Sats ASA (SATS) Earnings Call Transcript & Summary

good morning, everyone, and welcome to this Q&A session for the first quarter presentation from SATS. I'm Sondre Gravir, the CEO, and together with me here in the room from the service office in SATS such, we have Cecilie Elde, our CFO, and we have Stine and Martin from IR. So we did not plan -- as last time, we planned this as just a Q&A session. So I hope we have all been able to read the report and seen the presentation from earlier this morning. And we have set aside 30 minutes for Q&A. So with that, we'll leave the floor open. Eirik, please go ahead.

A couple. On Slide 6 in the deck, you showed some pretty encouraging numbers in terms of activity levels. Could you just give a bit of flavor on that in April? Has the trend from February and March continued?

Yes, we can comment a little bit on the activity level overall, and the trend continues. And I think -- to be fair, I think this is overall trend we see in the society. We see that after the pandemic, those who are working out and used to work out before, they work out even more than ever. And then there's an even bigger group that is not getting active and where the threshold to get back in is pretty high. So it's a big job for us as an operator to also welcome those new members. But yes, among those active members that we have, the activity level is very high, and we expect this trend to continue. What we also see, as we are commenting here on the slide, is that participation in classes and joining group classes has been somewhat slower in the recovery. That is gradually improving. But it's still below the normal level we saw from prepandemic. So this increase is also driven by a very active fitness floor population. So we are happy with the development. And this is a key area for us to activate members because we know that those who are active, they don't churn.

Perfect. And also a bit of a step change on the focus on M&A. You added some slides there this quarter. And if you could just give some color there on the ongoing discussions. And I appreciate that this process are -- they are what they are, but anything you could give would be helpful. And also, if you could talk a bit about the margin levels for the targets that you're looking at. And also maybe potentially some scope for synergies, for instance, in the percent of sales or something like that. You gave the kind of target multiple and everything, but some more financial KPIs will be good as well.

Sure, I can start with, just in general, the processes, and then Cecilie can comment on the margin picture and our assessment. So basically, we are -- our ambition is to grow. We see that a big share of the population, as we commented before, nearly 80% of the Nordic population, is not a member of a fitness club. We see increased demand. We have still available capacity in our existing clubs. That is priority #1, of course, to fill those clubs. That gives a high margin contribution, but we also want to add more capacity. And we have been opening 35 new clubs through last 2 years, 22 new clubs confirmed in the pipeline, including the 7 clubs from the acquisition of Bare Trening Sør. And when we look into our existing clusters and potential new clusters, there is always -- as we are indicating in the presentation today, there's always a balance between should we go with an acquisition or go greenfield. And we don't have, so to say, a clear preference. This is case-by-case consideration depending on if there are, I mean, to be frank, good enough acquisition candidates in the market because there are some clear positive things about going greenfield because then you really get an optimal club. So when -- we have several ongoing dialogue. As we are also showing on the presentation today, that the market is still quite fragmented. A big share of the market is made up by small, independent clubs or very small chains. So there's quite few, so to say, very transformative M&A opportunities in the market. But we want to expand going forward, and then it will be a balance with infill acquisitions and greenfields. And then depending on, of course, on the ongoing dialogues and the price consideration, we'll consider from case to case what is the best appropriate. And then what -- if you want to comment a little bit on the margin picture, what we see, Cecilie.

Yes. And we see that we are able to take out synergies when we acquire new clubs. We can take out all overhead. We see cost efficiency coming from implementing the SATS model and implementing it to our network. And we're also able to increase the yield because we're putting on our broader product offering. So in general, we see a margin improvement 6 to 12 months after sort of acquiring and taking over the operations in the clubs. And the aim is, of course, to get to same margin level as the rest of the club portfolio. Petter?

Yes. Only one for now. In the outlook statement, you highlight that Q2 is seasonally weak. Can you shed some light on this one, both on the revenue side and also on the cost side?

Yes, thanks for asking. And when we put that on the slide, we discussed is this been taken as a clear guidance or what? The intention is not to give a clear guidance on software development in Q2 than expected. Q2 is developing as expected. But in general, we just wanted to highlight -- since we have now delivered quite strong member growth in several quarters in a row, we just wanted to highlight that seasonally in general, Q2 is a somewhat softer quarter than Q1, but we have no indications so far in the quarter that it will be normally soft, put it that way. So it's just to highlight the fact that Q2 is somewhat softer. It's not that we are -- it's not like a warning that we are seeing a very slow development so far this quarter.

Okay. So it may -- more relates to the membership recovery than that -- call it, the revenue trends versus Q1 of the cost levels? Is that...

Yes, you can comment, Cecilie.

Yes. It's just reminding everybody about the seasonality because, I mean, we haven't really reported on a normal second quarter yet without the pandemic. And normally, if you look at the 2019 figures, the growth in the second quarter is, of course, weaker than it is in the strongest quarter that we have in the first quarter. So looking at just the member development, it will be softer, as we said. But financially, it should not develop any different. So it's sort of a mixed picture of what you can expect on the member development versus the financial results. And when we talk about the seasonality here, it's the member development. Then I think we have Markus.

I have two questions here, so we can take it one at the time. But the first one is, how should we relate this price increases to OpEx increases? So when you say sort of full recovery by, say, 2023, is this meaning that you have the sort of same price increase as you have in like-for-like OpEx increase per club, say, holding the member base constant? Or how should we sort of relate these price increases to OpEx increases? And when you say sort of full recovery, what does this imply? That's the first question.

So we, as everybody else, see increasing inflation pressure. We did the price adjustment in January, and we will do another price adjustment during the summer. It will not be enough this year to compensate for the cost increases that we see both through increased electricity prices and how it affects us going forward and sort of the indication right now on what the inflation will look like for 2022. But our expectations to inflation is that doesn't change. Then, when we come to 2023, we will fully have neutralized the cost increases that we see for 2022 on a like-for-like basis. So -- because in 2023, you sort of get the full year impact of the 2 price adjustments that we do, and we plan to do another inflation adjustment, as we always, do in January 2023. So we're sort of lagging a bit behind in sort of getting back to the inflation level that we see right now.

Okay. But if you have a sort of operational leverage or more members compared with 2019, that would be a positive to that guidance or...

Of course. Of course.

Okay.

So just talking about our price level versus the cost increase that we see. But you're right, that will come on top.

Okay. My final question is on consumer behavior. And if you see any sort of differences in demand for Fresh Fitness, low cost versus full-service SATS, do you see evidence that consumers are holding back on spending, say, trading down, less services, et cetera? Some flavor on consumer behavior because I think that's a general concern among a lot of consumers and investors that you see trading down, and that may impact growth.

Yes. No, we don't see any shifts on this. And I think it's two things that is important to keep in mind there. Number one is that in general, if you look at consumer research, the willingness to invest in personal health and living a healthy lifestyle, staying active, training, et cetera, the willingness to invest in that has increased after the pandemic. And secondly, the price point for SATS is still pretty low compared to -- if you look at many other European markets, as we have commented on earlier in earlier presentations, typically for the higher-end membership product offering that we have, we would typically see EUR 100-plus per month in the European market. So compared to the purchasing power in the population in the Nordics, even if we see inflation increases, et cetera, we still believe they have a value for money and competitive price point with SATS. So -- but it's good. I think it's a very relevant question, and I think it's -- we are very happy that we also have a strong position with Fresh, so we can follow on that part of the market closely as well and see early indications if we should see any of these trends, as you are indicating. But we have no -- we don't see any signs of that so far. And I think just the last comment there. I think it's also worth mentioning that the price adjustment we just recently did, we saw an even lower effect on additional churn than we have seen when we have done similar type of price adjustments prepandemic. So that is actually indicating the opposite. Thank you. That's so far the ones we have on the list there. We have one more?

[ Barbara Snee ], go ahead.

Hi. Can you hear me?

Yes, we can hear you.

Yes. I just had a couple of questions. First of all, on the acquisition of Bare Trening Sør. You outlined a couple of metrics for financials that you're looking at in acquisitions. Can you provide some of the details on what was realized in this particular acquisition and also the number of members that they currently have? And secondly, you pointed out in the presentation that Denmark was -- the recovery in Denmark was progressing a bit more slowly than in other countries. What are the reasons for that?

For Bare Trening Sør, we will -- or we haven't -- it's closing in June, by the way, so we haven't taken over those seven clubs yet. And we haven't provided any financials on that acquisition yet, nonmembers. So -- but it's a good target for our Fresh Fitness brand and fits into that concept well. It's unmanned, a bit smaller clubs than the rest of the portfolio and fills out the Southern part of Norway in a good way. So we expect to sort of gain the same synergies as we did from the last Bare Trening acquisition that we did a couple of years ago in the Oslo area. Same type of concept. So that was a great acquisition, and we expect this one to be equally good.

Then when it comes to Denmark, I think in general, the market in Denmark is recovering somewhat slower than we have seen in some of the other markets. And especially if you compare, for example, to Norway, Norway and Denmark has been pretty similar during the pandemic with the same type of restrictions at the same points in time. And we basically saw a quicker recovery in the market not only for SATS but in the market in general in Norway compared to Denmark. And this was also -- this was also clear if you look into numbers reporting from other operators in the Danish market that are reporting numbers publicly. That is also clear from their statements. And comparing to that, we are pretty happy with our development in Denmark even though the total market is recovering somewhat slower.

Right. Well, exactly. I know the numbers that you're referring to from your Danish competitor there, and I was wondering why. I mean what are the factors you think that make that recovery slower in Denmark than in Norway or in the U.K.?

We have some -- we have done some member surveys indicating -- but there's no clear indications because we have done member survey now across all our countries on training routines to understand both from the -- those members who have become active and those who are not getting active again. And there are no clear indications. And we expect the market to recover in the same way. We don't see any big changing trends or anything that is very different in the Danish market. So we expect the market to recover, just slower, but it will recover. And we expect throughout the fall the market to be back where we saw prepandemic and then continue to grow after that.

Do we have any more questions?

Doesn't seem to be so. Then we thank you all for participating in this Q&A session, and I wish you a healthy and happy day. Thank you.

Thank you.