Sats ASA (SATS) Earnings Call Transcript & Summary

Welcome to this fourth quarter presentation for SATS. We are doing this presentation as a webcast from our offices here in Nydalen in Norway. My name is Sondre Gravir, and together with me today, Cecilie Elde, our CFO, will also join us for the presentation. We will have a Q&A session towards the end of the presentation, and you can post questions as we go along on the webcast interface. So overall, SATS delivered [indiscernible] 2018, 6% growth adjusted for Denmark. And EBITDA grew with 19% year-over-year in Q4, 28% adjusted for Denmark, resulting in an EBITDA margin of 15% and 18.3% adjusted for Denmark. We have also done an organizational change towards the end of Q4, where John Kristian Stubban left the position as a country manager in Norway. I have been acting in the role since then [indiscernible] 2014 and before coming back now. And in such, during her previous period, she both had the role as Club Manager, Regional Manager, Finance Manager and actually also Country Manager. So we are very happy to have Wenche Evertsen back in SATS in the role as Country Manager for Norway, with her strong operational knowledge and experience. Looking into our club portfolio, we see that we are on track in terms of club expansion. In Q3, [indiscernible] and closed ELIXIA Itakeskus because of the close location to ELIXIA Itis in Helsinki, which we have renovated and expanded. Now in January, we also opened 2 new clubs, ELIXIA Tapiola outside Helsinki and SATS Ursvik in Stockholm. Both these clubs open with a good presale of memberships. Looking ahead, we have so far, 3 more greenfield signed and planned for opening in 2020. [indiscernible] Skøyen to SATS Hoff to optimize the 2 clubs cluster we have at Skøyen, and SATS [indiscernible] in Stavanger will move to SATS Herbarium, which is a new city center shopping mall location. Then we have also acquired 2 Body Joy clubs, which we took over from February 1 this year. These clubs will be SATS Hamnen and SATS Mölnvik and really strengthen our cluster just east of Stockholm. We are also in the process -- also in other [indiscernible]. When it comes to volume development, we can grow members by adding more clubs to the portfolio, we can sell more memberships in existing clubs or we can reduce the number of members leaving us. As we said last time, we will focus on member activation a little bit in this presentation. And in the next presentation, we will dive into our digital initiatives. And on this slide, you can see an illustration that illustrates the different revenue business and adjacent products and services. Let's look into the member volume development. And as you can see in the first quarter, we have a 21% growth in 2019 in membership volume. The growth adjusted for Denmark is 3.8%. And then, as I said, it's important for us to activate our member. And as you might recall from the IPO [indiscernible] that we measure through NPS surveys on a monthly basis. So the most effective way we can address churn is to make our members become active and not passive member after joining SATS. And this is really head on addressing the myth in our industry. You don't make money on passive members. You make money on active members in the fitness industry. And this is also then fully aligned with our mission of making people healthier and happier. And we have significantly [indiscernible] our members from the sign-up through the first weeks of working out and during the full membership period. And we measure the effect on each step of this journey. And in the digital onboarding, we motivate you to get started with using the app, do your first club visit, try our first GX class and also take a PT Start session and suggest you different type of work set. And on all of these areas, we see good improvement after implementing the new onboarding process [indiscernible] a churning member is lower. And we see that the overall number of visits have increased by 12% during the full year of 2019 compared to 2018. And in 2019, we actually had 36 million visits in our clubs. But more important, we see that the number of visits per member has increased with 7% in 2019 and is now on a positive trend. We have also seen a very strong growth in the usage of [indiscernible] in January this year, we see a 31% growth in the usage of our digital training offering compared to January last year. And the result of all of this is slowly declining churn levels in the base, which is positive for the underlying development. So to sum it up, by constantly improving our product offering, and by helping our members to succeed, we are able to improve the activity level in the base. Hence, we are able to reduce churn over time and [ increase ] revenues. We introduced a flexible, pay-for-what-you-use membership model back in January 2017. And as a result of this, we saw an expected downward development for the membership yield, as new members could join SATS on a lower price point than previously. And throughout 2017 and 2018, the yield in the base recalibrated. And we have, over the last 12 months, done several important initiatives to improve yield and now [indiscernible] in Denmark to have comparative numbers. The 3 major yield initiatives we have taken are: we have changed all our membership contracts, so we are able to inflation adjust our existing members without notifications. We did this the first time in January 2019, and we have now also done this in January 2020. Secondly, we have also introduced a more dynamic pricing approach to our different clubs, so we can increase the prices on the selected and the most initiatives, as I said, in 2020 and we will not use price as a very strong campaign driver in new sales. And all of this is resulting in the fact that we now see new members are coming into the base with a higher yield than the average existing yield in the base. So we expect the positive yield expansion to continue. Cecilie will come back to the detailed revenue numbers in the financial sector, [indiscernible] but also a 3% increase, as you can see on the slide, in other revenue per member. This is driven by a positive development in revenues from personal training and from our retail business. And in the fourth quarter, the growth on other revenues was 12.3% overall, but only 1% excluding Denmark. Retail continued to have a growth in Q4, but we did not manage to grow our personal training business. This is both in the recruitment process of new, great personal trainers in SATS, the onboarding model for our personal trainers when they joined the SATS family, and also, we improved the salary model for personal trainers, so we make sure that the total amount of personal trainers in SATS will be growing going forward to fuel the growth we see in demand for these services. And already now in the beginning of the year, we see positive effects from these initiatives that we have taken. [indiscernible] we saw a few slides ago, and it's also driven by our ability to sell our members more great retail products, which is increasing the average basket size per visit. For 2020, we have several initiatives planned that we are very excited about that will fuel the growth of our retail business going forward. In Q3, we will launch own SATS-branded clothing collection. This will be a high-quality collection with sustainable materials and an ethical value chain, which is in [indiscernible] vegan options. We have also launched, as you can see here, our e-commerce pilot on retail, taking our retail business digitally. And first, with the affiliate marketing model through our SATS shop website with some close selected partners. And as a last example of what we do within the retail area, we have also implemented fresh food as a part of the retail offering in more than 15 clubs in Stockholm. This has been received very well by the members, and we will launch the [indiscernible] is of course, the new adjacent products and services we are launching. We have started to focus on treatments in our clubs, physiotherapy and sports massage. And in Sweden, we are offering this in more than 17 clubs already with a solid margin in the business. And we are also now rolling this out in Norway in selected clubs. And we see a very positive development so far in our 3 pilot clubs, and it's clearly a demand among our members to have a [indiscernible] we will continue the expansion in Sweden. As you understand, we are taking many interesting and exciting initiatives to expand our position and our product offering going forward. We're doing this in order to fulfill our vision of making people healthier and happier. SATS is more than only working out in the physical SATS club, even though this will continue to be in the core of our offering to our members going forward. And all of these initiatives will fuel the revenue growth ahead there. And then on the last quarterly presentation, we also said that we will give you an update on Denmark and the development there, so we can follow this closely on a quarterly basis and see that we are on the right track in the turnaround project in Denmark. And of course, we keep our promises. So we will give you some details on that market now. Cecilie will go into the financials more in detail later on in the financial section. But the EBITDA delivery in Q4 in Denmark was minus NOK 11 million coming down from [indiscernible] operations in Denmark, which will, in the midterm, result in a positive EBITDA delivery in Denmark. And as commented on earlier, we believe we can make a solid EBITDA margin also in our Danish operations in longer term. As part of the turnaround, we have, in 2019 reduced the overhead cost in our Danish operations. We have reduced the number of FTEs, overhead FTEs in Denmark, with more than 1/3 compared to the situation when we took over [indiscernible] group training and structures. And we see that the majority of classes we now offer in the schedule of SATS Denmark, are now SATS classes and not old fitness dk classes. We have also implemented our digital offering, and we see that the number of visits in Denmark is also now moving in the right direction, which is an important indicator for us in terms of activity level, loyalty and member satisfaction from our Danish members. Another key initiative that we talked about [indiscernible] of our 38 clubs in Denmark, 29 are located on [ Shelan ], and 20 of these are located in the core Copenhagen cluster. And overall, we now have a very strong cluster in the Copenhagen area with attractive locations and club quality level on par or actually even higher, I would say, than in Oslo and Stockholm after the upgrades we have done in 2019. And on the slide here, you can see some illustrative photos after the major continued work we started in 2019. Linda-Li Cederroth, our experienced country manager from Sweden, has taken over the responsibility as a country manager in Denmark from Jakob Hansen, the previous country manager, who was also the CEO of fitness dk. And we will continue to roll out the great SATS product portfolio in the Danish business and continue to educate our employees and educate more group training and structures. And maybe most importantly, we will [indiscernible] even more time than expected, but our guiding remains that we will bring Denmark to profitability in the midterm. We have also received many questions from investors around the PureGym acquisition of Fitness World, and how this will affect our Danish business. And I just want to comment that we don't expect this to have any major effects from either SATS Denmark or the industry development in general in Denmark. Fitness World has been a professional and good operator in the Danish market over the last year [indiscernible] and also a somewhat higher price point. Then Cecilie will take us through the financial sections, and then we will have the outlook, and then we will round off this presentation with a Q&A following Cecilie's financial deep dive. Cecilie, please?

Thank you, Sondre. Good morning, everyone. We are pleased to announce another strong performance in the fourth quarter and thus continuing the positive trend that we've seen in recent years. As presented in the beginning, we have continued to deliver strong membership growth rates across the portfolio in 2019. And this is also in line with our expectations, and we feel comfortable that we will be able to continue this trajectory going forward. Total revenues were up 6% in the quarter compared to the same period last year and 7% for the full year, which is in line with our guiding and stronger than what we've seen previously. And going into more detail, the membership growth is especially strong, up 24% in the quarter compared to last year and a solid 8% if you exclude Denmark. This is also in line with our expectations and consistent with the reporting that we've had throughout the first 9 months of the year. Volume growth is supported by the strong momentum that we see in yield as a result of the ongoing yield management initiatives that Sondre talked about earlier. Full year development compared to last year, as we saw in the quarter, was 7% growth in member revenues when you include -- exclude Denmark, again, in line with our guiding. And the improvement is consistent across all of our segments and in the comparable markets, both in the quarter and full year. Other revenues were up 18% in 2019 or 6% if you exclude Denmark. And the key drivers behind the improvement are initiatives related to personal training and retail in addition to, of course, the volume effect and the number of visits. And our goal is to improve the member -- revenue per member, which has increased with 3% year-over-year. However, as Sondre mentioned, the quarter for other revenues ended slightly weaker than what we have seen in previous quarters, up 1% when excluding Denmark. Retail continued with a solid growth, but we haven't been able to manage to grow our PT business. And this is, as said previously, driven by our ability to recruit and retain personal trainers and not a change in the demand for PT services. Moving on to performance in profits, and as last quarter, our commenting will be on adjusted EBITDA before the impact of IFRS 16, which is an alternative performance method that is more closely aligned with the way that the Board and management view the results. In the interim report, you will find a full reconciliation of these APMs to profits according to the new lease standard. Adjusted EBITDA of NOK 155 million in the quarter is up 19%. However, if you exclude the negative contribution from the Danish business, we have a 28% growth on the comparable markets, with the margins continuing to improve, up 3 percentage points to 18% compared to the last -- same quarter last year. And this is significantly stronger than last year, driven by top line growth and operational leverage, but also lower marketing spend than we had last year as we had front-loaded marketing spend in the first half. In addition, different prioritization of some operational activities in Q4 has higher impact year-over-year, which we will not expect to see in the coming quarters. Looking at the full year development, it is consistent across the comparable markets where our largest segments in Norway and Sweden have delivered continued strong margins through a combination of revenue growth and utilization of operating leverage. Finland, although at a lower margin level has a strong revenue-driven improvement, both in Q4 and full year 2019. And as mentioned several times, Denmark has expected a negative impact of 2019 financial performance, and with an adjusted country EBITDA of negative NOK 11 million, it is an improvement compared to last quarter. But full year, we see a negative result of NOK 44 million related to the Danish business. And as we've touched upon several times, we expect to see improvement going forward, but it will take some time to get Denmark back to profitability. Compared to last year, we have seen an increase in overhead cost. But this is due to a conscious decision this year to invest in future scale capabilities. And we are continuing to invest in overhead resources further to improve capacity for growth. An example of these investments is increasing the number of people in the commercial and digital teams, resulting in increased sophistication in our pricing methodology, customer journey improvements and digital development. And as Sondre presented earlier, we see progress in these areas with increased number in member activation, growth in average revenue per member and progress within the new business initiatives. And this is something that we're going to continue to invest in going forward because we believe that these initiatives are important long term. So all in all, 2019 has been another year with financial -- solid financial performance and adjusted EBITDA of NOK 573 million is up nearly 15% compared to last year when you exclude Denmark. We believe that the current trading is supportive of a continued strong growth profile going forward as well, both in terms of revenues and profits. We have increased level of investments in the business throughout 2019, with a total CapEx of NOK 94 million in the quarter and NOK 325 million for the full year. This is higher than the same periods in 2018, partly driven by a higher number of acquisitions and new greenfields, specifically, expansionary CapEx for new and acquired clubs, including our perfect club initiative, represent NOK 96 million of the total CapEx for the year. We have added 9 new clubs to the portfolio throughout 2019. Maintenance CapEx, which is related to the current club portfolio and IT at NOK 229 million, is also higher than what we saw in 2018 and slightly higher than the historical averages and the level that we expect for the coming years. This is due to a temporary step-up in the digital platform as well as club maintenance in the new Danish clubs. And I think this reflects on the importance of our strategic ambition in strengthening our product offering. So we will continue to invest in the sustainability of future earnings through maintaining great clubs, innovate to provide members with the differentiated and high-quality products going forward, and maintenance CapEx remains in line with the levels communicated at IPO at around 5% of revenues. All bank borrowings were refinanced under a new revolving credit facility in Q4 2019 following the IPO. The new facility consists of a multicurrency revolving credit with a maximum principal amount of NOK 2.5 billion, of which NOK 1.3 billion were drawn by the end of Q4. Interest under the new facility will be paid on an annual interest rate equal to the applicable LIBOR plus a margin, which is reliant on the leverage ratio for the company, currently at 125 basis points. Net debt was just about -- just above NOK 1.1 billion at the end of December, resulting in a stable leverage at around 2x adjusted EBITDA. This is also in line with our long-term targets. We do, however, reserve the right to deviate from their leverage targets, taking into consideration of internal and external factors, such as material acquisitions, macroeconomic conditions and capital market environments as we see this as a long-term target. And finally, moving on to cash flow. Year-to-date adjusted EBITDA less maintenance CapEx results in an operating cash flow of NOK 344 million, which gives a cash conversion of around 60%. This is somewhat down from last year, mostly due to the negative contribution from Denmark, which also has resulted in higher maintenance CapEx. After deducting the expansion CapEx, the underlying cash -- operating cash flow is NOK 248 million. And going forward, we believe that we have a solid cash generation capability to maintain flexibility to reinvest in future growth and return cash to shareholders. So lastly, I'll leave the word over to Sondre again for some insights into the outlook.

Thank you, Cecilie. I'll comment on the outlook before we will do a Q&A session with questions provided through the webcast interface. So looking ahead, overall, the long-term guiding from the IPO documentation remains unchanged. We will continue to strengthen our clusters through new club openings and M&A. Furthermore, we expect to see revenues growing both through volume growth of members, further yield expansion as commented on in the presentation and growth in other revenues, as we also described in the presentation. The beginning of the year has been as expected in terms of revenue development. On the cost side, we are though, intensifying and front-loading the marketing spend in the first quarter of 2020. Then as one of the core values of SATS is members first, we will continue, as Cecilie commented on, to invest in product development, both physically and/or digitally to strengthen the value proposition and the member experience, both digitally and in the SATS clubs. To be able to carry through all the identified projects with high expected value, we will increase group overhead above inflation in 2020, as Cecilie also commented on. So overall, we are excited for 2020. We will continue to make more people healthier and happier. And now I think we will move over to questions from the webcast. Thank you for listening. Stine, do we have a [Audio Gap]

We are not guiding specifically on Denmark on a yearly or quarterly basis. What we have guided on in the IPO process and the guiding remains unchanged is that we will bring Denmark to profitability in the midterm. And the turnaround process, as we also said in this presentation, in Denmark is ongoing. We are happy with the underlying development of our Danish business. It will take time -- some time to turn around the EBITDA margin in Denmark, but we will bring them back to profitability in the midterm, and we will not [Audio Gap]

We see this is an ongoing discussion, but we see that we are performing well and that the investments that we've done in the commercial area and the digital has been good. So we do expect higher cost and inflation, but not specific numbers as of now.

Last question from Morgan Stanley. Q4 profit grew more than revenue in Norway and Sweden, which is very unusual. Might some of the cost reductions reverse in 2020?

[Audio Gap] change the underlying development.

I think it's also fair to say that it's due to cost initiatives that we have seen the good margin expansion, for example, in Norway. It's just through the fact that we are delivering on our operation leverage as we have commented on in the process earlier on. We have pretty high share of the cost base, which is fixed or semi-fixed and when we add new members and are growing as we do currently, this have an operational leverage, which is improving margin. And this will not change.