Sats ASA (SATS) Earnings Call Transcript & Summary

Welcome to this Q3 Q&A. We will start with a short introduction and then turn over to Q&A.

Yes. Good morning, everyone, and thank you for joining this Q&A call. My name is Sondre Gravir, the CEO of SATS, sitting in together with Stine Klund from IR; and Cecilie Elde, our CFO. This is a Q&A session, so we will not go through the presentation. Just thought I could introduce the session with the main messages from our presentation earlier this morning. As it's following from Slide 3 in the presentation deck, we see consistently increasing revenue development now in Q3 with total revenues up 8%, 5% currency adjusted to NOK 1.2 billion. This is primarily driven by successful yield initiatives throughout the quarter. We're also delivering a record high third quarter EBITDA of NOK 170 million and an EBIT of NOK 127 million. This is up 10% and 29%, respectively. And we have a strong liquidity position of NOK 1.1 billion and a leverage ratio comfortable within our target of 1.5 to 2x that we have guided on, and these provide a solid foundation for our plans going forward. So we will continue to invest in the product offering that we highlighted in the presentation today, both to improve our group training offering and the quality of the product offering we give to our members, but also to increase the capacity in the existing portfolio. The guidance on moderate growth from previous quarter stays, and we are also keeping the same guidance on maintenance CapEx and on capital allocation going forward with dividend payment and share buyback program starting from 2025 of at least 50% of net profit. So that's the main highlights from today's session. So with that, we open for Q&A.

Ole Martin, please go ahead.

Yes. First of all, you change your accounting treatment on the equipment. And looking at 2025, all else equal, should we assume that a similar reduction as for the Q3 level, so annualized reduction of NOK 22 million or something?

Yes, all else equal, that will be correct. But of course, this is equipment that will gradually come out of the depreciation period and we will also add significant equipment going forward as well. So that level will not stay, it will increase, but this will have -- this will also have a future effect on the existing equipment in the books.

Okay. But also understanding this -- I understand that equipment lasts longer than what you have previously expected. Should that also have an effect on how we should think about maintenance CapEx as a percent of sales going forward as well since things seem to last longer?

Yes, that will, over time, require lower maintenance CapEx since we utilize equipment for a longer period. We will not change the guiding on share of CapEx as of now. But of course, that means that we will have a longer period to distribute the cost of equipment.

But on that, can you give a mix of how much of the maintenance CapEx that is related to equipment as such, so we can have -- make our own assumptions with regard to this?

Around half depending on how much major upgrades we do related to leasehold. But that might vary from year-to-year depending on the focus and sort of what is in the pipeline with regards to prolongation of leases.

Okay. Last question for me before I join back in the queue. On other ARPM, it declined 7% year-over-year, but you stated on the call that it was more or less flat. It looks to me like Norway was quite significant down. Can you -- was there anything specific in Norway in this quarter that we should be aware of?

No, not this quarter, but this is related to last year's figures where we got some late COVID impact on revenues in 2023, which we, of course, did not get this year. So it's related to Norway and related to an extraordinary COVID compensation last year.

Yes. And looking ahead, should we now expect other ARPM to start to increase again? Or what's your reflections on that?

We expect the other ARPM to increase going forward, at what rate we will not guide on that. But of course, this is an area where we think there is potential, especially within personal training. So we believe that there is a significant growth potential there going forward as we saw before COVID. But as we've talked about several times over the last couple of years, this is an area where we, number one, saw the biggest hit after COVID; and number two, where we see that the macro environment had more effect than on sort of 80% of our business, which is the main revenue.

Eirik?

Yes. Sondre, if I can start with where you kind of rounded off on your opening remarks on the capital allocation. Could you just help us understand a bit better your thoughts on time line for the buyback program because I understood that the dividend will come in the second half of next year. But how should we think about buybacks? And when we could kind of potentially start to see those come through?

Yes. We haven't communicated any further detail than what we communicated on the guidance after the Q2 presentation where we said that dividend will be based on the first half year earnings of 2025 and then in combination with the share buyback program, and that the share buyback program could be initiated earlier because we will be at the lower end of our target leverage ratio by end of year. This still holds true. So we will come back to that at a later stage when we plan to initiate the share buyback program. So there's nothing new information to share compared to what we said by the closing of Q2.

Okay. And wondering a bit on Sweden, how much of the margin decline is kind of cost-facing investments, which are more of a one-off nature? And then how much is kind of underlying margin pressure? And just more big picture, what's kind of needed to get Sweden back in a better shape from an earnings perspective?

I think there's no significant share of the margin related to one or the other. I think it's a combination of -- this is the market where we've added the most capacity where we also have potential to improve number of members per club and square meter. And of course, we are now adding investments into especially group training and the group training schedule in order to sort of front load costs to enable more growth in the quarters to come. And we see early signs that it's having desired effect. And when we compare to what we have done in Norway, Sweden is sort of 12 to 18 months behind in sort of that investment journey. So we feel confident that we will be able to improve the margin in Sweden as well, but it will take some time to see a full effect of that investment.

Yes. And I think it's also very important to underline that this is not a one-off investment in this quarter only. This is something we will continue for several quarters to come to have increased offering, among others, group training classes in the Swedish clubs. And then, of course, the positive effects will also start to come in the quarters to come, but the higher investment in capacity and product offering to our Swedish members will consist over time.

That's very clear. And just one final one for me, a bit of a, you could say, housekeeping question. But to get to a full year CapEx of around 5% of sales, we need to see like NOK 130 million, NOK 135 million-ish in Q4 CapEx. Is that what you're kind of implicitly saying with the comment on Slide 15?

Correct. And as you say, that's a huge number. So it really depends on if we are able to finalize all the projects that we currently have in pipeline. That also means that there might be some overspill into next year. But when it comes to the projects that we are working on, that's the amount that will hit the books hopefully this year, might be somewhat overspilled to next year. You should have the 5% in your notes.

Over to Junaid Razak? No? No hand raised? Any other questions? Ole Martin?

I just want to follow up on Eirik's question there. You stated in your presentation that you had 76 clubs targeted to be upgraded in 2024. Where are we now in terms of the number of clubs that has already been upgraded?

Most of them have already been upgraded. But there are some big projects going on now in Q4 and some of them might be pushed based on also some delayed equipment delivery. But -- we don't have full clarity on the exact timing, but most of those 76 clubs that we are referring to are already closed projects, but there are a few very big upgrades going on at the moment.

If there is no other questions here, maybe you can add some color, Sondre, on how you see the competitive landscape in the various markets. That would be helpful.

Sure. I think, overall, the competitive landscape has not changed a lot over the last, I would say, few quarters. We see, what I would say, intense competition in all markets, somewhat different type of competitors with more regional competitors in Norway and more national competitors in the other markets. We see especially now a new, so to say, wave of low-cost capacity opening in all markets. This is what we saw in the Nordic countries around 10 years ago actually. 2014, 2015, 2016, we saw a lot of new low-cost capacity coming into the market. We see now some of the same, especially in Norway and the Finnish market, not so much in the Swedish and the Danish market. So I would say that the competition is intense, but has not dramatically changed. We see -- we know we're coming from historical numbers where we see over the last couple of years or ever since 2018, 2019 a dramatic increase in number of clubs and capacity in the Stockholm region. That new opening, so to say, flow has declined somewhat over the last couple of quarters. Even though new capacity is being added, it's not at the same scale as we have seen over the last couple of years. So no big changes in the last 2 quarters in the competitive landscape, but overall quite intense competition. So we just have to have the best product offering in our clubs and the best atmosphere, so members prefer to stay with our clubs. And so far, we are delivering on that and we'll continue to focus on that going forward.

Thank you. Back to Eirik Rafdal.

Yes. Just two quick ones for me. Looking at the overhead cost, it grew a bit faster than the kind of club OpEx. Is that because it's kind of scalable HQ things that are deployed into the different countries that are growing faster than the club OpEx? And also, is the 12% of sales as it's flat year-over-year, but is that kind of representative for the baseline going forward?

I think the current level of overhead is representative going forward, and hopefully, we will get the percentage of revenues down over the coming quarters. There's nothing specific in this quarter within this cost base, so -- and it varies somewhat from quarter-to-quarter. But this is a relatively -- this is the baseline you can use going forward. We will not do any changes to overhead.

And there's no ambition to have any significant increase in the overhead cost in absolute terms going forward to fuel revenue growth. Revenue growth will be fueled with existing capacity on overhead with, of course, some minor adjustments, but not a significant increase.

And just one more kind of big picture. Norway has kind of been the opposite of Sweden the last couple of years, taking a lot of investments that's been fruitful. But are we kind of approaching some sort of peak-ish margins, what's able to get out of the business in Norway? Or do you think there's still kind of more margin expansion to be found in the Norwegian business over the next coming years?

No, we're not at the peak.

Thank you, Eirik. Over to Phillihp Bjerke.

How should we think about the membership loss in Sweden? Are you losing market share? Or is it a general market decline in Sweden right now?

We don't have strong insights, to be honest, into the market numbers in the Swedish market as there are no clear total market reports. We, of course, have our indicative numbers. It's a pretty flattish development in the Swedish market. We have closed -- the 3 clubs we closed in the quarter is in Sweden. So we expect the Swedish portfolio to grow over time going forward. But this quarter, it's pretty flattish and it's partly a Q3 topic also with the big part of the quarter being in the summer season. So not very different from what we expected and planned for our Swedish operation this quarter, also given the yield increase we've seen in the Swedish market.

Thank you. [indiscernible].

Just a follow-up on competitive dynamics and pricing and rebates. Could you give us some insight in what kind of split do you have between fully priced and rebated members and how that is trending? And if there are any differences between the markets, for instance, Sweden versus Norway, et cetera?

Yes, there are not big differences between the markets because we have a quite consistent policy on this. So basically, we have standard memberships and the list prices we are operating with, those are the prices we are selling new memberships coming into the portfolio. We have then student discounts and we have senior discount and we have corporate agreements discounts. But that's it. So when you see campaigns from SATS, you would typically see, of course, incentive to join if we do tactical campaigns. So you might get 30 days off, you might get a discount for two first months or something, but then you pay normal list price. And this is why also we see that the underlying ARPM in the base and the underlying membership yield in the base is coming up because new members are coming in at a higher price than before because they're coming in at list price, which has consistently increased. So -- and we haven't changed that. Of course, we change based on the competitive situation. And based on, so to say, what we see around us, we change the marketing investment and we change the tactical elements of our campaigns. But we don't sell memberships at general, for example, on a 30% discount for the coming 12 to 24 months period to come. So -- and this is consistently across markets. And then, of course, we see different type of behavior from our competitors. That being said, we will not change our approach to this going forward. We focus consistently on having the best product offering, and yield increasing activities is a key part of our financial plan also going forward. Was that answering your question or any follow-ups?

Yes, it's fine. It's fine. And let's say, the proportion of clients being on, for instance, corporate rebates versus fully paid programs are sort of stable? Or is there any change in trend there?

Quite stable. We, of course, work a lot to increase it also because we want more successful corporate clients, but also, of course, increase the normal [ pie share ], but it's around 1/3 of our members who are somewhat connected to a corporate agreement.

Yes, Ole Martin again.

I just wondered, there's been a bit of an unusual seasonality in the membership base this year and it's been related to the campaign activity. Is Q4 going to be a normal quarter from that perspective? Or can you give any reflections on that?

I think the underlying seasonality is intact, but we've spent some time talking about our balance between increasing prices and volume and the trade-off between the two. So in that sense, adjusted for that last comment, I think the seasonality is pretty normal, but we get sort of -- we get more out of [ real ] than out of volume.

Any last question before we round off?

Thank you so much for joining the call. Highly appreciated.

Bye-bye.

Bye-bye.

Thank you.