Sats ASA (SATS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Q&A session following SATS' Q2 presentation this morning. I'm joined by CEO, Sondre Gravir; and CFO, Cecilie Elde; and we are now ready to answer your questions. But before we do that, maybe you'll give a short summary, Sondre, of the key takeaways from the quarter before we let everyone into the meeting.

Yes. Thank you, Jonas, and good morning, everyone, and thanks for taking the time to join this Q&A session. We presented the second quarter figures earlier this morning. And we started the presentation with the summary of where we stand, and we are delivering record high financial results for the sixth quarter in a row. We've been consistently following the path we outlined on the Capital Markets Day for SATS in October 2022, where we have improved revenues and improved EBITDA and EBIT consistently over the last 6 quarters. If you look at the revenue growth the last 12 months, we have delivered a growth of 10% due to our strong operational leverage, where we see that new revenues are dropping through to EBIT at a high level. We have increased EBIT last 12 months with 260% to NOK 438 million. We also guided that we would stay at the leverage ratio between 1.5 to 2.0 net debt over EBITDA. We have, after Q2, reached a level of 1.7. So we are well within the communicated range. We have said that we want to stay at the lower end of this range. We expect to be there by end of this year. And our plan is to stay at this level, but not go significantly below the level. We have also, as we announced towards the end of July, successfully 1 year before maturity, refinanced our revolving credit facility of NOK 2.5 billion. We have extended the maturity to 2027 with options for extension for up to [ 2 ] 1-year terms. We have renewed the agreement on pretty similar terms that they've had in the previous agreement, which we consider are in good terms. And then lastly, we also communicated today, given the current development, given the current cash generation, the liquidity position we have and the current expansion plans, we have capacity for shareholder distribution going forward. So we announced that we will start with semiannual earnings distribution of at least 50% of net profits, starting with dividend payments based on first half of 2025 and then earlier than that initiated share buyback program. So that was the key highlights from the presentation today. All these financial results are, of course, driven by the fact that our members seem to along our product. They work out more than ever before. We have done several new product launches, also new product launches late in this week, and we see that these new products are well received in the market. So we are growing across all segments from young to seniors. So with that, I open the floor for questions from the audience.

[Operator Instructions] Please, Joachim go ahead.

Congrats on a really solid report yet again. It's always good to see. I was just wondering a bit more about shareholder distributions. Could you share some information regarding the split between dividends and share buybacks?

We haven't decided on the split between the 2. The reason why we're communicating buybacks is also because we believe we will be able to start that earlier than the first dividend payout. So we will come back with sort of how that program will [indiscernible] and the balance between the 2.

Yes. Okay. But so likely share buybacks based on some sort of 2024 results then and dividends for the 2025 results that sort of...

So when we see that leverage is really in the lower end of the target range, then we will look at the share buybacks.

Then it's Petter Nyström, who's next in line.

A question on Denmark. Can you give some considerations regarding Denmark? Does it make sense for you to continue staying in Denmark given relatively soft profitability? And if yes, what is needed to lift the profitability?

Thank you, Petter. Yes, we will continue with our operations in Denmark. And what is needed is very simple, but also hard. But it's basically just to continue what we have done over the last couple of quarters by improving the yield, improving the product offering and keeping cost control. Hence profitability will improve. We see that the Danish market as it has always been, is very competitive even though if you look at the competitors in the market, they are now taking down some capacity, which we believe is good, closing quite a lot of clubs. We have a good performance on our Central Copenhagen cluster. And we also see that our new product launches are delivering good in Denmark as in the other countries. So this will contribute to profitability improvement and higher yield going forward.

And when you say it will lift profitability, is it possible to give a time frame on that? Is this something for 2025? Or is this further out?

We are not -- we haven't put a concrete or communicated. Of course, we have our internal plans, but we haven't communicated externally. Different targets and time line for different markets. So we will continue on the path. We have seen over the last couple of quarters with improving yield, and that's the focus also going forward.

Then it's Eirik Rafdal, next in line.

Got a couple. Number one, I feel you kind of -- you've delivered on what you've set out to do over the last 2 years plus spent about 1.5 years regaining the volume after COVID and then more selectively now working maybe more on ARPM and less on volume. And the first question is a bit short term. Is kind of the ARPM growth mid-single digits and moderate volume growth that we've seen in the first half of this year? Is that representative for how we should be thinking around the second half of this year as well?

Yes. I think seasonality-wise, it will look more or less the same as what we've seen over the last 12 months. And so yes, we will sort of -- we will continue on the platform, optimizing revenues. So that means that a higher share of the growth will come from yield rather than volume.

Perfect. And I know it's early [indiscernible] August, but could you share kind of a bit of thoughts around that growth mix that you're looking for, for next year on volume versus price mix? What you've got in the pipeline for new clubs, refurbishment, stuff like this? And if it should be kind of what we're seeing today, more aggressive on volume, just your thinking there for next year would be great.

Yes, we are not guiding any completely development for next year. We will continue on -- basically on the path we have it now. We have guided on, as we also said clearly in the outlook, we see a significant available capacity in our existing clubs. The main focus is, of course, to utilize that capacity even better. And then we have guided on opening 8 to 12 clubs in average over the next coming years. It might be some variances from year-to-year. And that's basically the guiding we will stay at. And then also with -- and now we've been clear on the capital allocation. So we will not guide any further in detail for 2025.

That's perfect. And just one final one for me. If you could share your thoughts on the kind of more discretional spending like PT and retail, at least Sweden, they're a bit ahead of the other Nordic countries in terms of rate cuts. What we're hearing is that the Swedish consumers have responded quite quickly to the first cut. Now we had another one earlier this week. What are you kind of seeing in terms of more discretionary demand in Sweden and your views for kind of next 6 to 12 months there?

Yes. No, I think it's an important area as we have been focusing on a few quarters ago. We have not seen the macro, so to say, environment really affecting our membership revenue, the core business, but we have seen it on other revenues as you're alluding to. And that is still the case. What you see in the report today, though, is that, so to say, the PT revenue is not declining. It's developing somewhat better. We also see improved margin. The same goes for retail, where we see significant improvements in margins. So we expect of the revenues to come back to, so to say, growth trajectory when we see that the macro situation in the market turns. There's nothing underlying in our business that indicate that, that will not be the case, and we see some early signs of improvement. But it's too early to say in depth. And I think luckily, we have not seen a strong negative impact from the macro situation we have been in. So it will not -- we don't expect the membership sales, for example, to explore just because interest rates in the markets are coming down because it's been a decent development over time.

Then it's [indiscernible]

My question is on the sort of competitive situation. I mean it's very good to see the macro coming back and you're optimizing your revenue. But in Norway, which is the key or the biggest market or earning market for you and [indiscernible] in Sweden. Do you have any -- so on a general view, do you see any key threats buries on the competitive side that you would like to mention? Or is it like more stable market now where everybody is trying to sort of optimize revenue in a rational way? Or do you see any initiatives that we should be worried about? Or how is that picture?

It's a very relevant question. I wouldn't describe the market either in Norway or the other countries as stable. It's fierce competition. I think it's fair to say. It's been fierce competition ever since the pandemic, which we understand. It's a growing market. So that's just as expected. I think the competitive situation is quite strong in all markets. Some of different type of competition, though, we see, for example, in the Swedish market and the Danish market, you have more international competitors. So we have big national chains that we are competing with in our local city clusters. While in Norway, you have more regional and local competition. And then we see several competitors opening a lot of new capacity. But it's important to keep in mind that it's somewhat another type of product offering that we have. We have our truly staffed clubs with classes or group training being a key part of personal trending being a key part of our product offering. And there, I would see that we have strengthened relatively our competitive situation. So in terms of market share and especially when it comes to group training, which is key for us, I would say that we are on a positive trajectory also in terms of market share competition.

Ole Martin, you're next.

I'm going to drill a bit back on the question from Eirik on the member growth and the price increases. It looks to me like you had a slightly soft Q1 on membership growth. And then in the second quarter, we had a normal seasonality. And then now when I look at pricing now, it looks to be not very aggressive, I would say, it looks like you're actually being less aggressive than usual. Are you seeing that still you're getting the normal seasonality on those prices? Or should we expect you to be more aggressive on campaigns further out? If you can give some color on how you're thinking about that? And also in that comment, if you can -- the price increases that -- or the membership prices increase that we saw in Q2. Is that fully reflect all the price increases that you implemented? Or should you have a further tailwind going into the Q3 and Q4?

Well, for the last question, when it comes to the price increases, yes, they are now fully integrated into the quarter. We have -- we had the -- the last price increase was in February, so you didn't get all of that effect into the first quarter. But for the second quarter, it's fully integrated. But of course, new members coming in, coming at a higher price than the average in the base. So throughout the fall, when we have a lot of new members coming in, you should see sort of a slight uptick in the pricing, the rest of the year as well.

And then to your first part, Ole Martin, of course, you're absolutely right. This is the trade-off between, so to say, I guess when you're referring to less aggressive on pricing, I guess you're referring to, so to say, campaign levels we're doing and the discounts we've given in the campaign. And you're right, we are not very aggressive, which has been our strategy over the last few quarters. We get a lot of questions about this as everyone sees that our competitors are maybe more aggressive than ever when it comes to discounts. This is the trade-off of, of course, building revenue growth long term. The quality of the new members you get in, how long they stay and how much they pay. We have a structure, as Cecilie is saying that we want the new memberships to come in at higher level than the average base price, lifting up the yield in the base, and that will be our strategy going forward. And given that we don't do a super aggressive campaigning now, I guess that it's also an indication that the development is as we expected.

And then another question on your clubs. You look to close 3 clubs in Sweden at the same time, as you are opening some new ones. Can you comment on how the rate levels are on new clubs versus the clubs you're closing?

Rent levels in terms of cost base?

Rent levels.

Those clubs are fairly on average, I would say. So not big of a difference between the ones that we're closing and the ones that we're adding in. In general, the closing that we do now is due to contracts coming to an end. Some of it, these are relocations where we're able to move the members to nearby clubs. So in practice, this should sort of increase our members per square meter because we try to absorb that sort of member loss from that club into the other clubs.

So we can say that the lease rates have come down on new clubs. It's the same level as for the old one, despite the significant inflation that we've seen on old lease rates?

Yes.

On average, yes.

And then a final one for me. You now look to aim for net debt to EBITDA, which is on 1.5 to 2x. I think previously, you had a net debt-to-EBITDA target, which was close to 2. Can you share some reflections on why you should have lower leverage this time around?

Yes, we have guided on the 1.5 to 2, and then we have also reiterated that we will stay at the lower end of that [indiscernible]. And we believe that is right given the current financial environment, and we believe that is the right, so to say, balance sheet to have. Of course, interest cost is also higher than compared to the levels we saw back when we guided that leverage of 2. So that's why I believe it's right of us to stay in the lower part of the [ inflow ]

But also your balance sheet is now already in very good shape, and you could have probably initiated the dividend payment earlier instead you look to have a preference for share buybacks. Is it possible to say anything about the size of the share buybacks?

As Cecilie said in the question earlier, we will come back to the balance. It's not that we have any strong preference for the vol instrument ahead of the other. We think that we are -- we can start the share buybacks earlier as we guided on dividend payments based on the first half of 2025. And then yes, you're right. It's, of course, a trade-off between debt and when you start shareholder distribution. And I think we've been quite consistent in our communication. We have a guidance of 1.5 to 2. We will stay in the lower end of that inflow. Now we currently are at 1.7%. Hence, we prioritize to further bring the leverage a little bit more down before we start shareholder distribution. And then there's different views on what is the absolute right balance, but that's the choice we have made.

Petter, please go ahead.

Follow-up questions from me, and it might go to Cecilie. And I might have missed it, but obviously, new members are coming in at a higher average revenue per month. Is it possible to say roughly how much that spread is between new members and existing base?

Generally, it's not a huge spread because we do consistent price adjustment in the base as well. But you always have a part of the member base that we don't price adjustment sort of the deviation between the newest members and those members. That's sort of what's driving a small gradual uptick of the average price over time. But of course, now we have done the price adjustments consistently over several years to sort of that lag in that gap, minimizes as time goes on.

Any other questions this morning? If not, I think that concludes today's Q&A session. Thank you for all your questions, and have a nice day, everyone. Thank you.

Thank you.

Thank you.