Sats ASA (SATS) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to this Q&A session with SATS in connection with our fourth quarter presentation. Here in Oslo, we have Cecilie Elde, our CFO; Martin Stenshall, our Head of IR; and myself, Sondre, the CEO. So this is the Q&A session, where we follow up on the quarterly presentation we released this morning. Great to see so many of you connecting. We will do this in English as we have some English-speaking participants on the call. We do not plan to go through any presentation as we did that this morning, when we presented the quarter. But overall, we are satisfied with leaving 2021 behind us with the same member base as we had going out of 2019 and with increasing activity level in our member base. We'll leave it up to you guys to ask questions. So hopefully, you have a lot of questions, so we can have a good discussion together. [Operator Instructions]

Yes. Please go ahead, Markus.

Congrats on a good quarter despite very challenging conditions. So my first question is on the member development in January and how you see that progressed and maybe some more flavor. Should we expect actually quarter-on-quarter growth in Q1 despite sort of -- I would suspect that it's challenging to get new members in over New Year's this year. So a bit more granularity on how you expect that to -- or end of Q1 would be helpful. And then my second question is more on how the campaign level will impact financials into 2022.

Yes. Thank you. I will start and Cecilie can also comment on the campaign level, et cetera. But of course, the restrictions on the last wave, so to say, of the pandemic with Omicron started to affect our business than in the second half of the quarter. And that lasted into January. So it was a different January than a normal January would have been without the pandemic, of course. At the same time, we saw the trends that we are indicating from Q4 with still a decent sale but quite high activity level in the base and a lot of visits. That's continued into January. But of course, sales was a bit softer than the normal January. And then now when we see that restrictions are being lifted in all countries, this has an immediate positive effect on both sales and visit. So we do not guide, so to say, on Q1 overall. But we expect member growth to continue, of course, throughout the first quarter but also further throughout May, the spring than maybe normal, so to say. And then we do comment on campaign effect on financials?

Yes. So when it comes to campaigns, in any normal year, the first quarter is an important quarter for us. And we also invest heavily in marketing and campaigning. We did that in Q4 as well. Maybe Q4 was more abnormal than Q1 will be. We will, of course, make sure that we do everything we can to take our share of the available numbers in the first quarter. And so you should expect it to be as normal, maybe slightly higher.

Then just an additional comment on campaigning and financials. So I think it's -- we invest, of course, in marketing and we invest heavily in marketing when we believe that's the right thing to fuel growth. And we use tactical commercial offerings linked to the marketing investments to drive sales. But it's important to say that what we are pretty prudent on is to make sure that we do not do long-term discounts on the memberships in the tactical campaigns. And that, we will not do going forward either. So yes, there's a value, so to say, upfront value of becoming a member. You might get a free month or some sign-up gifts or something. But the price points they enter into, where they had the running yield going forward, is based on list prices. And we do not discount long term the list prices in general, so to say, in the campaigns. And that's important for our future yield development that we actually get, so to say, the positive yield lift that we started to deliver on before the pandemic and that we see clearly now, as Cecilie presented earlier today, clearly now is happening also in the base going forward. Thank you, Markus. Any other questions from the participants?

I can follow up if there are no other questions. Because I think it's very interesting to see that you're now ramping up your sort of digital investments and training at home. Some more flavor on how you see sales of your new products and the activity levels there and how you expect that. Will there be any meaningful impact in '22 on your financials? And some more discussion on that would be interesting to hear.

Yes. I think the starting point here is the fundamental belief, so to say, in a future hybrid model for fitness. So there were speculations early in the pandemic that, will depend the pandemic change the way we live our lives? Will everyone now just want to work out at home and digital or only work outside and not come back to the physical gyms? I think our comeback numbers on visits and what we've seen from peers also globally indicates clearly that we get pretty fast back to a normal situation, where people want to go to gyms and even more bigger scale than before. But at the same time, we have also established new working habits, working digitally and also new training habits. And we believe that we want to offer that flexibility. So the background for our move, so to say, into digital fitness is a combination of both being able to offer a hybrid model to existing members but also to target new target groups. So you have the 80% of the population who are not as of today in the Nordic countries a member in the gym for several reasons. There might be a high barrier to go to physical gyms. Those, we want to target with a digital offer, and also to target potential members in areas where we don't have physical presence. So those are, so to say, the strategic rationale for entering into this. And then this is a long-term game. We just launched Mentra by SATS as our new, so to say, digital home training brand with the first physical product being an interactive fitness mirror, the Rflex. We will, towards the end of this year, also launch a connected bike as the second, so to say, hardware on this platform and then also have this -- launch this as, so to say, a pure digital training platform and subscription over time. But this will be a gradual ramp-up. It will -- of course, it is an investment. It's affecting our financials, if anything, now in the short and medium term negatively. But this is due to just ramping up a team with coaches and developers. We have already done that. That's quite flexible cost. But for us, it's important to also take a clear position in the digital space and grow, so to say, the usage, both physically and digital. So we get quite a lot of questions from investors, et cetera, these days when things are normalizing after the pandemic. You have probably all seen the big changes happening in Peloton, et cetera. So we get questions, will you now, so to say, stop to invest in digital because we see from global examples that digital is dying, and it was just a short-term thing during the pandemic? And for us, the rationale for investing in digital fitness was nothing directly related to the pandemic. It's because we believe long term that the world of fitness will be hybrid.

That makes sense.

Ole Martin?

Okay. I wondered if you have a couple. If you can start first by touching on the working capital development that we should expect for the next couple of quarters, how should that develop. And if you also can comment if there are any more leftovers in terms of government support that we potentially can expect in Q1 or second quarter.

Sure. The working capital effect in the quarter was positive. And as you say, it's mainly related to receiving governmental support. So we've cleared that part now. So we have no other governmental support coming in. Might be something in Finland since we had a closedown of clubs there, but that's still up for discussion. We don't know yet what that support will be, if any. But in our business model, the ramp-up that we saw in the third quarter with -- and in October especially with new members coming in, that has a positive effect on working capital due to sort of the prepayments that we have in memberships and also in personal training. So we -- in this quarter, you sort of got a correction since the growth was so rapid during these last months. And -- but normally, when we grow the member base, we will also improve the working capital. So you will expect it to improve slightly over time, not to the extent that you see now in the fourth quarter. But over time, we will improve the working capital, meaning it will be more negative going forward as well. And when it comes to other impacts, we have some delay in tax payments related to Sweden, which I think I've talked about previously, which will come in the first quarter.

Can you remind us about the level of those tax payments? What's the magnitude?

That's NOK 60 million.

NOK 60 million, okay. And then you have a growing membership base, which is quite strong. But I wondered if you can sort of give us a better feel for how much is the contribution on this membership base from the new clubs. And if you separate the effect from those clubs, are the sort of growing activity levels still that good? If you can add some color around that. And if the new clubs, are there sort of membership growth there? Is that comparable to the sort of pre-pandemic levels in terms of how they develop? Some color there would be appreciated.

I think in terms of the member growth, they are performing in line with the rest of the base. But of course, the starting point was difficult, given that most of them were open in a time with either club closures or very high restrictions. So I think the graph that I showed in the presentation sort of shows that the comparable club base now has the same revenue as in 2019. But of course, that's driven by some of the new clubs. So the underlying member revenue from comparable numbers is in line with 2019. But then you sort of have the extraordinary effect from freeze related to COVID and, of course, extra campaigning during the quarter. So it's a mix between both the new clubs and the clubs that we've had since pre pandemic. So it will take some more time before the new clubs mature to the same level as the like-for-like clubs. And the like-for-like clubs still also have some growth to regain in order to be fully back.

But should we read that strategy as sort of unexplored potential and you expect a sort of quicker catch-up on the new clubs than what is currently in the books? Or am I getting this wrong?

No, I think you should expect the same growth across the whole portfolio. But we have 29 clubs in the portfolio now that we didn't have in 2019, which is sort of underperforming compared to the rest of the portfolio since the member base at those clubs are not fully up to sort of the average members per club in the portfolio. So yes, that's untapped potential. And of course, filling those clubs with more members will not drive additional costs. Because the cost for these clubs are already established, so getting new members in will have a very high drop-through to EBITDA.

And to your comment, Ole Martin, I think it's -- as we have commented on earlier, we have typically seen when we open, so to say, a greenfield in a normal situation without a pandemic, we typically see that it takes 6 to 12 months to reach breakeven in the run rate of the club. So to your question, is that, so to say, time period extended now when you open during the pandemic? The short answer to that is absolutely yes. It takes longer time because the sale -- for example, when we opened the new clubs in Finland and all the clubs in Finland were closed, basically we're not selling in the new clubs either. And then when we now see that we open our clubs, restrictions are being lifted, then sales is picking up again. So we typically in the clubs we have opened during the pandemic, when we evaluate those openings and look in the back mirror a little bit down the road to see how long it took for them to reach maturity and how long it took for them to reach breakeven for those that we were open during the pandemic, it will be somewhat slower.

And then touch -- quickly touching on your cost base. There, you are doing some yield adjustments. Are they sort of sufficient to compare to the cost level that you see now in your clubs, so you don't get margin dilution on the back of the cost inflation that we're seeing?

On the like-for-like clubs, yes. We were able to increase the prices with inflation and then some because we're lifting the lower -- lowest prices. So for the like-for-like clubs, we are -- it's possible to absorb sort of the cost increase. But in the short term, we will have lower margins since we have higher costs related to the new clubs.

And the impact on power prices here is also -- how much is -- is that it's quite significant, I guess. Is that something that you're able to really take out in pricing?

Depending on what level the electricity prices will be going forward. But of course, there is a delay between those price increases and the price increases that we are able to take out because we normally do it on an annual basis. But yes, of course, we are affected by that kind of increase in prices. But now we are moving into a season with at least warmer weather, so naturally, it will have -- we will have a lower number of hours. Eirik, do you have a question for us?

Yes. Eirik from Carnegie here. I arrived a bit late, so apologies if they've already been asked. But I was wondering, firstly, we saw that EVO got new owners in the quarter. At least in the local press, they seemed aggressive in terms of club rollouts. And moving forward, just kind of your two cents on that, I think, would be appreciated. And I was also wondering a bit about kind of your overall thoughts, and maybe that's best left for a CMD maybe later in the year or early next year or something, but in general, kind of on growth versus dividends versus debt levels when things start to normalize, if we kind of look a bit to the longer term. And your high-level thoughts there would be appreciated as well.

Thank you, Eirik. I can start with commenting on EVO and then you can take the financials, Cecilie. Just a short comment on EVO. I think they've been in the process for a long time, and I think it's great that they have gotten some good, new, strong owners. We see pretty high competition in all our markets and establishments from competitors going on all the time. The club portfolio overlap between SATS and EVO is not the biggest, but -- so we only think it's positive that they've got solid owners. And as I said, we have many competitors establishing new clubs all the time in all our markets. And we have to fight back with having the best products. And that's our focus and also making sure that we have a competitive offer. So that's our focus.

And to your question regarding growth, dividend and debt, I think you're right, that's something that we will have to come back to more clearly later on, but -- and that's, of course, also something we have to discuss with the Board. But I think that's the hard part right now, sort of balancing between these three areas. And if you look at what we have done during this pandemic, we have clearly sort of prioritized growth. Dividend has been off the table during this period naturally, but we have increased debt, not only due to pandemic but because we have prioritized the growth. And I think growth will continue to be important going forward. We see a lot of opportunities. We have taken a lot of opportunities, and we see that they are also coming in going forward. We are more attractive now. When we see new real estate projects coming up, they want to have us as part of their projects. And so we see, as we've said, great potential in establishing a wider footprint. And then we will have to come back to sort of how we balance out dividends more in the long term.

Thank you, Eirik. Any other questions from the group?

Yes, this is Petter from ABG. Are you able to -- okay, sorry.

Yes. Sorry, this is Barbara Smit from Fitness News Europe. Is it okay for me to ask a couple of questions?

Absolutely.

Great. So one of them is about you mentioned a new concept in Stockholm that you're trying out in Stockholm and Oslo. Could you maybe give some indications of what is new about it? Secondly, you mentioned there's more than 6,000 current subscribers to Mentra by SATS, so you gave some indications of where you see the potential. I'm wondering what the current profile is generally of these subscribers. And lastly, tying in a little bit with the previous question, where do you currently place the potential for the group? And I'm thinking particularly of Norway, where in some parts of the country, the density is becoming really quite high. So with the -- you indicated that you're ramping up actually openings and potential acquisitions, small acquisitions. So basically, where -- what is the now estimated full potential, particularly in Oslo and more widely?

Sure. Thank you, Barbara, three highly relevant questions. So first of all, the concept you're just commenting on the presentation today was basically, in general, we want to highlight that, yes, we are expanding our club network, but we are also ramping up our investments in the current club portfolio. I think one of the things that recognizes SATS is that we are able to grow our clubs even though they are maturing. And we invest in the clubs to make sure that they are still growing members even if the clubs are 10 to 15 years old. And so we are upgrading the clubs. We are upgrading the concepts. And one of the concepts we are launching now is a new HIIT zone at one of our clubs in Oslo. And we are also -- where we have boxing classes and new -- launching new high-intensity classes, which is responding to the trends that we see clearly in the market of demand among other members of what type of concepts they want more of. So we're testing that now. And we will launch that in several selected clubs in our different countries as we go along. And we're also launching a new, so to say, design and the way of doing our GX rooms to make them more modern. And then -- so that's the new concept we were referring to. And then when it comes to Mentra, I don't think it's -- we're not guiding on, so to say, the potential. But what is -- the users we get from Mentra now is that we get SATS members that are using the digital content. And we typically see both existing members but also members coming in from areas, where we don't have a physical footprint like more rural areas, buying the Rflex and using this instead of using, so to say, the local gym in their area. So we will continue to develop and grow our digital offering there. And then lastly, when it comes to the density, I think seen from outside, there's quite a lot of people that are surprised that we are opening so many of our new clubs in the already strongest clusters, that they would expect more new clubs when we added like 29 new clubs. Wouldn't that be more like new cities? But we have been clear on the priorities in our expansion from the beginning. Number one priority is to strengthen our current clusters. Number two is to go into new cities in the Nordics. And number three is to move after the Nordics. And so far, we are deploying all our growth capital in priority number one because we see a lot of still interesting growth opportunities in our current clusters. Even in Oslo, where we have such a high density of clubs, there are still big competition in Oslo. And we will continue to invest in our club clusters in Oslo but also then in the rest of the Nordics. So that priority remains the same also going forward when we ramp up expansion.

So Sondre, when do you expect to move on to step -- to Phase 2, basically?

We'll see. It might be new opportunities coming up. But I don't think it's natural to go into concrete timeline on that. Thank you, Barbara. Other questions?

Yes, I have a question. It is Petter from ABG. Sorry if my questions have been answered. I was 5 or 10 minutes late to the call. Two questions. Firstly, on the 15 new clubs in 2022, should we expect this to be evenly distributed throughout 2022? And the second question is in Denmark. Looking at the member base, it's fairly flattish year-over-year. Can you share some thoughts here on the competition landscape and then what we should expect here over the coming years?

Yes. Just to the 15 signed new openings, those will be distributed both throughout 2022 and 2023, actually. So there's not like all of them coming now in the short term. We are opening though quite some clubs now in the next coming months. But those are distributed throughout 2 full years. But that number will increase. So that's -- it's not only 2022. And then when it comes to the development in Denmark, basically we also have, so to say, catch-up from the bottom, so to say, during the pandemic in our Danish club. And the development there in the new year is pretty good. So we haven't seen any competitive, so to say, big changes in the competitive landscape in Denmark. There are several players in the Danish market who are quite aggressive also in marketing and campaigning at the moment. For us, it's been important to stick to, so to say, the concept and build up the member base and focus on our key strength, which is around the specialty group training. And that will be our focus also going forward.

I think that's what we have time for today. But if you have any more questions, please reach out to Martin or me, and we will, of course, answer your questions.

Thank you.

Thank you.

Wish you all a great day.