm joined on the call today by Eric Hackman, our interim CFO. Firstly, I'd like to see you through the key points from the update and then hand the call over to Eric to comment on the financial performance, and then as usual, we'll be open, for questions. So I'm I'm pleased to report that our improved sales activity has driven strong revenue performance in the third quarter. Total group revenues increased by 10% to $637,000,000 to constant currency, and revenue from total open centers that excludes centers that have closed, have increased by 13% on a similar basis. This improvement has been broadly based with good performance coming from, the Americas and Asia Pacific. And these 3 together represent more than 80% of our business, and they all delivered good double digit growth in Q3. As indicated before, the UK remains disappointing, but we have action plans in place to address the issues in this market And we've, accelerated our program to close, replace and refurbish, specific locations in mid August, our new sales and operational structure has also been put in place. And whilst it's early days, we've already seen some of the benefits from this So, you know, in conclusion on the UK, lots of actions being taken. Please remember, this is still a good profitable business. It's not a bad business. It's still profitable. It's just not as profitable as it was. We think the actions we're putting in place will restore it to somewhere close to its previous performance It just takes time to get these things done, but we're absolutely focused on it. Importantly, We're looking at the whole business. We've seen further improvements in the mature revenue growth on the back of this improved sales activity previously mentioned. Revenue in the quarter increased by 3.9 percent on mature, with high single digit growth in Americas and EMEA. Combined, these two regions are approximately 2 thirds of our mature revenue. Year to date, mature revenue is therefore up 2.9% A sequential improvement on the 2.4% that we saw in the first half. Mature revenue performs in the UK has stabilized at a rate similar to the first half, but with Q3 showing some improvements on Q2 year on year. Mature occupancy has increased by 70 basis points to 74.3%. Here, we see still plenty of room for growth in the mature state, and that's obviously a key strategy for us moving forward. We're very focused on trading the business, maximizing occupancy and revenues from the mature estate, of course, all the estates. So we remain remain focused equally on the returns we're making for our investments on our investments and on a 12 month rolling basis, The returns for all of those locations opened before 31st December 2013, 17a half percent. Well above our cost of capital. And also, this is after increased CapEx, maintenance CapEx, which is written off of this number, prior to, prior to calculating return. And also, just to remind you, this is a post tax number as well. So not not a bad return even with the the UK not performing, and and as it should. We've continued to develop our network. Seventy two locations added in the quarter taking total new openings 204. Across all of our brands, we've added 76 new locations in our large form. I'm sorry. We've added 76 new locations, in our large format brand spaces. So these centers substantially, higher size than the a typical Regis, location or the other brand locations. And as of the 30th September in a total of a 154 locations open and a strong pipeline for the remainder of the year. Year to date, we've added 4,700,000 square feet of workspace, and our global network now stands at 55 0.8000000 Square Feet across 3258 locations. With our network refurbishment program, together with the natural ending of certain leases, 25 locations were closed in the quarter, taking the total for the 9 months to 71. Our growth pipeline the whole of 2018 remains broadly unchanged at approximately $230,000,000 of net growth investment representing about 275 locations and an additional 6,700,000 square feet of space. This is over 20 more 20 percent more space than we added in 2017. In line with our strategy of lower risk and more capital like growth, we are experiencing accelerating momentum in our franchising activities. Whilst the numbers are currently relatively modest compared to the total group, This will become an increasingly important part franchising in some of the more developing markets, but we're now seeing growing interest in some of our developed markets and overall we have a really good pipeline in this area. We have substantially built the operating team to to grow our franchise business. And we think this is a very exciting, further development in the way we grow the business into 2019 and beyond. So in summary, the good sales activity we talked about before translated into better sales momentum and occupancy. And we've seen prices, price increases in addition in the mature business. Our newer locations have continued to develop strongly. And we believe that this will continue into the fourth quarter. We are continuing to explore a range of potential strategic opportunities Some of these, you may have heard some of the noise in the press, that they are we are busy and at work looking at possibilities We haven't got anything that we can talk to you about at this moment, but we do believe that there are things that we can do in addition to focusing on trading, which is first order of the day that will deliver increased shareholder value into 19 and beyond. I've already talked about our increased franchising activities and heightened level of interest that we've got from potential partners in new and existing geographies. You have to remember the interest in co working, the interest in flexible space is very, very high at the moment. So we think it's a good time to be looking at these strategic possibilities. So we'll continue to report on on the initiatives we have as they become more concrete. And as we start moving them into into the execution phase. And with that, I'll now hand over to Eric who'll discuss the performance in more detail. Thank you, Mark, and good morning to everyone on today's call. Now let's look at the financial performance in some more detail. With the headwind from prevailing exchange rate reducing in the third quarter, group revenues in Q3 increased 10.2% at constant currency. And were up 8.9 percent at actual rates to $637,900,000. As Mark said, group revenues for the 9 months to 30th September increased 8.1 percent to $1,800,000,000 at constant currency. The waterfall of the 1st 9 months, revenue development highlights the strong development of our newest centers and the improved mature performance but with Forex and closures having a negative impact. Material revenues contributed a 2.7% increase to group constant currency revenue. This together with a 7.6% increase from the additions to the portfolio in 20172018, helped offset the 2.4 percent closures impact and the ForEx headwind of 3% to deliver a year to date 4.9% increase improved revenue at actual rates. The year on year 2.9% growth in mature revenues for the 1st 9 months of the year reflects improving growth during that period from all those centers open, almost before the 31 December 2015, and the strong development of the 2016 year group additions. Our post tax cash returns on net investments remained strong at 17.5%, clearly well above our cost of capital. This is achieved after the increased investment in maintenance CapEx over this period, which to remind you we expense in this calculation. Our underlying cash generation year to date was 120,300,000 This is slightly down on the $129,600,000 reported for the same period in 2017. This reflects the slightly higher level of maintenance CapEx and cash tax paid. We have year to date invested 204,900,000 of net capital expenditure into growth. This compares to 224.1 in the corresponding period in 2017, which again, to remind you, included investment of approximately 110,000,000 on property, which we still own to date. Net debt has increased 50,700,000 to 433.9 compared to 383,200,000 at the 30th June 9 at 2018. This reflects the continued investment in growth and the share buyback program. During the third quarter, we also acquired some 8,800,000 shares for a total consideration of almost GBP 21,000,000. Our balance sheet continues to remain strong and we feel very supported by our lending bags. As indicated in the statement, the board remains confident that the group will deliver a full year results in line with management expectation. Thank you, and I will now hand back to Mark. Thank you. Thank you, Eric. So in conclusion, We remain confident of our position in this exciting growth market. We're encouraged by the sequential improvement in revenue growth from the improved levels of sales activity, and we anticipate discontinuing into Q4. We remain in a strong financial position with a prudent approach to risk. We will continue to strengthen our business with targeted approach to growth. We expect an increase franchising activity, and we're in active discussions with a number of interested parties, and we'll update you on this in at the full year results. We're also exploring a range of other potential strategic opportunities. We have a great business with this by far the most cost efficient business model out there today in our industry. We are the market leader in every country we operate in. Others make claims. We actually are the market leader in all of these places. And the sheer size of our networks really surpassed anything else that's out there. We've got a unique suite also of multi brand, formats, subcenters and products. To address different customer requirements and again, a key number when differentiating against the competition is that nearly 30% of our revenues come from ancillary revenues. There were not a single other competitor that gets anywhere close to this. The best they're doing are in the tens, possibly 15, the very best. We're we're double that. And that, again, is a testament to the way we run the business and having a great model focusing, on the basics that that you build this business from. What's clear to us as well is that and it's becoming clearer as we go along is that it helps the customers don't want the same thing. So we're seeing also benefits from having multi brand. So our ability to offer choice, both in prices, in formats, and in the services to, to supply to different work styles is working and it's working well. And as before, we continue to win more and more corporate customers than increasingly are using the network. And that again is a key strategy for us. It's winning more and more of these customers that want to use the network and not individual sites. With that, I'll hand back the call to the operator who will explain the procedure for asking questions. And your first question comes from the line of Steve Wolf. Please ask your question. Morning, all. Just a couple from me. Firstly, I know you said you'll give us a bit more update on strategic opportunities that you mentioned as and when you can, but you sort of speak more generally, about the options you consider available, whether it's in terms of spin offs, breakups, anything you can sort of outline more generally in terms of your thinking. Secondly, in terms of the disappointments you've experienced with the UK market, in terms of how challenging that is, just in terms of sort of general market, whether that's competition, whether how much maybe the investment you're having to put back into that market. And then thirdly, in terms of the franchise network, firstly, in terms of the contribution, perhaps anything you can give us in terms of how much the franchisees at the minute contribute to revenues or profit, and whether that has actually now changed your view of how much capital spend you might be putting into your thinking for 2019, whether it would have been 230,000,000 previously or that might now change to, you know, take out, you know, 10, 15,000,000, that you might save or or not be spending now. Thanks. Okay. That's quite a lot. Look, some of these things, I think, we'll update more detail at the full year. Just if I deal with this spin offs, it's not really it's spin offs if you want to call it that, but that is we've got, you know, we're in we're we now have discussions ongoing with various interested parties who are interested in doing what's significant, partnering deals. This is franchising deals where the franchising whole countries we have been doing it in a small way for quite some while, but they're not meaningful. We now have some meaningful ones that are ongoing. So what does this mean? This means that, we will partner a franchise a company who we think would grow the country in question or the countries in question much more quickly And but would also be, buying our business, our operating business that actually exists in that country as well. So we think we get a double benefit. If we are able to achieve this one, we will be able to start to get income in cash, if you like, from the side of the business, and we get further annuity income we have to work for it because we've got to provide franchise service, etcetera, etcetera. But, income then from a a more significantly sized business in, in one country or another. So, but they continue to be passed very much part of the network. They continue to be, a, you know, an integral part of the overall business, but we're doing it with partners. We we, as I said, we've been doing this for the last 5, 6, 7 years, but in a small way, we're now doing it in a more meaningful way. So what does this mean to shareholders? This means, some capital coming back the other way as we sell these, but these countries. And it means an annuity or a a revenue going forward that's more significant than what we would get today. So it's making use of the platform we already have, accelerating the growth. And there's a whole difference in terms of returns on capital in the cost of capital. There's taxation issues, taxation advantage. If you're local, there's funds movement in some countries quite difficult, much easier if local money is doing it and so on. So there's a whole range of benefits but it is an important part of our strategy going forward and it's part of our strategy that we had universally about releasing the value in this business. Which we think is not reflected in today's share price. We also are considering clearly, in spaces, the spaces have a higher value than the value of the rest of the group. And so we're just investigating that And if it does, then we've considered what we do with that. So very, very early stages. I would say, except for the franchise and partnering discussions, more significant ones, they are more advanced. Turning to this so called UK challenge, I I think some of the time, you know, again, the way we're talking about it, U. K. Is disappointing, but it's still a profitable, very good business. What we have are problems around the edge of it that we're sorting out It's not the fundamental core business that there is a problem with. New centers do well in the UK, it's it's not, sort of an overall UK, but it's not a competition problem. It's a problem with some of the the old acquisitions that we did, that needs to be sorted out now. And that's what we're doing. So you know, we don't see anything in the UK that would say, okay, the UK is somehow different to our business in France, to our business in Germany or to our in the United States, it just needs some repair work. And some very good investments we made some years back They were very good. We've had our cash back many times. I've been very happy with the investments. They need sorting out now. We're sorting them out. Period. That's it. Obviously, the economy is weak, because of the uncertainty surrounding Brexit, that's clear. And and demand slightly down. However, we, you know, we are doing well in in when the sensors are in good shape, when they're at the right rents and so on, we do well. Not a problem. Okay. Now we would expect the UK to keep coming back to health during 'nineteen. We can't see anything that's sort of making us feel that we're, you know, we're staring down the end of the cannon here. It's certainly not that. So it's a bit of sorting out. It's disappointing. But we're getting on with it. If we look then at your question about franchise contribution, at the moment, frankly, too small to worry about. But, sitting together with Eric, we're now working on, you know, basically the forecast of what this will look like and when we're going to start we'll start talking about it when it's more significant. It makes a difference. You don't want us talking about small numbers on this call. So when the numbers get more meaningful, we'll start to talk about it. Capital spend, will it change? It is likely to change for a number of reasons. We, 1st of all, you know, there's a probability that we will have incoming cash as we start to sell countries. So clearly, for shareholders, we, you know, we will start to get money coming back into the treasury from from sales of countries. Secondly, the rate of organic full fact, we take all the liability growth will be likely to be less in 2019 for many reasons. But the main reason is we're taking, much more we're putting much more of our efforts into franchising and partnering than we've ever done before. And we're taking a slightly more cautious view with the backdrop of the, a more uncertain economy. Overall, that's just a general thing. It's not country specific. It's a general a general feeling, a general view. So you know, capital spend will still be there, but it will be I think the numbers you use without going into those, we may update you more. We'll update you more in in when we when we're next week. But, we'll be highly likely to be less, and, we'll we'll give firm up on that, when we next week. Thank you. On that question, Steve, which I'm not sure if anyone else has any new questions, but guys. Thank you. Your next question comes from the line of Calum Batterspace. Please ask your question. Hi, good morning guys. Two questions from me. Firstly, just to follow-up slightly on the franchising question, hoping you could give more color on the likely economics of this model or how it works the moment. So say, is it that you get a percentage of the revenue to the franchisee? They take up all of the upfront CapEx costs themselves. And secondly, on spaces, you're now up to 170 centers or so. Just wondering kind of the contribution of spaces as a proportion of overall revenues at this point? How large is it of the overall group now? As well, is that business profitable in and of itself? I'd imagine it's not just because of the timeline of most of these sites have been opened since start 2017. Just wondering if there's any more color you can give us there? Thanks. Okay. So first of all, franchises, I mean, you had The franchisee puts the CapEx in, and pays us basically for makes a contribution to overhead and effectively pays a a royalty fee, which is, you know, it's about 4 or 5 percent for the use of the IP and everything else. So, but, you know, basically, and and plays a small upfront and opening fee and someone, which all of which are just contributing to overhead. So, you know, overall, you know, these are this is it's a different model. You know, it's not a 17% return on capital invested, it's, but it's, you know, it's a way for us to what we're most disappointed about is the fact that this year we're only opening 250 centers, whatever the number. You know, we should be opening in, you know, the thousands of centers, but clearly, you know, doing that with our own capital is not gonna work. So we need franchising and other forms of partnership that, rapidly get the number of centers up. We are we are a believer as a board And certainly myself, network wins the day. This is about coverage. It's always been about coverage. It's not about you know, having load of sites in London, you gotta be everywhere, every single part of the country, then you win. And that's it. And with franchising on, you know, going much more quickly, we expect that we can both create a better business for ourselves and at the same time, a great business for franchisees. The ones we've got already, we've done quite a few are doing well, and, you know, it can work for both sides. And clearly in an IFRS 16 world, you know, there are many addition no, there's a big additional benefit that it it's not coming onto our balance sheet. Turning to your question on spaces. Is it profitable? Well, actually, all the first ones are doing very well. They're making, you know, they're not more profitable than Regions. Just to be clear, everyone's got this idea that co working somehow is, you know, it's a recipe to mint gold coins every day. It it's the same business. See, that's not different. So that we make very good margins out of the census, the, the early ones that were done. And the first ones opened, in, about 10 years ago. So it's not, you know, the the growth has been in recent years, but even though it's the first ones nicely profitable. So, you know, good profitable model, helped by, you know, obviously, we're very economical on overhead, very tight on managing they they they, you know, they are good. What was the other question economic economics of the financial balance basis. Yeah. And that was clear. It was just if you could say it as well, how large basis is a portion of overall group revenues now? You know, this is okay. I don't know the number, but it's, I don't know what the number will be when they're on matures, when they're all mature. Yeah. Listen, I mean, that's how they are. This is Eric. If we want to say something more clearly about spaces and the size and the contribution, whether it's revenue or profit, we would do so. Personally, I would then favor to do something like that. Full year results. I will not do it. I will not update. Yeah, I'm a listen, if at the end of the year, we are at the 157 location, which is the exact number, out of 3,500 that we will have more or less of a total group. I mean, it's a meaningful number. It's a meaningful number because they're, generally speaking, 2, maybe even three times the size, not actually more, maybe four times the size, each one. So but we will update you with those numbers. It's it's it will be a significant number, because of the size that there are different the economics are different. The margins are same. And your next question comes from the line of Andy Grobler. Please ask your question. Just a couple from me. Firstly, on the on the balance sheet, net debt was a bit higher than I had thought, and back in August, the the guidance for the full year was around 3:13. It seems like it's going to be a fair bit more than that. From this point, could you just kind of walk us through the the bridge of how we get to to to that number? Secondly, kind of a similar theme, you mentioned IFRS 16 earlier. Have you got any updates on what impact you think that will have on your balance sheet and P and L if you were to report under IFRS 16 right now? And then lastly, just back to to franchising, I mean, you've talked you've talked a fair amount about it. I just wondered why why now? What's changed to make you think that this is the time to push that push that forward? Let me do the frame charging. 1st. And then I'll pass over to Eric on the other question. So what's changed? We painfully have restructured the business over the last 2 years. Maybe 3 years now to make it franchiseable. Now to make a business franchiseable, you have to make very easy for the franchisees. And our business 3 years ago was not easy. You need to be a rocket scientist to actually working out at center level. So the whole business has been restructured in such a way that it's relatively easy to run each operating unit And if the business therefore becomes franchiseable in a much more significant way than before, because all of the difficult stuff is done centrally in our 3 global hubs and in our big operations center that sits behind them. And so there's very little that occurs at center level. So there's less things that is much easier someone to develop a business locally and get it done. And of course, it's much more efficient for them. They need less people. So their returns on capital significantly enhanced by the business being franchise ready. So that's number 1. Number 2, I think is maybe we should have put more resource into franchise earlier We have been doing it during 2018 so that we will, you know, go into 2019 with a much more significant franchise team. Again, you can pick up noise about this in the I'm seeing in the newspapers, but pretty much globally we're putting in franchise teams, getting some markets are regulated, we've done all the regulation work. And we're ready to go and ready seller and our selling. And number 2, number 3, we think it's the only way to get into the you know, the deep countryside and suburbs and smaller towns of the country. If you believe in national coverage, if you believe in that that is what is key, then, you know, what we know from our own experiences is difficult for us to run very remote places, very remote businesses. There will be a change of difference in performance when we're running Fargo I'm not sure if it's north or south Dakota to us running something in Chicago. So We believe that local business people will make a much better job of it. The people we franchise so far, and there's been tremendous momentum in the second half of this year, whilst we really got going. You know, people aren't buying individual franchises. They're buying them in groups of 10. Possibly groups of 20. And they are very experienced business people that generally, so far, almost universally, I think have other franchise businesses where they'll have, you know, a group of, you know, pizza hearts, a group of McDonald's. They have They have quite a few other businesses. That's what they do. So the right time we were a bit slow in resourcing up. We've now done that. And, you know, we we believe in national networks. That's it. Alright. Let me take let me take the other, too, and let me start with, the the net debt. So, the guidance I think was given at the half year results. So why is it a bit higher was your question? That's right. Let's start to break it out in buckets, which is basically, at the beginning of the summer end of spring, we signed a new revolver, which basically meant that, rather than having 550 as capacity went up £750,000,000 sterling. So the reason why you do that is because you want to use that capacity. On the one hand, part of it is is used for guarantees and part of it is obviously being deployed. And what do we deploy it for At least as per the statement today, one is in growth CapEx of which we've done 75,000,000 and $40,000,000 of maintenance CapEx. But equally important is obviously we started with a share buyback program, which was also announced at that time of which we have done, just over 31,500,000 year to date. We've also seen a bit of an increase in our cash tax of around $10,000,000, which and together with in 1 or 2 other small individual balances explained the delta that you do that you have seen. And 2 more points to make. Is one that we also still hold, $140,000,000 of property on our balance sheet, which we are able to sell. And lastly, maybe just to put the context of the 3rd quarter net debt, increase versus the June 1. What do we actually expect for the end of the year? What we are expecting is, and that debt to EBITDA will that will be just a little bit higher than what we saw at the half year. So we're a bit higher than the 1.1 times net debt to EBITDA. With that, we think that we still have a very solid balance sheet. And then your other question, which was on IFRS 16, and there is nothing more that we can add or say, I don't know whether we've done that past year results, but maybe just a bit color. As you can imagine, this is a big part of what the central finance team is working on and has been working on for a long time. Because this has been flagged, we talked about it in the annual reports, at length in the last 2 years. The organization is making sure it's ready to do what it has to do with its reporting obligations. So people have been working on it. Systems are in place. So we feel as a company and this is my 7th week, I feel that we're doing putting everything in place for it. And just on IFRS 16, at what point will you start reporting under that standard? Will it be there for the full year? Do we have comparables or Exactly. Exactly. So the 2018 will be comped. No, so the idea is what you're going to see. You're going to have a parallel, you're going to have both So people will be able to see comparables. You can see what 'eighteen would have looked like under both standards. And you know, needless say as you would expect from us, Wayne and myself together with the central finance team, we'll make sure that well ahead of our full year results. We will have teach in. So we can take everyone through it, which should give you an ample time to be able to update your models in time for publishing results when the results come out the beginning of next year. We don't have further questions. Okay. Thank you very much indeed for your questions. As usual, Wayne and Eric would be available, for any further questions you may have later on today. Thanks very much. That does conclude our conference for today.