IWG Regulatory News (IWG)

TRADING UPDATE - 26 April 2022

IWG plc, the leading global operator of workspace brands, today issues its trading update for the three months ended 31 March 2022.

Good revenue momentum in the quarter continues. Progress on strategy with faster than expected new capital-light centre growth and merger with Instant.

 Financial Highlights for the three months ended 31 March 2022

· System-wide revenue increased 18.3% year-on-year, supported by increased franchising and partnering

· Revenue excluding closures increased 22.4% year-on-year

· Pre-2021 revenue and occupancy increased by 15.9% and 780bps to 74.5% respectively

· Pricing continues to improve month-on-month

· Substantial progress in reducing costs in line with previously announced initiatives and related provisions, although increasing inflationary pressures are creating some headwinds during 2022

· Net debt, pre-IFRS 16 basis, at 31 March 2022 of £763.8m, including bridge financing for The Instant Group merger

Business Highlights for the three months ended 31 March 2022

· Very strong growth in management agreements and other partnering deals; excellent pipeline for remainder of year

· Franchising remains a key focus for growth; 6 agreements and 18 committed locations added

· Unprecedented demand from enterprise customers; over 1,000 new enterprise customers signed in Q1

· Unrivalled national and global network coverage benefitting from increased adoption of hybrid working

· Some impact seen from ongoing lockdowns in certain markets, such as China

· Opened 36 locations, 78% franchised / partnered; 22 closures in Q1 with the network rationalisation near complete

· Total global network at 31 March 2022 was 3,328 locations and 64.4m gross sq. ft.

· Good progress on integrating IWG's digital assets into The Instant Group to create the world's leading independent fully integrated workspace platform

· Accelerated investment in people and training to meet growth demands

First quarter performance

As previously reported, we ended 2021 strongly and as expected, that momentum in the business has carried forward into the first quarter of 2022. Pre-2021 occupancy for Q1 improved 780bps year-on-year to 74.5%, and is 100bps higher than the average for Q4 2021. New 2021 centre openings are developing strongly with occupancy rising to over 50% in Q1 2022 compared to an average of 43% in Q4 2021. The new 2022 openings are exhibiting similarly strong trends.

The pace of recovery has naturally varied across the regions, with strong quarter on quarter improvements in pre-2021 occupancy in countries like Canada, Germany, India, Italy, Singapore and South Africa, and a slower recovery in geographies where restrictions have been reintroduced or more prolonged, such as in Australia, China and Hong Kong. The US, our largest market, has continued to improve occupancy in Q1 2022 ahead of the level achieved in Q4 2021.

The increase in occupancy has been accompanied by a sequential month-on-month improvement in pricing during Q1 with pricing almost back to 90% of pre-pandemic levels. New sales and renewal prices continued to increase, and discounts tightened, helping drive an improvement in the embedded price. Retention rates in Q1 were strong, slightly higher when compared to the previous quarter.

Following these positive trends, though with the expected lag, has been the growth in revenue from services across multiple service lines, including meeting rooms, virtual office, membership, and other customer services.

We have continued to see strong demand for our flexible work products with increasing interest from multi-location enterprise customers as they increasingly seek to adopt hybrid working. Our unrivalled national and international network coverage, spanning 1,143 towns and cities, means that we are uniquely positioned to address these positive demand trends.

Whilst we have made substantial progress in reducing costs in line with previously announced initiatives, in common with many businesses, we are experiencing higher inflationary pressures across some of our cost categories which will represent a headwind during 2022.

Excellent progress on capital-light development of the network

During the quarter, we added 36 new locations to the network, 28 of which were capital-light franchised and managed centres. As a result, net growth investment in these new centres reduced to £24.7m compared to £46.1m in the corresponding period last year. Our investment in The Instant Group was £270.0m.

The office market has been irrevocably changed by the pandemic, with hybrid working becoming the norm. This has driven a significant increase in interest in partnering with IWG, resulting in a strong pipeline of potential partners to help us move towards our ambition of achieving a network mix between company owned and partnered / franchised of close to 50/50 by the end of 2022. To convert this demand, we have invested faster than initially expected, including growing the number of business development personnel in the field.

Franchising remains a key focus in our pivot to a capital-light operating and platform business model. During the first quarter, we signed 6 franchise deals. In total these new agreements added a further 18 committed locations to the pipeline. As at 31 March 2022 we had 78 franchise agreements, with a total commitment to open 783 locations. With 474 of these commitments still to open, this provides a strong underpinning to future capital light growth of our current global network.

As we near the end of the network rationalisation programme we closed 22 locations. In total we grew the network by 0.3m sq. ft. in the quarter.

At 31 March 2022 we had an unrivalled network of 3,328 geographically diverse locations and 64.4m sq. ft. of gross space in the network.

Net maintenance capital investment in the network in the three months to 31 March 2022 was £19.9m (Q1 2020: £17.9m).

The Instant Group

Following the announcement of the merger of IWG's digital assets with The Instant Group on 8 March 2022, the independent Instant management team has made good progress with developing its strategic plan and integrating IWG's digital assets. The team has since merged Davinci Virtual Office Solutions into its online marketplace for flexible workspace, making the platform the leading aggregator globally for virtual offices. It has also more recently added the world's largest coworking aggregator, Coworker.com, to its platform, thereby creating an enhanced marketplace to provide more choice for companies and individuals as part of their future workplace strategy and helping Instant accelerate its goal of creating the largest independent marketplace for flexible workspace.

Robust financial position maintained

As at 31 March 2022 net debt, on a pre-IFRS 16 basis, was £763.8m (31 December 2021: £397.0m), reflecting the financing of the merger with The Instant Group and the normal Q1 cashflows. The Group has also agreed a reduction in its revolving credit facility from £950m to £750m in view of its decreased requirements after the financing of the merger of the Group's digital assets with The Instant Group.

Outlook

IWG is uniquely placed to capitalise on the strengthening structural tailwinds as more businesses globally embrace hybrid working. We plan to meet this demand by increasing the growth and coverage of our network by furthering our capital-light development and our investment to drive the targeted growth.

The trading momentum as we exited 2021, combined with record revenue visibility provided by the forward order book, has delivered a good start to 2022, with occupancy and pricing moving in the right direction towards pre-pandemic performance levels and service revenues improving quickly. However, higher inflationary cost pressures will represent a headwind during 2022. We will also continue to monitor the uncertainty in selected key markets, notably in China, where lockdown restrictions have been reimposed or the return to more normalised market conditions has been slower than previously hoped, together with the increased general geopolitical uncertainty.

With the combination of The Instant Group and the merger of certain IWG digital and technology assets, we have made a significant step forward in our strategy to be the global leader in the large, dynamic, and fast-growing flexible workspace booking platforms market.

The Group continues to review the potential to realise value from its property investing activities. With increasingly more of the new centres focusing on franchising, partnerships, and management agreements.

Overall, we look forward with cautious optimism to the coming quarters.

Conference call details

IWG plc will be hosting a call for analysts and investors at 08.30 BST this morning. Please register for the call via the following link to gain your unique access code:

http://emea.directeventreg.com/registration/3090656

A replay facility will be available for 7 days following the call:

Replay dial-in numbers: +44 (0) 33 3300 9785

Access PIN: 3090656

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