The Gym Group plc (GYM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to The Gym Group trading update conference call. I would now like to hand the conference over to your speaker today, Richard Darwin. Thank you. Please go ahead.

Good morning, everyone. Thank you for joining the call this morning. We'll do a short summary of the trading statement released this morning and then open up the line for questions. I'll cover the operational initiatives and then hand over to Mark, who will cover off the financial metrics. So first, let me start with overall trade. We've made a good start to the year with strong growth in the key quarter 1 trading period. We've also had a good quarter 2, maintaining membership at around the 800,000 level in a period when there are seasonal pressures on membership due to students finishing their academic year. The average member number for the first half was 797,000. LIVE IT., our premium pricing product, continues to make good progress. Penetration grew to 16.9% at the end of June, up from 11.7% at the start of the year. And we expect this to grow further in the second half. As Mark will explain later, this increase in LIVE IT. penetration has been a significant driver of our growth in average revenue per member per month. Turning now to new site openings. We opened 8 in the first half of the year, which means we've had a good start, opening more in the first half than we did last year. And with a good pipeline, we remain confident about our guidance of 15 to 20 for the year. We're also progressing well to open the first of our new small box gyms towards the end of 2019. And I'm pleased to confirm that the first small box gym will be in Newark, in Nottinghamshire. We've converted 2 of the remaining easyGym sites, London Oxford Street and Birmingham Kings Heath to The Gym branding, and we remain in discussions regarding lease assignment on both of these sites. The final easyGym in Birmingham Corporation Street, we've decided to mothball for now as the cost of conversion is significant due to structural changes we'd be required to make. As we've already have an excellent site within 300 meters, which has just received a major refurbishment, we've decided to relocate the members to our Birmingham City gym, which a 22,000 square feet is large enough to accommodate the members from both gyms. We've now ended the transitional services agreement with the former owners of easyGym and now operate all the acquired sites on our platform and systems under The Gym brand. In April, we started the rollout of our new model for personal trainers. We call that the New Gym Team. So far, we have 100 gyms on the new model, and we remain on track to convert all our gyms by September. The migration process to the new model has worked well and has been welcomed by PTs, benefiting from the extensive trial and substantial consultation that we undertook last year. And finally, on the operations side, I just wanted to mention the innovative work we've been doing in marketing in the first half. Following up the successful TV campaign in January and February, we've recently launched our First Steps offer, in which any 16- to 18-year old can enjoy free off-peak membership for 6 weeks over the summer as they go through the stretch of exams and then start their summer holidays. This is an excellent way to introduce the next generation to our gyms and to encourage them to maintain a healthy lifestyle. So the business has made a good start to 2019 and we're well placed going into the second half. I'll now hand over to Mark to discuss the numbers.

Thank you, Richard. Good morning, everyone. As Richard said, we've made a good start to the year with membership of 796,000 at the end of June, up 10.6% compared to June 2018. Average membership, which, of course, is the driver of revenue, was 797,000 in H1, up 20% compared to the same period last year. Overall, revenue grew by 26.9% to GBP 74 million driven by the good growth in volumes mentioned just now, plus a 5.6% increase in average revenue per member per month. There are a number of factors behind this increase in revenue per member. As Richard mentioned, the biggest contributor was the growth in LIVE IT. penetration, which accounted for approximately half of the increase. We also had a benefit from the inclusion of the former easyGym sites in H1 this year. And as these gyms are priced higher than the average gym in our estate it's also increased the overall average revenue per member per month. The net expected price changes across the estates also benefited average revenue. This is because the ongoing price maturation in our business more than offset the impact of the price reductions we implemented in certain sites at the end of 2018. The impact on average revenue per member per month of these price reductions from Q4 has been limited as we've move prices back up quite quickly in these sites after seeing a good pickup in volumes. And finally, there's the benefit to average revenue per member per month from having an increased number of personal trainers paying us rent as we move to our New Gym Team model. This accounted for 15p of the increase. Although, of course, we have salary and other costs for these personal trainers, which as previously guided, are greater than the uplift in rental income. We'll be providing a full financial update at our interim results, which will take place on August 29. These results will be published under IFRS 16, and we'll include the new KPIs we set out in our recent presentation, which can be found on our corporate website. That's all we wanted to say by way of introduction. We'll now open the line up for any questions.

[Operator Instructions] And the first question comes from the line of Douglas Jack.

I had a couple of questions if that's okay. First one, is in terms of the net debt position. Obviously, it's pretty flat, and you've opened 8 sites. Can you just sort of talk about how much sort of work in progress in terms of openings for the second half you've already put into the CapEx in the first half? In other words, what I'm trying to establish is whether or not your expansion program is now completely self-financing. And then the second question is just on cost pressures. Have you seen any change in the cost environment for your business over recent months?

Okay. Let me pass -- deal that with first one, then Mark can deal with the cost pressures one. I mean in terms of -- and I refer to what the analysts have forecast effectively is that consensus pretty much has us reducing debt marginally in 2019. So in that respect, the business is self-financing. In terms of the particular distribution of when the second half sites will be open, which I think kind of goes to your point, we would expect, as we've seen in previous years, that the second half openings will be reasonably back-ended, albeit, we have got, for instance, another site opening next week in Colliers Wood. So we're pretty pleased with the way that the sites are coming through in terms of openings overall.

Yes. And then in terms of costs, we're not seeing any particular change in the cost environment. Obviously, the dynamics are changing with respect to salary costs as we bring personal trainers into our business, but that's been well flagged and you'll have the numbers that are behind that. And in terms of other cost areas, it will be very similar to previous years. Marketing tends to be a little bit front-loaded into the first half because of our January, February campaign and you would expect that, of course. But the cost environment hasn't changed substantially.

And the next question comes from the line of Christine Zhou.

A couple of questions from me if I may. So firstly, on pricing. So you mentioned you moved up prices quickly up at the sites [ or the price reductions ] in November. I think you break this down for us at the full year, so you said 51 sites and 17 has prices increased and another 10 are planned. Could you tell us what that balance perhaps looks like now? And my second question is just on the First Steps campaign. Would you be able to share with us perhaps what the take-up has been like? Or any just general initial feedback you might have had?

Okay. Mark, do you want to do the pricing or the First Steps?

Yes. So in terms of the pricing on the 51 sites, most of those, 49, I think, has had an increase of one form or another. We're holding about 10 of those sort of price that's very similar to the low point that we had, probably GBP 1 above the low point. But most of them have increased by either all the way back to where they were or a partial increase back to where they were. So I think 49 of the 51 has moved back up.

And in terms of First Steps, I mean, I think we're very pleased with the take-up that we've seen. We've seen tens of thousands of visits from those 16- to 18-year old that has signed up for First Steps. Clearly, there's a commercial angle associated with their switches that we give them the 6-week off-peak membership. And then we look to either sign them up on the monthly direct debit, or as we go into September and October, we typically do a 9-month upfront package that students can buy and we'll look to sign them up onto that. So I think it's a strong initiative that is very much in line with our aim, which is to create a very diverse membership across our estate.

And the next question comes from the line of Anna Barnfather.

I have three questions, please. The first one is on the small box format, which I know is still kind of early days. But could you just give me an idea of how long you would need to run the trial before you accelerate that potential rollout of that product? Second question, just on FLEX IT. What you'll do if people do freeze membership, will you take that out of the membership stats? And is that really a tool just to try and upsell LIVE IT.? Or do you expect the take-up of that to be good? And then the final one, just on mothball sites, is that a long lease? Or what's the financial implications in terms of exiting or onerous lease provision on that, please?

Okay. So in terms of small box, what we've said previously, and we still say this is the small box is really an extension of what we do already, albeit it's in a smaller square footage. So between 5,000 to 8,000 square feet. The first one in Newark will be around the 8,000-square-foot mark overall. So we will get one open in 2019, but we do expect to do a rollout thereafter because, really, what this is doing is enabling us to go into towns, such as Newark, that wouldn't be big enough for us to have a large box format, but we think we can run a successful gym at around 8,000 square feet or even slightly smaller. So we obviously not say how many we're going to roll out in 2020, but we do expect to do a rollout in 2020 of the small box gyms. In terms of FLEX IT, the membership fee is not a new thing. So members have previously been able to freeze membership for GBP 5, and so therefore, that has always been in our numbers. Actually, the number that freeze is very limited. So it doesn't have a significant impact. Overall in our membership, but obviously, any impact would come through in terms of the overall yield. FLEX IT, again, is only a trial at the moment in 32 sites, very early days. So perhaps, we may have a little bit more to say about that as we come into the interim. And then the local site is really just an economic decision. So clearly, we're still incurring the cost and the rent associated with the site that we've mothballed, but we're not incurring the operational costs. And therefore, by moving the members across into the Birmingham City gym, then we think, overall, that creates a more profitable unit when you add the 2 together. And so it's very much just the right economic decision. It doesn't rule out the fact that we may look to reopen that site at some point in the future.

[Operator Instructions] And the next question comes from the line of [ Catherine Leonard ].

Sorry if it has already been asked. But just wondering, could you just break out the 5.6% yield growth you see in the first half and then what we should attribute to LIVE IT. and perhaps the underlying yield profile? And could you just confirm the positive -- [ I don't actually see it on the mature and immature ] in the first half. I know you typically don't give that. But I think in the statement, you mentioned that they are both in growth despite that dynamic approach to pricing you've taken. And just lastly, could you just comment a little bit about the competitive backdrop in some of the peers, and how they're performing of late? And the approach to pricing you're seeing in the market and the capacity allocations you're seeing?

Okay. Mark, you do the first thing and I'll do competition.

So in terms of the yield growth, average revenue per member per month, 5.6%. 1% of that 5.6% is the increase in PT rental income, which, of course, has an offsetting cost associated with it so -- which has been flagged. So in many ways, it's sort of a 4.6% net increase. From the 5.6%, about half of that growth is from LIVE IT. penetration, which obviously, now 16.9% is very encouraging and similar time last year, of course, it was really just getting going so that's quite a big year-on-year uplift. And very encouraging take-up in the easyGym sites, in particular there, where the LIVE IT. penetration is almost as high as the rest of the estate, which is really encouraging because it's only been a few months for the conversion for those sites. Of the difference of what's left, it's a combination really of 2 things: one is easyGym itself has added to the average revenue per member per month because it's, on average, higher than the rest of the estate. And so in 2019's numbers, but not 2018. And the balance is the maturation of price in our business, which is a combination of leavers that tend to leave on a slightly lower rate than new comers coming in. So that gives us a bit of a drift up. And also, the fact that new sites are normally slightly lower priced because they're on the maturation curve than the mature sites. And as our proportion of the new gets smaller without growing mature estate, then obviously, there's a bit of a mix effect there that helps in the maturation effect. You asked about new versus mature. Both there positive uplift in both. So that's encouraging because obviously, we've absorbed the price reductions in Q4 that we had and still managed to grow in the mature estate. So a good balance of where we got the yield growth from.

And in terms of the competitive backdrop. I mean I think that this market is playing out very much as we've been talking about in the last 3.5 years since the IPO, which is that you get 2 players, ourselves and Pure Gym that have scale, have the infrastructure, and therefore, they take the majority of the openings and the subscale operators struggle to compete. And I think we're seeing that. So we've seen, for instance, SWEAT!, which had 7 sites that went out of business; Xercise4Less, which is the #3 or 4, has stopped its opening program; whereas what you continue to see is both our sales and Pure opening at similar sort of rates to what we've opened in the past. And so that's something that we've been talking about for a while, something that we expect to continue. In terms of pricing, I think the market continues to be very rational. We've clearly shown good price -- levels of price increase over the 6 months. I think that's the same if you look at some of the other players and the market is increasingly rational as it plays out.

Great. Okay. And just finally for me, just on the LIVE IT. Obviously, I mean, it's a very impressive performance, and that's particularly so versus the February statistics that you provided at the prelims, where you had 13.5% of membership. So you've increased that by 340 bps just in the last few months and outside of the peak membership acquisition period. So in terms -- I don't know if you're able to give any granularity on where that might run from here or what's been driving that. I assume that it is still the case that it's predominantly new membership. So I guess, is that the benefit of the turnover -- a membership turnover and those maturing new -- maturing sites profiles?

Yes. So we don't give guidance on LIVE IT. simply because, as we've always said, it's a new product. It's pretty unclear. It's actually where it will play out. But I think it's fair to say that we're encouraged by the LIVE IT. performance that we've seen in the first 6 months. And what we've seen is that it's clearly in new members, it continues to be new members as opposed to conversions, and right across the board. But what we've also seen in particular, bits of strength, firstly from easyGym. And this is something that we said at the time of the acquisition, it's because of the concentration in the Southeast, we expect to see really good take up in easyGym. And we've seen that. To give you an indication, the penetration in the easyGym estate is almost up to the level of the penetration that we've seen across the whole estate. So we're kind of very encouraged by that. But we also see good take up of LIVE IT. in the new sites that we're opening as well and all those that are contributing to good a LIVE IT. performance.

And the next question comes from the line of Ben Toso.

Congrats on good set of results. I just wanted to ask how closely you monitor initiatives of peers, like Basic and Planet, things that they're doing. I like the idea with the introduction of the free membership for 16 to 18 years. But is there anything else that peers are doing that you guys could take as learnings and apply to Gym Group's business? And the second question is maybe a bit of a weird one, right. I haven't heard you speak before about what visibility you have with nonmembers using membership members' entry codes, and whether you have any desire or plan to limit that if it might be an issue.

Okay. So in terms of your first question, I mean, clearly, we look -- have always looked very closely at what other international peers are doing. Actually, the First Steps wasn't copied from Planet. It just so happened that kind of Planet also were clearly thinking about doing something at the same time that we were planning this. So -- but clearly, it's good that you've got 2 international peers kind of effectively both doing the same sort of initiative. On Basic, again, they placed it at home, so we take -- kind of take interest in anything that they're doing. We know that they've had YANGA in for quite a while. We've now got YANGA in about 44 sites, and we're planning to roll that out more extensively in the second half. And that will be an encouraging thing for us. I think in terms of other things that Basic do, we'll have a look at what they're doing in terms of virtual classes, for instance, and that'll be something that is likely to be on our development path in the future. I didn't quite understand your question on nonmembers. Mark, maybe you...

Yes. I mean actually, from our point of view, we think it's a very small impact in terms of the numbers of nonmembers trying to come through on members in entry codes. We have CCTV. And if we spot anything, it's very easy to manage it to go back and identify those people. And of course, one of the people going through the portals at the same time has got to be a member to have put in a code, and then we're able to talk to that member. And so it's a very limited impact. We've done quite a good job doing -- in limiting that. So it's not a -- it's still an operational factor, but it's not a big factor at all.

[Operator Instructions] And we have one more question that comes from the line of Owen Shirley.

I just wanted to ask, would you be able to split out the revenue growth excluding the easyGym in the first half? And then secondly, just to follow-up on the Birmingham site. How long was the lease? And are you looking to have someone else take it on effectively? Or do you think that you're going to reopen it at some point?

Just to check on, are you just thinking out on the easyGym from the first half of this year or last year for comparison?

The first half of this year because you acquired it in July.

Yes. So the first thing to say, as -- if you're looking at the total member numbers for this year compared to last year in June, we've got a pro forma number in there of 720,000, which includes the easyGym number of about 63,000. So you wanted to do a like-for-like comparison, excluding easyGym for the first half of last year, you could take 63,000 of that number. And that, of course, explains part of the -- or explains the difference in growth rate between our June versus June number, which is 10.6% up; and our average member across the half, which is 20% up. Going forward, we're not planning to disclose easyGym or Lifestyle member numbers. They're part of our estate now, and so it's not something that we are going to give specific numbers on. We're pleased with progress. And particularly pleased with easyGym in 2 respects at the moment. One is we're now have got all of the sites onto our branding of the house -- onto our systems, which is great. And as Richard mentioned, we've ended the temporary services agreement with the former owners. And the second thing is the LIVE IT. penetration, which we're very encouraged by. And Lifestyle, we've had a good pickup in growth, which we talked about at the prelims in March and that's continued, and so we're pleased with progress there as well. They're a little bit ahead of easyGym, of course, because we converted those earlier. But we're not planning to give out individual easyGym and Lifestyle numbers going forward.

And then on Birmingham, we're not planning to dispose of that lease at the moment. As I've mentioned earlier, we've got a few options in terms of what we can do. And again, we don't rule out reopening that site at some point. If we do that, it will become part of an overall kind of larger Birmingham City gym likely, so that the membership would apply across both sites. And so we're just evaluating the sort of options that we may put into that site overall. So no plans to dispose of it.

And we have no further questions at this time. You may continue.

Okay. So thank you very much for joining the call this morning. As I've said, this has been a good start to the year, and we're well placed to deliver against our targets in the second half. We look forward to seeing you at our full update at our interim results in August. Thank you very much.

Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.