Sats ASA (SATS) Earnings Call Transcript & Summary

Yes. Then it's 10:30. So good morning, and welcome, everyone, to this live Q&A session following our second quarter presentation. Thank you for joining, great to see many known names in the call. This is a 30-minute session. So we will not go through the presentation in detail. We assume that you have been able to have some time to both read the report and also look at parts or the full presentation. I just thought we could give you now a few minutes in the beginning with the highlights and then we will open for question. And we will use the normal raise the hand function in Teams for the questions. So in the room here, we have Stine, who is our IR responsible; and then we have [ Martin ], who will step into Stine's role when she is leaving now for maternity leave; and we have Cecilie, the CFO; and Sondre, myself, CEO. So just to give you a brief update of the quarter. It's been, of course, a mixed quarter. We started the quarter with most of our clubs in Norway and Denmark closed, which, of course, heavily affected the financials also this quarter. But we ended the quarter with all clubs open and with a very positive recovery after the reopening. So we see that we are on a solid way back when it comes to getting the member base back on track. We see that the reopening this year has been, if anything, stronger than the reopening last year. A higher share of the member base has been activated. We see visits are growing. And we also see that the frequency of visits from the active members are growing, including the member satisfaction. So overall, 7% increase in the paying member base in the quarter. And then please keep in mind that it's only 1 month of the 3 months in the quarter where we have been fully operational with all clubs open and with still quite strict restrictions. And then looking ahead, we expect the pandemic to further accelerate the demand for living healthy lifestyle and staying active. Of course, the public health has taken a hit with a lot of inactivity during the pandemic. But we expect the demand to increase going forward. And that's also, so to say, the backdrop of why we are investing quite heavily in growth going forward. We have opened 18 new clubs in 2020 and so far the first half of 2021. And we have already signed and confirmed 19 new club openings until the end of 2022 with 13 coming already in the second half of this year. And we have seen a very good development in the new sales in the clubs that we have opened so far this year. And in addition to investing in our physical growth, we are also then investing -- continuing to invest in our digital growth, both on the SATS platform and with the new home training platform that we mentioned last quarter that we will launch now over the summer in Q3, Mentra by SATS. And the first product there will be the Rflex mirror, which is an interactive fitness mirror. So overall, we are very satisfied with the reopening. And then of course, the financial result for the quarter is weak as a result of the long club closure also affecting our numbers in this quarter. So with that introduction, I think we'll just leave it up for Q&A. And hopefully, there's a lot of questions.

Who is the first out?

Adrija?

Three questions from me, please. Given the very encouraging initial response, when do you expect like-for-like membership at your existing clubs to return to pre-COVID levels? And secondly, is there any permanent change to your cost structure? So in other words, when membership levels return to pre COVID, will there -- will margins be same as before or even better? And lastly, pardon my ignorance, but how long can members freeze their membership at the moment, given all clubs have already opened?

Yes, I can answer one and three and then Cecilie will answer on the margins. We're not guiding concretely on a date when we expect the member base to be back at pre-COVID level. We entered into COVID with around 700,000 members. As we have reported now, we are leaving out the second quarter with 612,000 members. We had the loss in the member base or a reduction in the member base throughout the club closure period, not because of increased churn, but because of the lacking sales. Actually, churn has been quite stable throughout COVID as we saw before COVID. So we expect a quite rapid recovery as indicated already now in Q2. Remember, the growth in the member base, the 7% growth in paying members, is mainly coming from 1 month of full operation, not the full quarter with full operation. So we expect a pretty rapid recovery throughout the autumn, but we're not setting a concrete date for when the like-for-like membership base will be back at pre-COVID level. And then when it comes to freeze, just a general comment, we have had very open, so to say, freeze-through. It's been very easy to freeze your membership. You can do it fully yourself digitally with just stating corona or COVID-19 as a reason. Hence, our freeze levels have been very high. So for example, in Sweden, even though we have had the clubs open, the freeze levels have been very high compared to a normal situation, which is affecting revenues. Then the freeze levels are now coming down quite significantly, still 8 out of 10, so 80% of the current freeze has stated corona as a reason. We will gradually activate those memberships after the summer. And currently, you can only freeze until the end of August with corona as a reason. And then after the summer, we will not continue, so to say, to have the general freeze-through that you could easily just freeze your membership yourself with corona as a reason. That opportunity we will change towards the end of August. So then we will expect freeze levels quite quickly throughout the fall to come to a normalized level in all countries. And then margins, Cecilie?

When it comes to the cost base, I guess, the short answer is that it has not been long term materially affected by the pandemic. Of course, we initiated several initiatives just to make sure that we reduce the cost base when the first lockdown came. And there are some additional costs related to stricter infection control routines. But overall, I mean, we always work with optimizing our cost base. So we've been able through this pandemic to keep cost base in line with what we had before the pandemic. And we expect that going forward as well. So margins will be at the same level as soon as we get the membership back to the same levels that we had before.

And Eirik Rafdal is next.

Eirik from Carnegie here. A couple of questions from me as well. And I think one is kind of a housekeeping question. It's on Slide 29, and just to be firm and kind of understand that, on the contractual price increase of 4.7%, just to be clear, that's pure price hikes, right, and not any kind of positive mix effects of more people opting for, for instance, a GX? I also noted in the presentation that you stated that you're doing selective campaigning but not discounting running price or contractual price and that you're less aggressive on the campaigning after the reopening last year. If you could just please remind us what the kind of extraordinary marketing cost was in Q2 and Q3 last year and how much lower this will be this year. And my final question is on Sweden. And I think that's been kind of generally very impressive on EBITDA through the pandemic. And if you could just please give some more color on the kind of collapse in EBITDA in Q2. I think the top line was down about 10% in Q1, but EBITDA was still decent. I understand that freeze rates are coming up. But anything else than the freeze in Sweden?

Sure. When it comes to the price and the yield development, we report on the contractual price because that better shows what the underlying development is in what our members are actually paying. Because yield is, as you know, affected by freeze, campaignings we do. So we think it's important to just follow the contractual price. And since we haven't discounted -- we haven't got any campaign discounting the price permanently. We have had campaigns where we give away 1 or 2 months for free. And then from month 3, they pay the full price. And the discount that we give away, we have to defer over the full binding period of the membership. And that is why the yield is affected so hard while the contractual price that we sort of take with us, when we talk about the run rate going forward, has been increasing. It has been sort of stabilizing over the last month because we've had so tight restrictions on GX as an example. But when we -- the restrictions are lifted, we expect the sale of GX or region memberships to increase again as before the pandemic. And when it comes to Sweden, you're right, we've had solid results for a long time in Sweden. But over the last 6 months, restrictions have really been tightening in Sweden as well, despite being able to have open clubs. So it is actually the freeze levels in Sweden that is the main reason for the drop in results compared to last year. Because last year, it was just in the beginning of the pandemic, there were no really restriction at all. And we see that we have limited number of participants in GX as an example, meaning that a huge part of our product offering has been limited significantly. And that is why more members than average put their memberships on hold.

And then just a last comment on Sweden. So these restrictions are then also confirmed by the government. Those will change tomorrow. So then we will be back to much more normal capacity. And then also with the point we said earlier on when we're changing the freeze regime over the summer, we expect the situation to normalize fairly quickly in Sweden. And then to your point on marketing investments, I think the marketing cost from campaigning is twofold, right? So one thing is the direct marketing investment. That will not be lower than after the first reopening. We are quite aggressive when it comes to, so to say, the direct paid marketing. Where we are not as aggressive as last year is that a lot of the volume we sold last year in Q3 after the reopening was with 2 months free, so basically starting to pay full membership price after the first month. Now we are doing more selective marketing, differentiating the marketing more in different markets based on the competitive situation. And quite a lot of the sales is not on the 2 months free campaigning and more like 1 month free in average. But there are different campaign mechanisms we are using. But overall, the implied cost of the marketing campaigning will be somewhat lower this reopening compared to the previous reopening.

Thanks, Eirik. And [indiscernible] is next.

I think one thing we learned throughout the whole pandemic is that business is, and also for you, very unpredictable. I mean, you have had open-close, open-close throughout the whole period. And I guess, you also have been surprised on the negative side many times. And so therefore, I'm a little bit surprised to hear that you -- with the leverage you have on your balance sheet that you are quite aggressive in terms of reopening or opening up new clubs. I'm not concerned that we might have a more unpredictable restrictions going forward. And that will, you say, put your business model on the line or on the edge with that kind of strategy.

Yes. Thank you for raising that topic. And yes, you're right. It's unpredictable and we have learned that. But what we see now is that we are operating with tighter restrictions still in all our countries. But what we see is that the visit development is, if anything, stronger than after the reopening last year, as I said. And we expect -- and we also see that with our strong club clusters both in Copenhagen and in Oslo and in Stockholm and in Helsinki and so on, we see that we are able, due to the distribution of visits, that even with quite strict restrictions because we had so much available capacity before the pandemic in our network. So when visits are distributed more equally throughout full cluster and throughout the week and throughout the day, we see that we are able to still operate with actually higher visit levels than we had in 2019, so pre COVID, even with restrictions in place. And that, combined with the fact that we see and expect increased demand for fitness in general going forward, and we expect that the penetration of, so to say, paid membership and the ability or willingness to pay for staying healthy is increasing. So that's why we are expanding. And so far, we see, as I said, that the new openings have performed very well. And what we are doing, we are still quite selective, so to say, in the spots where we open clubs, either it's clear white spots where we have been searching for real estate and good real estate opportunities for a long time, but pre the pandemic, we didn't find it, so to say. Now what we see is that we get a much more incoming flow of real estate opportunities after the -- in the wake of the pandemic, so to say. And that opens some opportunities that we have been longing for to grab. And so it's a combination of that. And also where we basically expand our capacity where we have quite full clubs. So we are still quite, so to say, selective in the club openings.

Okay. And then the -- but I only want to stress that, let's say, the leverage on your balance sheet is very high and you should have -- you would say, you should pay attention to the leverage. Because if something goes wrong, it will be quite devastating for the business model. Secondly, we have had a very excellent summer so far in Scandic countries. To what extent is that affecting your business?

Of course, great -- summer is not a high season for us in general. And I think that it's fair to say that, so far, the last couple of days or the first 2 weeks of July has been different than a normal summer. More people are staying home and having their holiday back home, which is, of course, making visits on a higher level. We see quite than normal July, but we see quite big differences in the different cities and countries. And in some countries, for example -- or in some countries, we still see that there's quite a lot of people traveling. And when travel increases, of course, fewer people are staying home and then we -- that is affecting also the July visits. But so far, the period after the second quarter ending and so far in July, we are happy with the development both in sales and visits.

Thank you. Over to Knut Erik Løvstad.

I just wanted to clarify this compensation from the government to this NOK 70 million that you talked about. Are those lost sort of forever? Or is there any chance that you can recover some of those in a later quarter? Or what's the status with regards to this potential NOK 70 million?

Well, we haven't included them in the figures as of the second quarter, meaning that with at least like the wording is in the current description of the fixed cost compensation, we will not be able to apply for it. It's -- I'm not sure that, that was the intention when they made the clarification on how companies should be treated. So we will, of course, look into it. But we haven't taken it into account in our numbers or our plans going forward.

It's likely that you will qualify for those NOK 70 million, that's what you're saying?

Based on the description of how the compensation scheme is right now, it is not likely. But we will have to see if that was the intention when they set up the new regulations.

Is there any risk with regards to compensation that has already been received or booked in previous quarters?

No, this was a tightening of the restrictions as of March. So we have already applied and received the compensation for November to February.

So this is an actual change.

Yes, this is a change in the ruling there.

That was communicated quite late.

Yes.

Okay. Final question for me. I think you mentioned on the call earlier that you expected net debt to rise a bit also in Q3, I'm not sure about Q4. But does that mean that we're going to see sort of a cash burn also in at least Q3, you don't expect to return to a positive cash flow in Q3?

In Q3, we will still have some deferral effects on working capital. At the same time, Q3 will be a quarter where we invest heavy in marketing and getting all of our members back, fully staffed clubs. So normally, Q3 is a weak quarter. So based on that, there will be some cash burn in the quarter.

Good. Ole Martin Westgaard?

Yes. Hopefully, you can hear me. I just wondered, can you talk a bit about sort of how you see the club cost pre and post COVID? Should we sort of expect the same level after COVID as well? Or do you see any difference there? And secondly, related to that, I guess, more clubs means that this is not only a play on getting the members back, but it's actually a play on attracting new members that have not historically been active in your clubs. What can you say about activity that you see so far about actually new members coming into the club that have not historically been active in your clubs? And I'm not sure if you have communicated it. But what is actually the current freeze level, if you can say that? And on the last question, we have the working capital. So if you can give -- Cecilie, you have historically given a bit more insight to how we should think about that in -- for the coming quarters. So if you can give some more color on that, that would be very helpful.

Do you start commenting on club cost and working capital and freeze, Cecilie and I can take the second part?

So overall, we don't see any material change in club costs. 1/3 of the cost is related to rent, 1/3 is related to staffing and the other 1/3 is all of the other cost items. So when it comes to the 1/3 that's related to club staffing, we make sure that, that varies according to a number of visits. So in a period now where we have lower visits and lower members, we are able to reduce that cost somewhat. So of course, in the buildup of the membership base and in the buildup of number of visits, club cost will be slightly lower, but as it is in a normal year during the normal seasonality, so no really change in the club costs on average per club. We are adding some clubs so that means that temporarily, we will have higher club cost before we were able to really fill those clubs with new members as you also asked about. But overall, no material change in club costs even after the pandemic. And when it comes to working capital, we have a member base where you prepay your membership. So when we closed down in November of last year, a lot of our members had already prepaid their memberships for December. And since we had the opening and closing environment in the months over the -- by the end of the year, some of them even paid for an additional month. So that means that that's the main reason that we see a negative effect on working capital in this quarter. And we will continue to see that slightly spilling over into the third quarter as well. It will be around NOK 20 million in a negative working capital effect. In addition to that, we'll have some postponement of taxes, which will come in, in later periods. But as of the fourth quarter, working capital will be more back to sort of normal levels. We haven't -- for your question on freeze, we haven't really communicated the actual freeze level. But we still see, especially as we saw in Sweden, that the freeze levels are still higher than normal even for summer. But 8 out of 10 of our frozen members state that COVID is the reason for why they have frozen the membership. So that means that there's still a lot of potential in unfreezing those. And we expect to see a rapid unfreeze of those after summer.

When it comes to your question on members, new versus, so to say, old members returning, so in a normal situation, most of our sales is not to old members. And actually, it's not that we expect a lot of the sales now to be with old members. And the reason for that is exactly what we have said many times that actually the churn has not increased significantly. So there's not been many more members leaving their membership than in the normal situation throughout COVID. So we expect actually most of our sales when we reopen now to be with new members who have not just recently quit their membership with SATS. So the membership mix, so to say, in terms of the history with SATS is not very different from existing clubs versus the new clubs we are opening, if these clubs are not in totally new geographies, which they are not. They are usually, so to say, strengthening the already existing clusters. So we don't see any, so to say, challenges in terms of the new sales in this new club opening. The presales is developing very good. So that's the reason and, so to say, the logic behind the membership sales. And typically, we have around 25% of our new sales with members who have been members before. Then we cannot track this data in detail because we have to delete member data after 6 months due to GDPR. But based on more qualitative research, that's the status.

Okay. Perfect. And just one follow-up, Cecilie, on the public fees and the government taxes that you stated. Looking at your balance sheet, going back to pre COVID, that was around NOK 100 million in public fees and charges payable. Is that the same level that we should revert back to? Is that representative for that working capital rate?

Yes.

Yes, perfect.

Good. Ulrik Ellesgaard.

Just a couple of questions from my side, please. Just first of all, on the freeze levels we just talked about, what would be the realistic share of the frozen current members that you will reactivate into paying members? I guess, they will need to decide whether they will quit or they will start becoming paying members again. So will it be 50% or 80%? Or what do you think that you will reactivate based on your previous experience? Second, I have a question regarding digital training offering, specifically this Mentra and mirror system that you're talking about. What will be the pricing strategy for this? And also, if you could comment generally on how will it affect the ARPU and the margins going forward when you start to introduce more digital training tools and offerings?

Yes. Good questions. Thank you. I can answer those. First, on the -- when it comes to reactivation of frozen members, we see that absolutely a vast majority of the frozen members are reactivated into paying memberships. That is also before COVID but also now after the reopening after COVID. And 8 -- as Cecilie said, 80% of the frozen memberships are due to corona. And we see that when they reactivate, they start to train and they become active members and they continue to stay as active members. And then of course, we will see somewhat -- get somewhat higher or lower reactivation into paying memberships now than we saw before COVID. But still the vast majority now after the reopening has been activated into paying memberships. And then when it comes to the digital area, we are in -- we are expanding both our existing digital offering, which is quite extensive already, and we are expanding with Mentra by SATS, as we say. When it comes to the interactive mirror, the pricing will be twofold. So it will be a one-time purchase cost for the mirror, around NOK 13,000 and SEK 13,000. And then it will be a monthly subscription on top of that, which will be discounted for SATS members. So it's quite a similar pricing structure that you would see from similar offerings. For example, in the U.S., if we look at -- if you look at Mirror or other players in both U.S., U.K. and Germany, actually the one-time cost for the Mirror is actually quite much higher than that. And then of course, you will have down payment schemes, et cetera, making it like a monthly bundled cost. Then when it comes to the margin, we will have a slight positive margin on the hardware, not very high. But then of course, the margin in this game is on the subscription price. Then when it comes to, so to say, the SATS digital offering, that will not -- the investments and the changes we are doing now there and the expansion we are doing there is not significantly, so to say, changing the SATS margins overall as we have been investing on our digital side for the last couple of years already and quite extensively. So I don't know really if that answered your questions.

And on the average revenue per user, will that be [ changed ], you think, by monthly?

So what we see is that the underlying yield for our SATS members, as Cecilie was commenting on in the beginning, is actually increasing, both because contractual membership price is increasing and we see very good growth in our PT and retail business, which is also adding up on the total ARPM on members. And then when it comes to the new digital offering, what we will see there is an increase in ARPM then for those SATS members who decide to also take part of this offering. And then of course, the ARPM for those who are only Mentra by SATS members will be somewhat lower than for the SATS general ARPM because the membership price is -- or this monthly subscription price is lower for Mentra by SATS than it is for the physical access to SATS. We are 2 minutes over time. We still have a few more minutes if there are any more questions. But we, of course, respect that those who need to log off to join other meetings are doing that or continue their holiday. So thank you if you are logging off. But are there any last questions? No raised hands?

No raised hands.

Okay. Then thanks a lot for joining the call. We are looking forward to both the summer but also the period after the summer and growing the member base and delivering a strong third quarter. So thank you for joining, and we wish you all active and healthy summer.

Thank you.

Thank you.

Thank you.