IWG Regulatory News (IWG)

9 March 2021

IWG plc - ANNUAL FINANCIAL REPORT ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2020

IWG plc, the global operator of leading workspace brands, today announces its annual results for the year ended 31 December 2020

Whilst 2020 was a challenging year, our decisive action has reset the Group to take advantage of accelerating demand for hybrid working

Key Highlights(1)

COVID-19 created the most challenging year in our history but provides our greatest opportunity in 31-years

- Open centre revenue up 0.5%(2) to £2,393.4m, up 10.2% in H1 and down 8.8% in H2

- Pre-2019(3) revenue down 7.4%(2) to £2,129.8m, up 0.2% in H1 and down 15.8% in H2

- Pre-2019(3) occupancy at 72.9% (2019: 73.9%), occupancy reduction moderating over the year

- Strong demand for products supporting hybrid working: Virtual Office and VO customer services revenue growth 6.4%

- Adjusted operating loss from continuing operations of £173.8m (2019: profit of £136.8m), in line with management expectations

Swift, comprehensive actions taken to reduce costs

- Specific COVID-19 related adjusting items of £379.5m

- Annualised cost savings anticipated to be in the range £325m to £375m; estimated cumulative benefit of c. £2.4bn

- Cash flow before net growth capex, investments, share repurchase, dividends & adjusting items of £140.7m (2019: £224.6m)

Maintained strong financial position

- Strengthened financial position following £320m equity placing and £350m convertible bond offering

- Net debt at 31 December 2020 of £351.1m; net debt reduced in Q1 2021 with return of £283.7m of investment

- £802.3m of available liquidity as at 31 December 2020

Strategic transformation to capital light model continues apace

- Franchising remains a key focus area for growth

- Added 15 new franchise partners and an additional 67 committed locations in 2020

- Signed first franchise in the US since year-end in Metro Detroit

- Strong growth in management agreements and other partnering deals; Master franchise discussions ongoing

Well positioned to capture increased opportunities post COVID-19 recovery

- 2020: a year of unprecedented challenge, likely to persist well into 2021

- Stronger H2 2021 financial performance underpinned by cost savings and expected improved revenue growth

- Existing positive trends accelerated by the pandemic: increased demand for hybrid working solutions and suburban locations

- Uniquely positioned to help enterprises adapt to the new world of hybrid working; many new deals signed

- Strong pipeline of compelling M&A opportunities but we maintain a prudent approach

Hybrid working driving surge in membership deals

- Unprecedented demand for enterprise membership agreements

- More than 1m future members in the pipeline

- Significant new enterprise membership clients include NTT, Standard Chartered, Cisco, Salesforce, Talentsoft, Nestle and Staples

Annual results

1. Results presented in accordance with pre-IFRS 16 accounting standards (as defined in Alternative performance measures section)

2. At constant currency

3. Pre-2019 refers to the performance for all operations opened on or before 31 December 2018 and which were open throughout the period

4. Net debt in accordance with IFRS 16 includes lease liabilities of £6,558.5m

5. The comparative information has been restated to reflect the impact of discontinued operations

Mark Dixon, Chief Executive of IWG plc, said:

"This was a period of exceptional change for IWG, for our employees, our clients and for the overall business environment worldwide. Certainly, 2020 was very difficult, and I anticipate these challenging market conditions to prevail for a few months to come. Indeed, we made additional provisions for further network rationalisation as the recovery from the pandemic continues to take longer than we anticipated last summer. I believe this was a prudent decision that emphasises our commitment to doing what needs to be done for the greatest long-term benefit of the Group.

But 2020 was also a year when our market underwent a decade of evolution in just 12 months. It was a year when companies across the world discovered first-hand that their workforces could be highly engaged and productive while utilising the hybrid way of working: at home, in a local office, and occasionally at corporate HQ. This trend is not new, but one that has been accelerated by the emergence of the COVID-19 pandemic. Today, we anticipate a massive surge in growth when we eventually emerge from the unprecedented downturn that the COVID-19 pandemic has created. The sheer scale of our global network positions us uniquely well to benefit from this surging demand. At the same time, our franchising and management agreement strategies are performing to plan as the spearhead of our capital-light expansion strategy. In summary, we are progressing well on our plans to strengthen our position as the leading service provider to the global flexible workspace industry and I firmly believe that the years ahead will be tremendously exciting for our business."

Details of results presentation

Mark Dixon, Chief Executive Officer, and Eric Hageman, Chief Financial Officer, are hosting a webcast today for analysts and investors at 9.00am GMT. Those wishing to watch the webcast will need to register in advance by clicking on the following link:

https://streams.merchantcantos.com/IWG2021

There will also be a replay facility available for 14 days after the call:

For further information, please contact:

Chairman's statement

For everybody at IWG, our employees, clients, partners and other stakeholders, 2020 will always be remembered as the year when the way we all work changed rapidly and forever.

THE YEAR EVERYTHING CHANGED

The year began with enormous promise, as our business made its strongest-ever start with every sign that 2020 would be a year of significant achievements, especially as the shift towards the hybrid flexible working model gradually continued to gain traction among businesses everywhere. But then things changed, quickly and dramatically, as awareness grew in markets across the world of the very real challenges coming from a growing global pandemic and associated national and regional lockdowns. The speed of change was immense, as 2020 metamorphosed into the most challenging year in memory, not only for IWG but also for most nations, businesses, communities, families and individuals around the world.

FACING THE CHALLENGES

As the intimidating new challenges faced by our clients, employees, franchise and landlord partners, and other stakeholders became apparent, we quickly took comprehensive proportional actions to help protect the future of our business. For our customers and employees, we rapidly implemented new health and safety protocols as well as provided financial support for customers. To preserve cash, we focused on reducing costs across the organisation, including renegotiating leases resulting in many more variable lease terms and management agreements and, where necessary, rationalisation of our network. We also withdrew our final dividend to shareholders for 2019 and suspended our share repurchase scheme and further dividends.

The Board is especially grateful for the personal contributions made by our employees and Senior Leadership Team in meeting the challenges, including swiftly implementing the new health and safety measures to protect the work environments for our employees and clients. I am personally very appreciative for the Board engagement throughout the year via more frequent meetings and increased activity between meetings to deal with pandemic related matters. As the pandemic developed, our Executive and Non-Executive Directors alike took a 50% reduction in their salaries or fees for the remainder of the year and the Executive Directors will not receive any bonuses for 2020, although they have worked harder than ever before.

The impact of the pandemic and resulting actions taken had personal and financial ramifications (as evidenced in our own 2020 results reported herein) on our clients, employees, franchise and landlord partners, and investors. The Board offers its sincere appreciation to everyone working constructively with us as we navigate through the challenges created by the pandemic.

EMBRACING THE OPPORTUNITIES

As the year progressed it became increasingly clear that the crisis was driving fundamental long-term changes for companies, workers, communities and the environment. As more and more organisations adopted the hybrid working model, the desire for many diverse groups to achieve the sustained benefits from this way of working became clear. Companies are able to reduce their operating costs and mitigate financial risk. With the right support, there are mental health and productivity benefits to employees from working locally and commuting less. By helping millions of individuals to work efficiently closer to where they live, we can be a powerful catalyst for our customers to reduce their carbon footprint. In addition, numerous communities can retain talent and attract employment as never before.

As part of our ongoing efforts to continuously improve our approach to environmental, social and governance matters, we have the objective to become carbon neutral within five years. We will also add a Black, Asian or Minority Ethnic Director to the Board by May 2022. Reinforcing IWG's commitment to diversity, equity and inclusion will help us retain and attract talented people who will support our clients and our own enterprise vitality and growth going forward.

PREPARING FOR RAPID GROWTH

Today IWG has by far the world's largest and most widely distributed flexible workspace footprint, which allows us to enable more people than anybody else to work from home, close to home and at other convenient meeting places. The accelerated shift to hybrid working habits is creating an opportunity for unprecedented growth. We plan to rapidly expand our already extensive network by continuing to pursue our capital-light model focusing on franchising, management contracts and other forms of partnership. During 2020 we raised equity capital and issued convertible bonds collectively worth £670m. These funds and the measures previously described will support IWG's future development as we broaden our network and service offerings through organic growth and M&A opportunities.

IWG is well positioned to meet the rapidly growing demands of the hybrid working model as the world emerges from the economic and social impacts of the pandemic. Our clients, new franchise and landlord partners across the world are attracted by our brand portfolio, advanced technical platform, global footprint and above all the expertise and commitment of our people. We remain confident in the long-term structural growth drivers of the global flexible work market and our strategy to strengthen our leading position within it while unlocking shareholder value.

douglas sutherland

Chairman

9 March 2021

Chief executive officer's review

2020 was simultaneously the toughest time in IWG's 31-year history and the moment of our single greatest developmental leap. It was when our market underwent a decade of evolution in just 12 months.

2020 was the most extraordinary year of my career. On the one hand, it was extremely challenging, not only for our trading performance but also for our customers, their employees, their families and communities across the 120 countries where we have a presence. The disruption caused by the COVID-19 pandemic to people's businesses and lives is immense, outweighing the combined impact of all the 50+ national, regional and global recessions I have personally experienced over the last three decades. It will clearly continue to have a major impact for some time to come.

On the other hand, this was also a year in which IWG's global market took a massive leap forward as companies across the world discovered first-hand that their workforces could be highly engaged and productive while utilising the hybrid way of working: at home, in a local office, and occasionally at corporate HQ.

As a result, at year end, the medium- to long-term future for IWG and the industry we pioneered is looking more positive than ever before.

A new way of working

It would be wrong to assume that the shift we have been witnessing in how organisations work has been driven entirely by the COVID-19 pandemic. This has merely accelerated a trend that's been underway since the dawning of the digital era, which started in the 1970s with the arrival of the first personal computers.

Some five decades on, the only 'analogue residue' still holding companies back from going fully digital was the physical space they worked in. Now, the pandemic has finally and permanently blown this away - and IWG, as the global leader in flexible workspace, is at the forefront of both driving and enabling the office to be wherever workers have the digital tools and access to data they need to do their jobs.

This begs a question: why should companies go to all the expense of providing city centre-based office accommodation when recent months have shown that people can be at least as effective, engaged and productive elsewhere?

In 2020, IWG did more than anybody else to answer this question once and for all. Quite simply, companies no longer need to do so. They can and do use our digital business and communications tools to support and engage their employees at home. They can use our growing portfolio of suburban and rural centres across the world to give people the chance to meet, brainstorm, innovate and create close to home, without the need for a long, tedious, expensive and environmentally damaging commute.

And, when required for the purposes of company identity and cohesion, they can still bring people together to congregate at a city-based corporate HQ, provided and managed by IWG or one of our growing global network of franchise partners.

Group income statement

6. Including joint ventures

Revenue and gross margin

We can see the effects on our business of this trend in action by studying the location of the deals we completed during 2020. While there was lower demand for city-centre properties, we saw a very strong escalation of interest in suburban locations. For example, while deals for locations in New York City fell by around 30% during the year, they rose by more than 40% in Southern Connecticut and in many other primarily suburban and rural locations. We also saw a significant rise in demand for small offices, accommodating one or two people.

The sheer scale of our global network positions us uniquely well to meet this surging demand. During the year, the appeal ofthe hybrid model persuaded organisations of all sizes to become IWG clients, from global giants like Standard Chartered, Nestle, Cisco and Staples to many thousands of large and medium-sized organisations right down to small, single-office and even freelance businesses. In fact, we have just signed our biggest enterprise deal in our 31-year history with NTT providing global access to our centres to their 300,000 employees worldwide.

A rapid, decisive response

So 2020 has been both enormously difficult and hugely important for IWG. Following a very encouraging beginning to the year, our strongest ever in terms of financial performance, the situation rapidly changed as the scale of the crisis facing our customers across the world quickly became clear. We had to respond with speed and determination, taking some difficult decisions to cut costs, acting fast to help many clients overcome potentially existential challenges and working hard to support our own team members through this exceptionally testing time. For example, while the pandemic caused us to rationalise some 6% of the network during the year, it was our constant priority to work with landlords on creating solutions that make centres impacted by COVID-19 sustainable for both parties. We made good progress in this area during the year, with many successful outcomes, but much work remains to be done.

We've also innovated as never before, fast-tracking new products and services to market, and refining and strengthening others. And we've worked hard to ensure we have the capital at our disposal to help us grasp the important opportunities for growth that are certain to follow recovery.

Overall, our results for 2020 proved the resilience of our unique business model. In any other year, these results might have been cause for some concern. But given the challenges we faced and overcame in 2020, I am extremely proud of them and of the global team of amazing IWG people whose hard work, courage and passion have made them possible.

This extends beyond our financial results alone, and I have been delighted that IWG is a company that is committed to look after the health and safety of its people and customers.

Clear, compelling advantages

The appeal of the hybrid working model was underlined by the particularly strong sales activity we experienced during the second half of the year, although given the exceptional circumstances this was offset by increased customer churn. During the year, we also supported customers with a range of measures worth approximately £100m including payment deferrals.

Nonetheless, the fast-growing appeal and universal advantages of the hybrid working model are clear and compelling. At their simplest, they are:

- Companies gain better financial flexibility to invest in their people and in growing the business instead of the buildings from where they operate, reducing financial risk and generating shareholder value. They also enable them to attract high-quality employees with the offer of flexible working.

- Individual workers gain better mental health and reduced costs through not having to commute many miles into city centres, gaining more time with family and friends.

- Communities gain from the ability to provide more high-quality employment opportunities, encouraging people to stay and spend locally.

- The environment benefits from the long-term carbon-reduction benefits of reduced commuting allied with more efficient modern and upgraded workspaces with fewer damaging emissions.

Indeed, we are so confident in the environmental benefits of hybrid working that we are now targeting carbon-neutral status as an organisation within five years, brought about by a combination of reduced commuting, improved building efficiency, better use of resources such as water and energy, and increased recycling and carbon-offsetting activities. We will provide regular updates as we progress towards this target.

Partnering for capital-light expansion

These are not the only benefits of hybrid working. Its appeal extends beyond potential customers and their employees to include a range of business types that are keen to become involved in such a fast-growing sector of the global real-estate industry.

Property companies, building owners and new investors are all targeting it in significant numbers, and they recognise the value of the scale, experience, visibility and skills we have to offer in a partnership approach.

We also recognise that the wider opportunity is far too big for IWG to realise on our own, and that we need, more than ever, to work with franchise partners and property owners across the world in the years ahead. We have always worked closely with building owners, bringing them the brands, expertise and access to our platform they need to maximise the value of their investments.

Since 2019 and throughout 2020, our emphasis has been on driving growth through franchising, management agreements and other forms of joint venture, as the key enablers of our capital-light growth strategy. This enables us to open more centres, faster and with less capital investment to meet the growing demand for hybrid working opportunities.

Our globally recognised brands, industry-leading platform, decades of experience and commitment to innovation make our offer very attractive to potential franchise partners. This and the growing interest in hybrid and remote working continue to drive more opportunities with potential franchise partners. During the year, we successfully completed 15 new franchise agreements in regions including EMEA, Asia Pacific and the UK, which between them included commitments to open 67 new centres. Since the year end, we have signed our first franchise agreement with a US partner, to develop seven centres over seven years in Metro Detroit. Several other agreements are in the pipeline as I write.

We also continue to pursue management agreements, in which building owners pay us a fee for creating and operating centres in their properties. In the second half of the year we entered numerous agreements of this type and have an attractive pipeline of further opportunities which I believe will come to fruition in 2021.

Clearly, we continue to have centres of our own on our balance sheet, which we bought in the past as part of our historical development programme. We also continue from time to time to buy assets, which ultimately could be used to create property funds. Such properties are a means to an end for IWG, and our focus will increasingly be on the capital-light route to expansion throughout 2021 and beyond.

Creating services for a global industry

For some years, our business has revolved less around the provision of workspace and more about providing the platform, the services and the support that people and businesses need to work efficiently and cost-effectively.

During that time, more than anybody else, we have come to understand the complete end-to-end requirements of organisations everywhere, enabling us to focus our development efforts on innovative, and often digital, new products and bespoke service offerings. For example, in our 2019 Annual Report we covered the launch of Rovva, our unique business support platform that puts in one place everything businesses need, from practical advice on finding a place to work, HR, funding and finance, to virtual office plans, workspace membership and business services on a global scale. On page 35 of our 2020 Annual Report, we describe our breakthrough, end-to-end work with EY that shows how we can innovate through partnerships to help some of the world's biggest organisations meet their evolving needs.

And elsewhere in the 2020 Annual Report, we talk about the 2020 launch of HomeToWork, our new business that delivers everything workers need to stay connected, productive and to enjoy working from home.

These are both game-changing innovations that are facilitating the shift to new ways of working for businesses of every type and size. And they are only two of several other uniquely powerful new solutions that we've either launched or are set to bring to market in the near future.

Our prudent approach to M&A

We know that the period immediately ahead of us is packed with opportunity for IWG, and we are determined to maximise the potential that this limited time window presents. During 2020, therefore, we raised significant quantities of capital to enable us to grow inorganically through M&A activities in parallel with our capital-light expansion strategy. At year end, we were in the final stages of due diligence with a number of acquisitions, on which we will report in due course. Post year end we have acquired a majority investment in The Wing, the leading community and co-working space company designed for women, paving the way for the business to pursue substantial growth plans both in the US and internationally.

Naturally, we continue to take a prudent approach to inorganic growth and will only take action when we believe a deal is overwhelmingly in the best interests of our shareholders and other key stakeholders.

Outlook

This was a period of exceptional change for IWG, for our employees, our clients and for the overall business environment worldwide. While it was undeniably an extremely difficult time for everybody and these conditions are likely to persist well into 2021, I am in no doubt that the uptake of new working practices it has accelerated for so many organisations and enforced on others is now here for good.

I am also in no doubt that these will ultimately be for the good of everybody - businesses, individual workers and their families, communities and the environment.

As for IWG, this fundamental shift in the way people work is clearly an enormously positive step over the medium and longer terms. Certainly, 2020 was very difficult, and I anticipate these challenging market conditions to prevail for a few months to come. Indeed, we have made additional provisions for further network rationalisation as the recovery from the pandemic continues to take longer than we anticipated last summer. I believe this was a prudent decision that emphasises our commitment to doing what needs to be done for the greatest long-term benefit of the Group.

Overall, I am very confident that the events of 2020 have done far more than merely confirm the resilience of our organisation and our business model. They have also delivered the changes in attitudes and working practices that will set us up for sustained success over the next 10 or 20 years and far beyond.

Today, we anticipate a massive surge in growth when we eventually emerge from the unprecedented downturn that the COVID-19 pandemic has created. Our franchising and management agreement strategies are performing to plan as the spearhead of our capital-light expansion strategy. And we are progressing well on our plans to strengthen our position as the leading service provider to the global flexible workspace industry.

In short, in a single year we have made a developmental leap equivalent to the progress we had anticipated for the next decade. The year gone is one we will never forget - and the years ahead are tremendously exciting.

Mark Dixon

Chief Executive Officer

9 March 2021

Chief financial officer's review

Financial performance

The review below highlights the reported results in accordance with IFRS. Under IFRS 16, while total lease related charges over the life of a lease remain unchanged, the lease charges are characterised as depreciation and financing expenses with higher total expense in the early periods of a lease and lower total expense in the later periods of the lease.

The Group also presents the results in accordance with pre-IFRS 16 accounting standards(1) as it provides useful information to key stakeholders on how the Group is managed, operating performance targets are measured, and reporting for bank covenants and certain lease agreements are prepared.

COVID-19

The declaration by the World Health Organization of the COVID-19 pandemic and subsequent global government restrictions impacted the Group's ability to operate at full capacity in 2020. The continuation of COVID-19, including new and extended preventative measures in most of the Group's markets, is expected to prolong the impact on our business in 2021. Following early signs of recovery during the fourth quarter of 2020, we expect our anticipated recovery in 2021 to be delayed but aided by global vaccination programmes.

As a result, in order to improve the transparency and usefulness of the financial information presented and improve year-on-year comparability, the Group has identified net charges of £389.8m (pre-IFRS 16: £379.5m(1)) relating to directly attributable expenses and gains resulting from COVID-19. These charges are adjusting items as they meet the Group's definition applied in previous years, being significant both in nature and value to the results of the Group for the year ended 31 December 2020.

The adjusting items relate to several separately identifiable items which involve accounting judgement and estimates as follows:

- Network rationalisation

- Provision for expected credit losses

- Transaction costs on deferred franchising deals

- Goodwill impairment

- Other one-off items

Should the actual costs relating to the amounts provided prove to be different to the costs incurred and provided for, the excess or surplus will be disclosed in future years, as adjusting items.

Network rationalisation

As previously announced, in direct response to the pandemic, decisions were taken to accelerate the rationalisation of underperforming centres to ensure we emerge a stronger business post COVID-19. The estimated net impact of network rationalisation is £322.3m (pre-IFRS 16: £312.0m(1)). This charge includes the impairment of right of use and non-moveable assets and exit costs incurred in the year, which are over and above the normal run rate for the Group.

Group income statement

7. Adjusting items relate to income and costs arising specifically from the impact of COVID-19.

8. Overheads for 2020 include COVID-19 and other non-recurring items of £85.0m.

Goodwill impairment

Despite the continued uncertainty created by COVID-19, there are no long-term indicators of impairment identified for the US and UK and these businesses are expected to recover post COVID-19. However, as previously reported with the interim results, the COVID-19 crisis and linked restrictions have impacted our ability to trade our way to sustainable profitable growth in certain markets. As a result, the projected cash flows for the operations in certain insignificant markets no longer supported the carrying value of goodwill, and an impairment of £4.9m was taken as at 30 June 2020. No further impairment was taken in the second half.

Provision for expected credit losses

The COVID-19 pandemic unfortunately presents an unprecedented crisis to many of our customers who may struggle to navigate through these challenges without external support. We have therefore endeavoured to provide support wherever possible to our customers to sustain our long‑term relationships.

Considering the disruption of centres globally, the Group reviewed the recoverability of its debtor profile and recorded an increase in the expected credit-loss provision of £17.5m for 2020. This increase reflects the greater likelihood of credit default by the Group's debtors directly attributable to the impact of COVID-19 and the likelihood of recoverability of such outstanding balances payable to the Group.

The increase is relatively low compared to the overall debtor profile as the Group has not historically incurred significant credit losses and continues to maintain customer deposits as additional security in the rare event of non-performance of customer contracts.

Other one-off items including restructuring

During 2020, the Group incurred £8.2m of transaction costs in respect of master franchise agreements that have not completed as at 31 December 2020 because of COVID-19. The Group continues its pivot towards a franchising model and discussions on master franchise agreements have since resumed. Other net charges of £36.9m were also incurred in relation to restructuring the Group in respect of the COVID-19 crisis.

Estimated resulting cost benefit

The anticipated annualised cost benefit arising from these actions taken to respond to COVID-19, if fully implemented,is expected to be in the range of £325m to £375m. The estimated cumulative benefit of these actions accruing to the Group in future years will be significant and is estimated to be approximately £2.4bn as previously announced.

Revenue

Total Group revenue(5) decreased from £2,648.9m to £2,480.2m, a 5.3% decline when compared at constant currency. This is a commendable outcome given the increasing quarterly year-on-year weakness experienced from the second quarter onwards, including double-digit revenue declines in the third and fourth quarters. The improvement achieved in sales activity has been offset by customer churn and the significant impact the pandemic has had on service revenue. Only EMEA recorded annual revenue growth, aided by the annualised benefit of acquisitions in late 2019, but even here revenue declined in the second half. Although the year-on-year trends for the Group after the first quarter were sequentially increasingly more negative, the absolute level of monthly revenues stabilised in the second half and showed some improvement in December.

As anticipated and previously highlighted, the performance of the business outside of central business districts was more resilient. The demand for more distributed working has increased sales in many of the satellite towns and cities outside of major cities, as more customers adopt hybrid working. The conditions experienced in 2020 have made it our most challenging year ever experienced. Despite seeing early signs of recovery during the fourth quarter of 2020, the continuation of the pandemic, including new or extended preventative measures in most of the Group's markets, is likely to persist well into 2021 before we see the environment improving.

Overall, open centre revenue(5) of £2,393.4m (2019: £2,408.1m) was broadly stable for the year, a 0.5% increase when compared at constant currency. Again, this performance is reflective of conditions becoming more challenging as we moved through the year. Open centre revenue in the first half increased 10.2% at constant currency, an outcome that was very much first quarter driven. The second quarter reduced to a small positive revenue increase and thereafter moved increasingly into negative territory as the impact of the pandemic continued to be felt on the business.

The continued maturation of the locations opened in 2018 and 2019 and the initial revenue contribution from the 2020 openings combined to deliver the broadly flat revenue position for the year. Regionally, as can be seen in the table below, the increase in revenue from our second largest region, EMEA, was essentially offset by the decline in our largest market, the Americas. Open centre revenue is not impacted by the pro-active network rationalisation programme.

Pre-2019 revenue(5) for the year declined 7.4% at constant currency to £2,129.8m (2019: £2,328.7m), with all regions experiencing year-on-year revenue declines. A similar pattern emerged through the year. After a very strong first quarter, weakness was experienced in the second quarter resulting in a relatively flat first half performance with revenue up 0.2% at constant currency. This weakness continued into the second half with each quarter showing increasingly weaker year-on-year performance. As a result, pre-2019 revenue declined 15.8% at constant currency in the second half.

Overall, occupancy for the pre-2019 business decreased marginally year-on-year to 72.9% (2019: 73.9%).

Open centre revenue performance by region

On a regional basis, open centre revenue(5) performance can be analysed as follows:

Americas

After a strong first quarter in 2020 our largest region, the Americas, faced a very challenging environment as the pandemic spread across the region.

Revenue from open centres(5) declined 5.9% at constant currency to £1,034.2m as conditions increasingly deteriorated from the second quarter onwards due to COVID-19. Total revenue(5) declined 8.4% at constant currency to £1,066.5m after a reduction of 1.1% in the first half. Without the benefit of the maturation of the centres opened in 2019 and 2020, pre-2019 revenue(5) for the region decreased 10.1% at constant currency to £969.8m, with double-digit declines in almost all the major countries in the region. A notable exception among the top countries remained Mexico, where a strong first half resulted in mid-single digit growth for the year despite negative growth in the second half.

Average occupancy for the region in the pre-2019 business decreased to 74.1% (2019: 77.2%).

During 2020, 32 new locations were opened in the region and 59 locations were rationalised. Following these actions there were 1,271 locations in total in the Americas at 31 December 2020.

EMEA

The stronger performance in EMEA relative to the other regions reflects the previously reported strong start to 2020 in most of the major countries in the region and the annualised benefit of acquisitions completed in the second half of 2019. Otherwise the performance through the year was similar to the other regions, with much weaker performance in Q3 and Q4. Open centre revenue(5) has increased 12.6% to £688.9m at constant currency. Open centre revenue growth(5) was heavily weighted to the first half with growth of 22.3% followed by a 3.8% increase in the second half. Total revenue(5) increased 4.7%, at constant currency, to £715.1m. Pre-2019 revenue declined 1.6% at constant currency to £564.0m. The pre-2019 occupancy increased to 73.9% (2019: 72.5%).

A total of 72 new locations were added and 76 locations were rationalised across this region during 2020. This net reduction of three locations took the total in the region to 1,093 at 31 December 2020.

Asia Pacific

Our business in Asia Pacific endured a challenging second half as the effect of the pandemic impacted revenue after delivering a good performance in the first half. Revenue from all open centres(5) increased 1.9% at constant currency to £285.0m. First half growth of 16.2% was followed by a decrease of 11.0% in the second half. Total revenue(5) from the region declined by 9.5% at constant currency to £304.2m. Pre-2019 revenue was down 6.4% to £252.2m (2019: £274.7m) and pre-2019 occupancy decreased to 70.4% (2019: 71.3%).

A total of 24 new locations were added in the region and 61 locations were rationalised during 2020. At 31 December 2020 we had a total of 645 centres in the region.

UK

Like our other markets, the UK had a strong first quarter, but was then increasingly impacted by the COVID-19 pandemic from the second quarter onwards. As anticipated and previously highlighted, the performance of the UK business outside of central London was more resilient. The demand for more distributed working has increased sales in many of the satellite towns and cities outside of London, as more customers adopt hybrid working.

Revenue from open centres(5) decreased 0.4% to £379.7m. Pre-2019 revenue(5) declined by 8.6% to £338.2m (2019: £370.1m) and total revenue(5) in the UK declined 8.8% to £388.8m, reflecting the continued network rationalisation in the UK. Pre-2019 occupancy decreased to 71.0% (2019: 71.4%).

A total of 13 new locations were added and 21 locations rationalised in the UK during 2020. The net of these additions and the network rationalisation programme led to an overall reduction of eight locations in the region to 304 at 31 December 2020.

EBITDA

Adjusted EBITDA as reported reduced to £1,233.9m (2019: £1,482.8m), due to the impact of COVID-19 on our business performance.

Under pre-IFRS 16 reporting, adjusted EBITDA(1) declined from £428.3m to £133.8m. Adjusted EBITDA still reflects the significant drag from the investment in growth, which in 2020 was £112.5m (2019: £27.6m), and a further £9.9m in respect of closed centres (2019: £10.3m). The pre-2019 EBITDA(1), which eliminates the drag from the investment in growth and therefore offers a more representative indication of the underlying earnings performance of the business, was £255.9m (2019: £435.3m).

Underlying performance has also been directly impacted as more of our markets went into lockdown, resulting in reduced profitability from the second quarter of 2020, that is expected to improve as global vaccination rollout programmes advanceand restrictions are lifted. The impact that COVID-19 has had on underlying trading performance is not recognised within adjusting items.

Overhead investment

Whilst reported Group overheads, excluding adjusting items(1) of £56.4m related to COVID-19, increased 12.3% at constant currency to £312.9m (2019: £281.0m), these included £30.6m of additional non-recurring costs related to corporate restructuring. This was also true under pre-IFRS 16 reporting, with Group overheads excluding adjusting items of £324.4m (2019: £280.0m). Excluding these non-recurring costs, overheads(1) increased by 4.9% to £293.8m, representing 11.8% of the Group's lower revenue reported for 2020 (2019: 10.6%). The increased investment in overheads, particularly in the second half, reflects the Group's continued development of enterprise accounts and pivot to a capital-light franchise growth model and a scaled platform of services.

Operating loss - continuing operations

Adjusted operating profit(5) as reported was £37.8m (2019: £286.8m). Including the adjusting items, the operating loss(5) was £352.0m compared to the profit of £286.8m in 2019 due to COVID-19.

Under pre-IFRS 16 reporting, adjusted operating loss(1)(5) for the year ended 31 December 2020 was £173.8m (2019: profit of £136.8m). In addition to the planned investment in overheads to develop the business platform, the operating profit(1)(5) continues to reflect the drag from growth investment of £175.3m (2019: £42.5m) as well as £23.8m (2019: £37.8m) from centres closed during 2020. Including the adjusting items of £379.5m, the operating loss(1)(5) was £553.3m compared to a profit(1)(5) of £136.8m in 2019.

Net finance costs

The Group reported net finance costs for the year to 31 December 2020 of £268.1m (2019: £231.8m), including £257.2m (2019: £213.5m) related to interest on the Group's lease liabilities.

Net finance costs in respect of bank lending decreased to £10.9m (2019: £18.3m) as there was less need for debt usage during the year. This primarily reflects the Group's laser focus on cash generation, the benefit for the entire year of the proceeds from the master franchise agreements completed last year, over seven months' benefit from the £320m share placing in May 2020 and the lower interest rate benefit from the £350m convertible bond issue at the start of December 2020.

Taxation

The reported effective tax rate for 2020 is (4.9)% (2019: (40.5)%). The effective tax rate(1)(5) on continuing operations under pre-IFRS 16 reporting was (7.7)% (2019: (13.1)%). Despite reporting a significant loss for the year resulting from challenging trading conditions due to COVID-19, the Group has incurred a tax charge due to several factors. These include the continuing profitability of certain countries and entities within the overall Group and following some internal restructuring during 2020, we have reduced the deferred tax asset of £89.8m recognised in 2019 by £20.1m, resulting in a 2020 deferred tax charge. The tax charge benefited in 2020 from no US BEAT (base erosion and anti-abuse tax) liabilities in contrast to the negative £17.5m impact in 2019. The 2020 tax charge also benefitted from the positive tax impact of the 2020 US CARES Act, resulting in a prior year current tax credit of £10.6m in the US.

Dependent upon the Group's continuing ownership of specific countries or regions which may change due to future potential master franchise agreements, the impact of COVID-19 on future results and how long it takes to utilise available tax losses, we currently anticipate an effective tax rate in future years to move back to a similar rate to that seen in the years prior to 2019 of approximately 20%.

Earnings per share

Basic earnings per share were a loss of 67.9p (2019: profit of 50.5p). The loss per share from continuing operations before adjusting items was 26.9p (2019: profit of 8.7p).

Under pre-IFRS 16 reporting, earnings per share(1) decreased in the year ended 31 December 2020 from 56.4p, including the gain in 2019 on the strategic partnerships and deferred tax benefit, to a loss per share of 63.5p. Earnings per share(1)(5) from continuing operations reduced from 15.0p to a loss of 63.8p. Excluding the adjusting items, the loss per share reduces to 24.0p.

Diluted earnings per(1) share for the year to 31 December 2020 were a loss of 63.5p (2019: 55.4p). Diluted earnings per share(1)(5) on a continuing basis before adjusting items for the year were a loss of 63.8p (2019: 14.7p).

The weighted average number of shares in issue for the year was 951,890,712 (2019: 892,737,688). The weighted average number of shares for diluted earnings per share was 969,363,683 (2019: 908,939,911). The Group acquired 13,590,080 shares in the first half of 2020, before the share repurchase programme was suspended, to be held in treasury to satisfy future exercises under various Group long-term incentive schemes. The Group reissued 1,968,169 shares from treasury to satisfy such exercises during 2020.

Cash flow and funding

Cash generation continues to be an attractive feature of our business model and the Group generated cash monthly at the centre level up until December when there was a modest operating cash outflow resulting from the completion of deals with landlords that have secured the significant long-term positive benefits noted earlier. As more deals with landlords complete, further modest outflows are expected in the first quarter of 2021.

Despite the negative impact the COVID-19 pandemic has had on business activity and customer growth, and the reported financial performance, the Group's cash performance has been very resilient with a cash inflow(1) of £140.7m before net investment in growth capital expenditure, investments, dividends, share repurchases and adjusting items (2019: £224.6m).

As previously reported, the Group deployed capital in the fourth quarter which included £276.2m on a potential investment which, post the year end, did not proceed, and has resulted in a return of that cash outflow in the first quarter of 2021.

IFRS 16 has no impact on the Group's cash flows other than presentation of where items are classified on the cash flow statement.

Cash flow

The table below reflects the Group's cash flow:

9. Net growth capital expenditure of £250.9m relates to the cash outflow in the year to 31 December 2020. Accordingly, it includes net capital expenditure related to locations added in 2019 and to be added in 2021, as well as those added in 2020. The total net investment in the period for 2019 and 2021 additions amounted to £93.4m.

Capital investment in the network

In line with the Group's expectations, net growth capital expenditure in 2020 reduced by £80.8m to £203.8m (2019: £284.6m). This reflects the dialling down of our growth programme as part of the mitigating actions taken to offset the impact of COVID-19 and the continued focus on pivoting to capital-light growth, which is expected to result in further reductions in capital expenditure in future years. Under pre-IFRS 16 reporting, net growth capital expenditure(1) reduced by £138.1m to £250.9m (2019: £389.0m).

During 2020 we added 141 new locations and rationalised 217 locations, mostly directly COVID-19 related. At 31 December 2020, the Group's physical network comprised 3,313 locations globally, providing the largest global and most widely distributed network. The new locations added 4.0m sq. ft. of space. This, together with the impact of the rationalisation programme, resulted in the Group having 62.9m sq. ft. of flexible workspace at 31 December 2020 (2019: 62.4m sq. ft.).

Maintenance capital expenditure(1) also reduced year on year. After the completion of the planned stepped up refurbishment programme, notably in the first quarter, which increased investment in the first half of the year to £80.7m (pre-IFRS 16: £91.5m), investment slowed from the second quarter. Consequently, maintenance capital expenditure(1) for 2020 reduced from £108.7m in 2019 to £81.9m (pre-IFRS 16: from £147.8m in 2019 to £96.9m). A further slowdown is anticipated for 2021.

Strong financial position

The Group has maintained a strong financial position throughout 2020. At 31 December 2020, the Group had significant liquidity headroom of £802.3m.

Net debt at 31 December 2020 has increased to £6,909.6m from £6,840.1m at 31 December 2019. Excluding debt related to lease liabilities, the Group had net borrowings(1) of £351.1m (2019: £294.1m). The year-end position is below the interim position at 30 June 2020 of £7,067.9m reflecting the network rationalisation programme and related actions taken by the Group in response to COVID-19.

The year-end net debt position includes £320m of gross proceeds raised through the equity placing on 28 May 2020, £350m from the convertible bond offering on 2 December 2020 less the debt element of the convertible bonds, and £527.1m deployment of cash for organic and inorganic growth and investments. The Group, as previously announced, also increased the net debt to EBITDA covenant on its £950m revolving credit facility. The new capital raised and increased covenant flexibility will enable the Group to further execute its stated strategy.

The lease liabilities recognised by the Group do not impact on the Group's covenants which are based on pre-IFRS 16 accounting standards.

Foreign exchange

The Group's results are exposed to translation risk from the movement in currencies. During 2020 key individual exchange rates have moved, as shown in the table below. Overall, these exchange rate movements had a mixed but modest impact on the Group's results. Revenue was reduced by £27.3m but gross profit and operating profit increased by £9.5m and £27.1m respectively, reflecting the relative contribution to Group profit from our US business.

Risk management

Effective management of risk is an everyday activity for the Group and, crucially, integral to our strategic planning. A detailed assessment of the principal risks and uncertainties which could impact the Group's long-term performance and the risk management structure in place to identify, manage and mitigate such risks can be found on pages 48 to 55 of the 2020 Annual Report and Accounts.

Related parties

There have been no changes to the type of related party transactions entered into by the Group that had a material effect on the financial statements for the period ended 31 December 2020. Details of related party transactions that have taken place in the period can be found in note 30.

Foreign exchange rates

Dividends and share repurchase programme

For the purposes of liquidity, we are ensuring that the Group maintains sufficient funding especially in a period of significant centre rationalisation. Our capital allocation policy remains in place, prioritising investment in the long-term development of our business and dividend distribution to shareholders. However, given the prolonged uncertainty caused by COVID-19, we believe it is prudent to protect our liquidity and as a result, future dividend payments and a restart of our share repurchase programme are placed on hold for the moment with a clear intention of the earliest possible return to our stated shareholder return policy.

Going concern

The impact of COVID-19 on the global economy and the operating activities of many businesses has resulted in a climate of considerable uncertainty. The ultimate impact of the pandemic on the Group is uncertain at the date of signing these financial statements.

The Directors have assessed the potential cash generation of the Group against a range of illustrative COVID-19 scenarios (including a severe but plausible outcome), the liquidity of the Group, funding available under the Group's bank facility and mitigating actions to reduce operating costs and optimise cash flows during the current environment.

In addition, the Group successfully raised £320m of equity in May 2020 and issued £350m of unsubordinated unsecured Guaranteed Convertible Bonds in December 2020 to take advantage of growth opportunities and strengthen the Group's global leadership position.

On the basis of these actions and assessments, the Directors consider it appropriate to continue to adopt the going concern basis in preparing the financial statements of the Group.

OUTLOOK

After an excellent start to the year, 2020 brought enormous challenges for the Group which we have navigated in a robust manner whilst maintaining a strong financial position. We have successfully augmented our capital resources and are consequently well poised to capitalise on the new world of hybrid working as global vaccination programmes are rolled out, restrictions are removed, and we emerge from this crisis.

We are already witnessing an unprecedented surge in new enterprise deals. We are signing membership deals that are multiple times larger than any previous deals in the Group's history and there is a rich pipeline that represents over one million future members. The quality and scale of these deals is demonstrably generating greater momentum in the evident shift to hybrid working solutions, which we are uniquely positioned to support.

Our business has shown great resilience through this period and, with the actions we have taken to reset the Group, we are confident this will bring us through the challenges and into the new world of working as a stronger, more profitable business capable of delivering increased cashflow and returns.

Eric Hageman

Chief Financial Officer

9 March 2021

Consolidated income statement