IWG upbeat on outlook despite mature market struggles

IWG, the workspace-as-a-service provider formerly known as Regus, updated the market on its trading for the period 30 September on Thursday, reiterating its previous advice that the anticipated sales improvement in the third quarter was weaker than expected, resulting in a pause in the recovery of its ‘mature’ business.

The FTSE 250 company said that in the UK, its “important” London business weakened, but outside of London it experienced growth in mature revenues.

Performance outside the UK apparently showed progress, albeit lower than originally anticipated, with some impact from recent natural disasters.

As a result, the board revised its expectations for group operating profit for 2017 to a range of £160m to £170m.

In the three months to 30 September 2017, revenue growth across all open centres increased 4.4% at constant currency.

For the total group, including closed centres, revenue increased to £585.7m compared with £566.9m in the same period last year - an increase of 2.5% at constant currency rates or 3.3% at actual rates.

“This represents a sequential improvement over the previous two quarters,” the IWG board noted.

“This was led by EMEA with high single digit growth, the Americas with mid-single digit growth, low single digit growth in Asia Pacific and with a low single digit decline in the UK overall.”

For the nine months to 30 September, group revenue increased to £1.76bn compared with £1.64bn for the same period last year - an improvement of 0.5% at constant currency rates and 6.7% at actual rates.

A mature revenue decline of 1.9% and a closures impact of 2.4% were offset by additions to the portfolio in 2016 and 2017 of 4.8% and a benefit from prevailing exchange rates of 6.2%.

“Our Mature business revenue declined 1.8% at constant currency to £538.8m [or 1.0% at actual exchanges rates] for the three months ended 30 September 2017,” the board said.

“Consequently, the decline in mature revenues for the nine months to 30 September has remained similar to the first half with a decline of 1.9% at constant currency to £1.64bn [up 4.2% at actual exchange rates].

“Whilst this was disappointing, the very strong uplift in sales activity for October would suggest that this is in part potentially a timing issue.”

Year-on-year mature occupancy for the same period improved 0.3 percentage points on a like-for-like basis to 74.9%, which the board said reflected the “strong improvement” in the occupancy of the 2015 additions as expected.

IWG said its key focus remained on building long-term shareholder value through delivering attractive returns from its existing business, and continuing with the disciplined investment in new locations.

Returns on a last 12-month rolling basis for those locations open on or before 31 December 2013 remained “well above” the group's weighted average cost of capital, at 19.9%.

The 2014, 2015 and 2016 year group expansions had all shown improvement on the returns reported with the interim results, the board said, which also reflected the “positive impact” of increased sales activity on its newer locations which were developing “strongly”.

Underlying cash generation for the nine months to 30 September was £129.6m.

IWG claimed the cash generation in the prior year of £208.9m benefited from the specific programmes undertaken then to unlock working capital, which resulted in an additional inflow of approximately £50m.

This year, net maintenance capital expenditure increased from £29.3m to £44.2m as - where the board deemed appropriate - the company continued to take the opportunity to refresh some of its existing locations.

The group had net debt at 30 September of £316.1m, a small increase on the 30 June position of £306.5m.

That was after increased investment in growth and further share repurchases through the third quarter.

“During the third quarter, we added 47 new locations to our global network,” the board said of network developments, confirming that net growth capital investment in the third quarter was £44.4m.

“In the nine months ended 30 September the group has added 196 new locations, primarily through the roll out of our successful Regus brand and the addition of 31 new Spaces locations.”

Net growth capital expenditure was £224.1m, including approximately £110m on property, as it had previously reported.

Those 196 new locations represented approximately 3.6m square feet of additional space, taking the group's total network at 30 September to more than 50.5m square feet.

Of the total organic openings, over 50% were partnering deals with property owners.

“Overall, there has been a net increase of 109 locations to 3,035 as at 30 September.

“Total co-working / workstations - including non-consolidated - increased to 511,398 [from 501,254 as at 30 June].”

IWG said it continued to anticipate opening approximately 310 new locations in 2017, and net growth capital investment of approximately £250m including the investment in property.

Those locations would add approximately 5.8m square feet of additional space.

The board said the pipeline of locations in its Spaces co-working format was “strong” with approximately 50 anticipated to be opened this year, which represents approximately one-third of the additional space, as those were generally larger locations.

In addition, it now expected to incur incremental net growth capital expenditure in 2017 of approximately £30m, related to a strong pipeline of new openings scheduled for early 2018.

The board added that, with the continued success it was experiencing in partnering with property owners, more than half of the organic locations in the pipeline represented those “more capital efficient” ways of expanding the network.

“The board remain very positive about the opportunity for the workspace-as-a-service market and our leading position within it,” IWG’s directors said in their statement.

“The board therefore intends to continue to invest further in growing our national networks, especially in relation to leveraging our network to benefit corporate account customers, where we have won further new contracts.

“We are also investing in our development capabilities to establish a strong pipeline of growth in future years. In the short-term, however, as previously reported, this will lead to additional overhead costs and new centre losses due to the timing of openings.”

It said the company’s approach to growth investment continued to be “disciplined and flexible”.

“We are pleased to see good growth in the number of new locations this year, particularly within our Spaces co-working format, which is addressing an exciting segment of the WaaS market.

“Our approach to risk management remains rigorous and we are encouraged by the increase in more capital efficient growth we now see in the pipeline for the balance of 2017 and beyond.”