Basic-Fit N.V. (BFIT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Basic-Fit's 2020 Half Year Results Conference Call and Webcast. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host for today's conference, Richard Piekaar, Head of Investor Relations. Sir, you may begin.

Thank you, Tracy, and good afternoon, and welcome, everyone, to our conference call during which we'll discuss our results for the first 6 months of 2020. With me today are CEO, Rene Moos; and Hans van der Aar, Basic-Fit's CFO. This call is being broadcast live on our website and a recording of the call will be available shortly afterwards. As usual, I would like to point out that safe harbor applies. We will start with Rene, who will discuss the highlights and the operational developments, followed by a more detailed look at the financial results from Hans. We will then take your questions. The call will finish no later than 3:00 p.m. And with that, Rene, I would like to hand over to you.

Thank you, Richard. Welcome, ladies and gentlemen, and thank you for joining today's call. On the first slide, you see the usual highlights overview with the COVID-19 pandemic and the related club closure, we have a very unusual set of results. Due to the club closure and the membership freezes and member compensation schemes, we missed nearly 3 months of revenue this period. A period that started very well with strong membership developments and a record number of club opening in the first 2 months. The number of club openings in the first quarter was 44. And in the month that has followed, we opened not more than 3 new clubs, bringing the total network to 831 clubs, an increase of 22% year-on-year. During this period of club closure, the number of joiners was almost 0, while we continue to have leavers, but at a lower level than normal. As a result, the number of members was 2.17 million up 9% year-on-year. As mentioned, we have lost a significant period of revenue. Year-over-year revenue decreased by 24% to EUR 183 million. The underlying EBITDA decreased by 9% year-on-year to 62.2%. We ended the period with EUR 189 million cash at hand after obtaining additional bank financing and after a successful equity raise last month. In this exceptional period, we were able to show the responsiveness and flexibility of the company. I was also proud to see the commitment and dedication of our staff to help the company sail through the storm and come out of it even stronger than before. On the next slide, I want to recap what we did after we had closed our clubs. Mid-March, we were confronted in all our countries by different lockdowns due to the COVID-19 outbreak, which forced us to close all our clubs. The first thing that we did was inform our members about the club closure and the fact that they would be compensated for the period that they would not be able to visit our clubs from mid-March to May. As of the 1st of May, all memberships were frozen. Following this communication, we did not see a significant spike in the number of leavers. While at the same time, we could continue to collect the membership fees of around 75% of our loyal membership base, who agreed to be compensated for this once our clubs were open again. During the period of club closures, we frequently communicated with our members and kept them engaged, among others, by promoting the use of our online group classes. We have seen that our investments in the Basic-Fit app and our GXR virtual group classes have been of added value during the club closures. The usage of GXR group classes in April increased sevenfold compared to the start of the year. To further stimulate people to exercise at home, we organized a big home gym day event in April, which was attended by more than 800,000 people in Europe. At the same time, our club employee could no longer work at the club. But all were retained and kept being paid in full. They were kept up-to-date on the latest developments and informed about the safety and hygiene protocols that we put in place once we could reopen the clubs. At the headquarters, many people worked harder than ever before, adjusting to the new reality, and at the same time, preparing for clubs to reopen in a world with COVID-19. We also took action to manage our cash flow and increase our liquidity in this in interim period. We halted the construction and opening of new clubs and minimize maintenance activities, like replacement of equipment and big refurbishments to bring the capital expenditure to a minimum. In addition, we lowered the club operating cost and the overhead cost. Received support from governments who provided compensation for staff costs, and we made use of the possibility to postpone tax payments. We also received strong support of our long-term business partners, including landlords, contractors, suppliers which helped us to limit our monthly cash outflow during the months of club closures. The Basic-Fit leadership team contributed by reducing their own salary by 50% for the period that the clubs were closed. To increase our financial liquidity, we obtained an additional bank finance of EUR 100 million, of which EUR 60 million is used to absorb the impact of the COVID-19 lockdown related club closures. And last month, we also successfully raised EUR 133 million through an accelerated bookbuild offering of new shares, which -- with the strengthening of the balance sheet, we will also be able to resume again our growth strategy. On the next slide, we show in chronological order, the reopening of the clubs in different countries. At the end of May, Luxembourg was the first country in which we reopen our clubs. The clubs in France, except for Paris and Ile-de-France followed shortly after on June 2. We have reopened the clubs in Belgium and the clubs in Spain, outside Madrid on June 8. The clubs in Paris and Ile-de-France reopened on June 14. The clubs in Madrid were reopened on June 22. And finally, on July 1, we could reopen the clubs in the Netherlands after being closed for 15 weeks. Of course, the clubs reopened in a different environment with limitations and new regulations in order to assure a safe environment to work in and to work out in, which brings me to the next slide. The safety of our members and staff in the clubs is, of course, our main priority. So before we reopen, the clubs, we made sure we could fully comply with the local regulation and inform our members on all the measures by e-mail. In all clubs, we worked with the reservation system, which enables us to manage the flow of members to our clubs and the maximum numbers of members in our clubs at any given time. We also integrated to [ drayage ] in the process and ask people to confirm that they don't have any symptoms and have not been in contact with people that do. If they cannot confirm this, they need to stay home. This also applies for our staff, of course. We have adjusted our already strict cleaning protocol, our staff and external people spent at least 6 hours on cleaning on a daily base, and we asked our members to clean the equipment before and after use. To this end, we added additional cleaning stations in the clubs. This clear signage in the clubs to regulate the flow of people in the clubs and to assure the required social distancing. In addition, we communicate in our clubs that members need to wash their hands frequently, preferably after each change of equipment. The usage of showers and dressing rooms is not allowed in France yet. And in the other countries, we make sure that also here, social distressing is applied. We optimize the club staffing schedules to make sure that extra employees are present at peak hours or at heavy traffic clubs. In addition, our remote surveillance center is helping our club staff to enforce the COVID-19 health and safety protocol. To conclude, I would like to emphasize that we have optimized the ventilation in our clubs to make sure that there is no recirculation of air, and there is ample inflow of fresh air. Now that we have reopened all our clubs in all our countries, we see members coming back and visits recovering to pre-COVID-19 levels. First, the frequently visiting young men and women, and during the next weeks that followed the other members. We have seen this pattern in all countries. A good way to illustrate this is by taking a close look at the visiting trend in our mature French clubs. That is the chart on the left-hand side, the visiting levels are now nearly similar to pre-COVID levels. You see that this year, the number of visits is a bit higher at the start of the day, which is explained by the extension of our opening hours this year, starting weekdays at 6 o'clock. Also noticeable is that the usual peak hours between 6 and 8 has become less pronounced. This is explained by the fact that many people are still working from home and the increased flexibility to visit the club. While we have reduced club capacity to comply with the new hygiene protocols, the chart on the right-hand side shows that in spite of these adjustments, our members can go to the club without major limitations. We also see a strong development in numbers of joiners. The chart shows the strong trend in units we had for the group in January and February and now also after reopening. Obviously, the number of joiners in April and May were very limited as all our clubs were closed. In July, the increase in joiners is very high. Actually, the number of new members is 70% higher than the number of joiners in July last year. This tells me that we gather to a real need. I also believe that fitness can contribute to battling the COVID-19 pandemic. By exercising in our clubs, people can work out in a safe environment and increase their fitness and improve the immune system. With the positive trends that we have seen after reopening, we have restarted construction of the clubs that we paused in mid-March. Next to the positive membership developments, we see increased availability of potential sites, and we are also able to negotiate better terms, including, in many cases, a pandemic clause, which will give us postponement of rent payment during forced club closures in the future. The strengthened balance sheet enables us to resume our club rollout plan, and we expect to open around 100 clubs this year. Our long-term strategy has not changed and neither have our targets for the medium and long-term. Of course, we will continue to closely monitor the development relating to the COVID-19 pandemic. And if necessary, we will again adjust our plans accordingly. If there will be no massive lockdowns with forced closures of a significant part of our clubs in the coming quarters, we will continue to target to have a network of 1,250 clubs in 2022. I'm confident that based on the very good start of the year, the swift action taken at the start of the corona crisis and the support of all our stakeholders as well as the additional financing we have secured, we are well equipped to cope with any potential further impact of the COVID-19 pandemic and come out of this as a stronger company. This concludes my part of the presentation, and I would like to hand over to Hans for the financial review.

Thank you, Rene. I would like to start with the income statement and the underlying results for the first half of the year. As Rene mentioned, we were forced to close all of our clubs for a significant period, which had a significant impact on revenue. We reported a 24% decline in revenue to EUR 180.5 million. Because of the compensation that our members receive for the time that they pay their fees while the clubs were closed, we will ultimately lose around 25% of the membership fees this year. France was after Luxembourg, the first country to reopen its clubs and reported a modest 7% decrease in revenue, thanks to the strong membership development prior and after the club closures. Countries that had to deal with a longer period of club closures like Spain and the Netherlands, reported more significant decreases in revenue. To give you a better understanding of our performance and how we internally look at the business, our focus on our underlying performance. I will start with the bottom half of the slide. EBITDA was EUR 96.5 million compared to EUR 152.4 million in the first half of 2019. The decrease is, of course, the result of the aforementioned lower revenue. Despite the achieved cost savings during the club closures, particularly on personnel expenses, thanks to the various government support schemes, total club operating costs were about the same as last year. This is the result of the strong growth of our club network by 149 clubs the past 12 months. To come to the underlying club EBITDA, we take the reported EBITDA and adjust for the cash rent costs on the active clubs in our network and exceptional items. In the first half of the year, the underlying club EBITDA was EUR 91.5 million compared to EUR 104 million in the first half of 2019. In line with the past practice, we treat the cost associated with closed clubs to the extent that we could not reduce the cost base and could not make up for it through government's compensation schemes or discounts received from landlords as exceptional items and excludes such costs from underlying EBITDA. The total exceptional club costs relating to COVID-19 consisting of cash rent, employee and other club operating costs were EUR 46.8 million, of which EUR 41.4 million has been recognized in the first half of this year. Total overhead expenses were EUR 26.5 million compared to EUR 32.9 million in the first half of 2019. The decrease is mainly explained by cost-saving measures we implemented following the club closures. We were able to reduce cost by postponing head office projects and spending less on marketing. We're also able to receive employee cost compensation in the various countries where we operate. Underlying EBITDA, which is calculated by adjusting the reported EBITDA again, cash rent costs and exceptional items, was EUR 62.2 million compared to EUR 68.3 million last year, a decline of 9%. The cash rent costs in the first 6 months of 2020 were EUR 49.1 million compared to EUR 52.4 million in the previous year. The lower cash rent costs reflect temporary COVID-19 related rent reductions and postponement. On the next slide, I would like to mention a couple of line items that need a bit of elaboration. Depreciation and amortization costs rose by 28%, and reflect our higher club count, which is up by 22% year-on-year. A new line item in the P&L is lease concessions. We recorded EUR 8.6 million lease concession income in the period. These relate to property rent discounts received from our landlords, which did not entail an amendment of lease contracts. In case of lease contracts amendments, adjustments were made to the right-of-use assets and lease liabilities. We recorded a pretax loss of EUR 67.3 million, resulting in a corporate -- corporation tax income of EUR 15.4 million compared to an expense of EUR 0.6 million last year. The effective tax rate in the first half of 2020 was 23%. Underlying net result was a loss of EUR 2.7 million compared to EUR 13.5 million profit in the first half of 2019. I want to mention again that, that loss is fully explained by lower revenue due to COVID-19. Reconciliation table shows the adjustment for PPA-related amortization, interest rate swap valuation differences, exceptional items, IFRS 16 and lease concessions and the related tax effects. On the next slide, I would briefly like to discuss our mature club development. As you know, a club is maturity of the club is at least 24 months old at the start of the year. I'm sure you understand that also a mature KPIs are significantly impacted by COVID-19 crisis. We started the year with 530 mature clubs, which is a 25% increase compared to the 405 mature clubs that we had last year. 323 of those clubs are located in the Benelux, with the balance in France and Spain. The mature clubs represent approximately 62% of the total number of clubs, they recorded EUR 137 million of revenue or 75% of the total revenue. The average number of members per mature club showed a decrease to 3,078 members, 9% decrease to 3,329 in the first half of 2019. During the period that our clubs were closed, the number of members that left was about the same average monthly rate as in previous years. However, while it was possible for members to leave, the number of joiners during the closures was close to 0. Next, we go to the slide on capital expenditure. Maintenance CapEx was EUR 17.8 million in the first half of 2020 compared to EUR 11.9 million in the same period in 2019. The investments were mainly done in the weeks before reopening where we use the opportunity of the empty clubs to do a number of refurbishments. In addition, we spent significant amount of money on the installation of smart camera systems in our existing clubs in the Benelux. The average maintenance per club was EUR 22,000 compared to EUR 18,000 in the first half of 2019. For the full year, we expect to spend on average around EUR 50,000 per club on maintenance. In 2019, the average spend was EUR 55,000. Expansion CapEx was EUR 67.5 million compared to EUR 80 million in the first half of 2019. The decrease is explained by fewer club openings during the period than in the first half of 2019. We opened 47 clubs versus 57 last year. On average, we spent EUR 1.23 million per newly built club, and we expect a similar amount for the full year. Another reason, of course, for the decrease in expansion CapEx is that EUR 80 million for 2019 also included the EUR 10 million prepayment for the Fitland acquisition. Other CapEx was similar to last year and included the acquiring of the full IP rights of our exclusive membership administration software. We expect other CapEx to be at around EUR 10 million for the full year, which is similar to last year. Next on our balance sheet. At the end of June, our net debt on a pre-IFRS 16 basis amounted to just under EUR 400 million compared to EUR 451 million at the end of 2019. As we have stated before and before, IFRS 16 does not have any impact on our bank covenants because these are based on frozen GAAP. On this basis, our leverage ratio decreased to 2.3x and from 2.5x at the end of 2019. In spite of a tough first half year due to COVID-19, we were able to improve our financial flexibility, thanks to the issue of 5.3 million new shares, which gave us gross proceeds of EUR 103 million. We also arranged additional bank financing of EUR 100 million, of which EUR 30 million is still undrawn. This means that at the end of June, we had EUR 189 million cash at hand, which we could increase to EUR 219 million. I would like to finish the presentation looking forward. With a strengthened balance sheet and in combination with the positive membership development after reopening, we have restarted the construction of the clubs that we paused mid-March. We expect to open around 100 clubs this year. Our long-term strategy has not changed and neither have our targets for the medium and longer term. The pipeline of new clubs looks as strong as ever. If there will be no massive lockdowns with forced closures of a significant part of our network in the coming quarters, we will continue to target a network of 1,250 clubs in 2022. Of course, we will continue to closely monitor the developments relating to the COVID-19 epidemic. And if necessary, we will adjust our plans accordingly. This concludes my part of the presentation. Operator, please open the line for questions.

[Operator Instructions] We will now take our first question from Marc Zwartsenburg from ING.

A couple of questions. First, on the payments, the cash rent costs. Part of that is, of course, a delay or some subsidy from landlords. Hans, do you have the full number if there was no COVID closures or would have been the run rate in terms of cash rental costs in the first half, please?

Well, Mark, thanks for your question. As we said, we have EUR 8.6 million as the lease concessions that will be part of the reduction that we had without any amendments. And also we have postponement of cash. If you look at the run rate and you look at the property rent that we paid in February, that's around EUR 11 million.

That was EUR 11 million higher. Normally, it would have been EUR 11 million higher.

Higher. That's the run rate of the property rent that we pay each month.

On a monthly basis?

Yes.

Okay. And how many postponements do you have to pay then in the second half, roughly? Because what has been really a holiday and what has been more of a postponing you have to pay it in the second half? You have a number for that?

Well, the total holiday was around EUR 15 million. So that was the rent reduction that we got.

15?

15. That's really the reduction. Some 1 month, some 50% for 6 months, some 3 months rent reduction, but also a few as for -- agreed with the postponement of the rent.

Okay. So that is still to come, that EUR 15 million will be paid in the second half?

No, the EUR 50 million is really the rent reduction that we received. We don't have to pay that. Apart -- some will be paid later, but it's a minimum amount.

Okay. Then on the memberships. Currently, when do -- cause currently still people are having discounts on the membership fees, if I'm correct? From the credits from April, May. When will those credits really end? When will people start paying their normal monthly fee again?

Well, so we -- so what happened is when people stop paying was May 1, 75% of our members kept paying until May 1. So that means, let's say, EUR 30. And what we agreed on is that in the coming -- the 6-month -- the coming 6 months that we were open, we would deduct EUR 5 per month from that fee that they're normally paying. So if they have to pay EUR 20, they're paying EUR 15 now for the coming 6 months.

After 6 month only at the end of the year, then people are paying a full amount again?

Yes. So we opened 1st of July, all clubs. So for -- for the Netherlands, it is till the end of the -- in France, it is a month earlier, so until December 1. But yes, at the end of the year, we are fairly even with the members.

And in terms of the premium, because in July, you have new people are joining again because the first months, nobody joined, but other people are joining again. What do you see in terms of membership take rates? Is it more the premium? Or are they taking the basic? Or what do you see?

It is, again, the basic is only in Spain. So that's a very small amount. Yes, so the comfort is -- the premium is a little over 30%. So that was before COVID and also after COVID, still the same. So I think at this moment, it is around a little bit more than 20% of the total base, but of the new joiners, it's a little more than 30%.

Okay. And maybe final one -- yes.

On total basis, 22%.

22%. Okay.

Total base.

And maybe final one for you, Rene. You only have a churn of 9, and you see quite different numbers in the market, also from association. Do you see -- what do you see in the competitive environment in terms of what your competitors are doing with their -- first of all their rates. But also, do you see trends disappearing? Do you see -- do you have a fear that their taking market share quite significantly. Can you share a bit within the competitive field, please?

Yes. Well, it's still early days, right? The Netherlands opened 1st of July. It is too early to really speculate about that, but you've seen some bigger change, especially in the U.S. that already went bankrupt is 24 Hour Fitness, for instance, and obviously a really big brand in fitness. The #2 of the world, 24 Hour Fitness in turnover and members. So they are in bankruptcy, Gold's Gym has already sold again to a German player. So yes, there are the -- it's for sure that companies or smaller clubs are struggling, but how big that is and how big that's going to be, we will know more in the coming months.

And is there a potential for you to pick up a chain that you see an opportunity somewhere? Or is the balance sheet with still the 100-plus rollout this year restraining you a bit from moving parts there?

Yes. I think if there is an opportunity, and we think it's a good fit with us, we will definitely look at it seriously, but then we will also work with banks to finance a potential acquisition. So I think we will definitely look. But for now, we are focused on our own business.

We will now take our next question from James Rowland Clark from Barclays.

So I've got 3 questions, please. The first is on your attendance being back at almost pre-COVID-19 levels. Could you just talk about who it is attending the gyms and who isn't? And the second part of that would be how does that look in your city locations versus your towns or regional towns or sort of villages? Secondly, just on leverage. Obviously, you just alluded to you would look at M&A if the opportunities came up. What sort of leverage are you happy with in the medium term, given there's still some uncertainty over localized closures? And then finally, just on new member growth that you're seeing, so 70% up in July versus the new members of last year. How does this compare across your geographies and demographics? And is there a difference in these new members who have never been members before? Or are they returning members?

To start with attendance. It is what we saw and that we saw that in all countries is that the younger people showed up in the first 1, 2 weeks. Also mainly male. So it was like 65%, 70% of the joiners were male members. After 2 weeks at the and more normalized and also the older member and more female members showed up. And it is still that the biggest percentage of joiners are the younger members. And the older members are more -- show up less, especially the people work out in the strength department, they are visiting heavy visitors again. So they're showing up again 2, 3x a week. So that's the attendant who is showing up. I think the young people and old people is more normalizing, but the still -- the focus is still not a focus -- the 65-age group is still limited active in our gyms at the moment. On the leverage, maybe, Hans, you can say something?

Yes, leverage is one thing but what is more important and what we're very happy with at the end of June that we have a huge amount of cash at hand to be able to if something line happens, we can use it for the growth, but you can also look at what happened with any other COVID related lockdowns or on a major scale. So the cash is more important because leverage is, of course, also connected with the EBITDA that we make. But on a normal level, we have always said that we want to have a leverage below 3. So around 3 years for us is a healthy number to work with. But again, at this moment, with all the uncertainty with the COVID, cash at hand, being able to make sure that we have enough cash to also be there when tricky times come like we saw, that's the most important thing. So now we're very happy with the more than EUR 200 million that we have available for growth but also for major problems.

Okay. Maybe to add to the first part about who's showing up. I just explained already that especially the younger people are showing up, but that's also the big group that is also our members, of course. If you look at the amount of people that is older than 50 years in our members base, it is only 10%. And so 10% of our total member base is older than 50. So our biggest group is between 18 and 35. About to compare countries, I think if you look at Belgium and Spain, they are a bit behind. And if you look at Netherlands and France, they are really above targets. So the biggest growth comes out of Holland and France. Belgium is similar to what it was last year and Spain is a little bit behind on last year. So that is -- the cities and the big cities and the villages, there's not a big difference that we see there. Does that answer your question?

That does.