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

Good morning, everyone. Welcome to The Gym Group's Half Year Presentation. I'm Richard Darwin, the CEO. And with me is our CFO, Mark George. This is an important update. We haven't done a detailed update for about 5 months now. And whilst we will cover the events of the first half, I think you'll all be more interested in what has happened in the last 2 months since we've reopened the estate. So we're now in addition where the entire estate has reopened, minus Leicester and Oxford Street, which is closed for a refurb. And I'll describe overall our mood as one of cautious optimism. Cautious because there's always the risk of a second wave, but optimistic because we think we've had a very positive start since reopening. And that positivity comes from the following reasons. We've got in place a very strong set of operating procedures that are working. These have been adopted very well by members and staff. And I think importantly, sector wide, there are no known instances of transmission from members whilst working out. And that's important because I think it means there's less chance of a nationwide lockdown in the future. Member competence is growing and member feedback is strong, as demonstrated by the growth in visit numbers. And we operated in August at cash flow positive. So as we continued to improve the number of paying members and Scotland reopens, we expect that to continue to build. And finally, we're the best capitalized business in the sector. We have very low levels of debt and strong liquidity. And we're well positioned to take advantage of a rapidly changing market environment, and to restart our rollout at the appropriate time when we have some visibility over the external environment. So in the presentation, we're going to give you some more details on all these areas. If we just move now to Page 2, we summarize here, the last 5 months, really in 3 phases. Firstly, we sought to minimize cash and cost outflows. Secondly, we've boosted liquidity. And thirdly, we then reopened with our COVID secure protocols in place. And I think the cash management in the first phase was very effective. Mark is going to give you some more detail on that. But where we are today is we have great visibility of what we need to repay relating to the closure period. And that's mainly rent, and that cost is more than offset by the benefit of the rents release scheme. We secured liquidity very early. We're very grateful for the support of both our investors and also our banks in the equity raise of GBP 40 million and the debt raise of GBP 30 million. And we have a strong amount of untapped liquidity. And then finally, on the reopening, that also came in phases, England first, Scotland reopened on Monday. And if I summarize our approach, it's been to manage our membership to ensure that we held onto as many memberships during the lockdown period as possible. That's why we froze all memberships when we went into lockdown. Ours is a flexible no-contract model, so members can leave at any time. And that's evidenced by the fact that it continued to drift down to 658,000 members on the 25th of July. But since then, we've begun to rebuild our membership up to 676,000 at the end of August. The paying members is the key metric, and we're really showing progress reducing the number of frozen members down to 37,000 at the end of August from the 60,000 on reopening. So with that, I'm going to hand over to Mark, who's going to take you through some of the financial data.

Thank you, Richard. Good morning, everyone. We'll start with a summary of the first half results. Clearly, this was a period severely affected by the COVID-19 crisis. And with the gyms closed for more than half of the 6-month period, we were significantly down year-on-year in terms of revenue and EBITDA. And we were loss-making at the PBT level. Our primary focus through the crisis has been cash and liquidity. And as you can see here, we ended the first half with net debt of GBP 29.2 million, and liquidity headroom of over GBP 70 million within our GBP 100 million facility. Supported by the equity placing completed in April, we ended the first half with considerably lower net debt than we started the year, setting us up well to deal with any reasonable scenario, including further periods of closure. Just going into the numbers in a bit more detail, starting with revenue. Year started well with the good January-February campaign, growing our membership by 12.2% in the first 2 months, very much in line with previous Jan-Feb campaigns. We started to feel the effects of COVID during March, and then we were required to close our gyms by the government on the 20th of March. Our decision to freeze members without charge meant that our subscription revenue stops at that point. Now members pay their direct debit payment to us monthly in advance, and we recognize the revenue from each payment over the course of the next 30 days while they have access to the gym. From 20th of March, as we weren't able to offer access to the gym to the members, we deferred GBP 8.5 million of revenue that had already been collected, and this revenue is now being recognized in the second half following the reopening of the gyms. In addition to not charging our members while the gyms have closed, we also didn't charge our fitness trainers their normal monthly rent payment. In total, for the first half, revenue was GBP 37.3 million. As you can imagine, we've had a strong focus on costs in the first half in order to preserve cash and liquidity. When the gyms closed, we implemented our plan to rapidly reduce costs. Operational costs were reduced to zero where possible, for example, in cleaning or to a bare minimum for health and safety reasons, such as with maintenance. Our biggest site cost is rent. Of the GBP 13.8 million cash rent originally payable in the first half, we paid GBP 3.3 million, so a cash flow benefit of GBP 10.5 million. This benefit came in 2 ways through constructive discussions with our landlords. Firstly, we were able to negotiate additional rent-free periods by extending a number of short leases by a few more years, and in a number of other cases, by selling a break clause. In total, we negotiated deals that have given us GBP 2.5 million of additional rent-free periods. GBP 1.1 million of that benefit came in H1, and the rest will come over the next 12 months. In addition to these savings, we also managed to defer GBP 9.4 million of rent payments, which will be repaid over the next 12 months now that gyms have reopened. We were able to take advantage of a number of government initiatives. We saved GBP 3.2 million in business rate costs in the first half. And this benefit will continue through to March '21, saving us around GBP 1.1 million per month. We also took advantage of the government's furlough scheme, and this gave us GBP 4.3 million of benefit in the first half. We're very grateful to the government for these initiatives. Some of the elements I've just run through will have significant impacts on our future costs. In some cases, it will mean continued savings, and in others, incremental costs. The table on the right of this slide shows the key costs that will be altered from business as usual in the second half of the year and in early 2021. One cost in this table that I've not mentioned so far is the incremental cleaning cost that we expect to have as a result of the many measures introduced in our gyms. We anticipate our cleaning costs increasing by around GBP 1.8 million per year, although we're only a few weeks into our new ways of working, so this is only an estimate at this stage. The important message from this table is that over the next 12 months, the additional cash outgoings of the deferred rent and incremental cleaning costs are almost exactly offset by the rates relief and additional rent-free deals. The income statement reflects the impact in the same period without revenue. Group adjusted EBITDA was GBP 1.7 million, with the profit in Q1 broadly similar to the loss in Q2. As you know, this EBITDA metric takes into account the cash rent paid. Given the extent of the rent deferral this period and the resulting increase in rents payable over the next 12 months as we repay that deferred rent, we will, for the time being, also provide a new metric, which is group adjusted EBITDA with normalized cash rent. Now normalized cash rent is the amount that would have been due in the period before any impacts from deferrals. On that basis, EBITDA in the first half was negative GBP 7.7 million. Turning to CapEx. I won't go through the detail of this slide. It's there for you to look at later. But in summary, we spent GBP 17.5 million on CapEx in the first half of H1, most of which was in the 4 sites we opened, 4 additional sites that were partially completed. The halting of expansionary CapEx that came at the start of lockdown in March will mainly affect the CapEx spend in the second half of the year, which will be considerably lower. In terms of other CapEx, after the lockdown, this was minimized and focused on essential maintenance and technology investment. In terms of our refinancing, as I said, much of our focus in the first half was about maximizing our liquidity in a period of uncertainty, we came into the crisis with relatively low levels of leverage, but with no certainty as to how long the lockdown would last and how trading would be after reopening, we wanted to secure as much liquidity as possible. In April, we completed an equity placing, raising GBP 39.9 million of net proceeds, with very strong take-up from existing shareholders. At the same time, we reached agreement in principle for a GBP 30 million extension to our debt facilities, an agreement that was then formally signed in June. We're very grateful to both our equity and debt stakeholders for their support in these transactions, which have given us significant liquidity headroom, and mean that we're the best capitalized company in our sector. As the business recovers momentum after reopening, we plan for this balance sheet strength to be a key strategic advantage as we look to return to the expansion of our estate when others may be more financially constrained. So just summarizing that cash position there. As you can see from this chart, we had negative free cash flow of GBP 5 million in the first half as a result of the significantly lower-than-expected EBITDA. Proceeds of the equity placing mean that we ended the period with GBP 29.2 million of net debt, which is significantly lower than we started the year. With the considerable uncertainty of the ongoing pandemic and the subsequent economic backdrop, it's not possible to provide detailed guidance for the rest of the year. But I did want to highlight a few points. We've emerged, after reopening our gyms, as a profitable business in our first full month of trading. The level of membership needed for cash flow breakeven is around 520,000 members, and we are already above that level and expect to grow from this point. With no expansionary CapEx at the moment, we're operating with a small positive cash flow, which is important as it means we're not eating into our liquidity headroom as the business recovers. CapEx in the second half will be focused on essential maintenance and targeted technology spend where we can see immediate impact to support trading. We will also complete the major refurbishment of our Oxford Street site, which we expect to reopen in October. We currently have no new sites under development, but do have a number of new leases agreed. We will restart our build program when we have sufficient confidence in the broader external environment. If we do incur any further CapEx spend on new sites in 2020, it will be modest and towards the end of the year, and most likely for sites that will open in early 2021. With that, I'd like to hand back to Richard.

Thank you, Mark. Let's turn to Page 13, where we look at the progress in the first 3 months of the year, where we showed strong growth in the number of memberships, number of sites and ongoing product development. In terms of membership levels, we saw a good growth in January and February, finishing February on at 891,000. In terms of the number of sites, we opened 4 sites in quarter 1 and now have 8 new sites open, and those are trading according to our expectations. And our investment, we continued with the refurb of Oxford Street and Fulham. These will be 2 strong sites for the future. And finally, on product development, we integrated FiiT into our offer. And that's a very important way that we see the world. We see out-of-home as being complementary and not substitutional to our physical estate. So ours is a strong growing business with an efficient business model as we went into the COVID crisis. In terms of preparing for reopening, on Page 14, our COVID-secure procedures were built around 6 operating principles. And we brought in some expert help from Sheffield Hallam University, their Advanced Wellbeing unit to help us review these operating protocols and also our detailed risk assessments. Our aim was simple, to demonstrate to our members that we could operate safely. And the early evidence, not just from us, but also across the whole sector is that, that is the case. The sector is being successful in terms of keeping infected people out of the gym. In fact, last week, ukactive quoted only 1 case per 500,000 visits of an infected person being in the gym. And across the sector, there was no known transmission of the virus that's taken place in gyms from members whilst working out. Why is that important? Well, it does increase the chances that the sector can demonstrate to the government that gyms are safe and should remain open, even if there is a second wave. Clearly, health and fitness, as we all know, is part of the solution to our health crisis. On Page 15 and 16, we set out the procedures. I'm not going to go into a great deal of detail here, other than to summarize them in 3 things that we've done. We've limited capacity at 1 member per 100 square foot. And our technology is working very well in terms of limiting the number of people that can come into the gym alongside those guidelines. We've increased cleaning and sanitation, and we also kept social distancing to the original 2 meters. I think the evidence of the success that we have is that our member satisfaction measures, and admittedly, this is very early days, are looking very strong. In fact, member satisfaction up 20% in the first month. And our satisfaction rating is above 95%. And I'm also pleased to report that our members are doing their bit as well in terms of cleaning the kit. So 2 further things I just want to mention before we get on to trading, and that's technology and people. So if we move to Page 17, we can look at technology. And in this instance, COVID has really proven to be an accelerator in terms of our digital interaction between us and our members. Even during the lockdown, we actually made quite substantial tech upgrades. And in terms of acceleration, we've seen more app usage and downloads. We've now got over half our members using the app. And the sort of usage levels that we've got mirror those that we had in our busiest time when we had more members in January. We've also introduced contact-less entry via QR codes and busyness tracker, which enables a member to see how busy the gym is at any point in time. We've seen good take up by members of both these features. And then as we list out on the page, we've also invested in a number of other tech developments to help us enhance our infrastructure and our capability. And I think you can expect to see more focused investment from us over the coming months to make further improvements. And our aim here is quite simple. We want to be able to attract more new members. We want to be able to upsell different products. And we want to keep our existing members as members for a longer period of time. And then on people, on Page 18. Our aim in the lockdown periods and afterwards has been to treat our people really fairly and be very open and honest with them. But we've also been prepared to take decisive actions where necessary. So as Mark said, we used the furlough scheme to cut costs. We had 95% of our workforce on furlough at the peak of the lockdown. We've also cut some central costs, around a 20% headcount reduction. But I'm really pleased to say, and this is the strength of our culture, that half those people have been redeployed into vacant ops rolls. And then finally, fitness trainers, who are really key to our operating model. If COVID just happened 1 year ago, we wouldn't be able to put our fitness trainers on to furlough. Because we've been able to do that, we've had very strong retention with vacancy rates, as we speak now, at an all-time low. And we are working with our fitness trainers and our personal trainers to support them as they rebuild their business by giving them discounted rents up to October. So the New Gym Team model, that we spoke about quite a lot in the past, which we implemented in 2019, has been a success, and I don't think we can ever expect to have got such tangible rewards from implementing it as we have done. On Page 19, we look at some trading data since we reopened. And really, trading has played out as we expected. We're clearly very pleased to get pretty much the entire estate open now with Scotland open on Monday, and it's just less that we await the government nod to reopen. We aim obviously to grow our membership and move members off the free freeze. And that's a good way of showing that we are reestablishing confidence with our members about using the gym. So we have grown the absolute number of membership since we reopened. Joiners are 30% higher than last year. We also expect some churn, but cancellations are only 6% higher. Our membership, as we speak, is 676,000, and that compares to 658,000 on the 25th of July. But we've also been successful in moving some members off free freeze into paying membership. On the reopening date, we had 60,000 free freezers. That number is now 37,000, and we expect to make further progress on that in the coming months. And also, yields are good. We've been charging some joining fee. We haven't made headline price changes yet, other than in one site, but we will be prepared to do that if our gyms get too busy, and we feel like we need to manage capacity. So this has been a strong start in terms of building membership. If you exclude fixed-term students, and on fixed-term students, we extended that period of membership because they couldn't use the gym in the lockdown. So they're in this year's numbers, but not last year's. Compared to last year, our paying member percentage is at 78% compared to 2019. On Page 20, we look at usage. And usage has been growing week-on-week on a like-for-like basis since we reopened. And that shows how member confidence is building. So a key measure we look at is the visits per paying member, which, as you can see on the left-hand chart, started on the 25th -- week commencing 25th of July, below last year's measure, but then caught up by the time we got to week 4. So that's a really key sign of confidence for us that our paying base is back using the gyms. And total visits is also growing, not yet up to last year's level, but that shortfall just reflects the fact that we've got fewer members overall. So we think visits will continue to grow as we recruit more members, and we make further progress in reducing the number of freezers. Overall, these 2 charts and the member #1 give us confidence, particularly when we consider that August is seasonally quite a quiet month. And as Mark said, it's enabled us to show that we can operate at cash flow positive from month one. And then one more on trading, which is something that's been quite well documented on Page 21 that the evening peaks that you typically get in the gyms have been flattened out as a result of more people working from home. And that's helping us to manage capacity levels at a time, clearly, when we have these capacity limitations in terms of the number of people that can come into the gym. We're still not 24/7, but we will be doing a trial on that in early September in a number of sites. And that will help further in terms of the capacity spike that you get currently at 6:00 a.m., as you can see. And also by providing the information through the busyness tracker, we're really encouraging members to seek out quiet times for them to do their workouts. And again, that has been successful. One other trend that has been noted is the quietness of city center sites. We have 21 overall at 183 sites in total that we would count as being city center sites. And at the moment, that city center usage is very quiet, much stronger in residential areas. But we'll see what September brings as we begin to get some people coming back to offices. So overall, the shift to home working means that there is a flattening of the curve, and we expect that to continue in the coming months. I want to say something, on Page 22, about the market. I think it's fair to say that we've seen more changes in the low-cost gym market in the last 6 months than we've seen in the 5 years since the IPO. We've always taken some comfort from the historical context that said that the proportion of the U.K. population, as a member of the health and fitness club, didn't decline in the last financial crisis. However, I think there is a key difference this time, which is that this time, we have more of a supply shock. So even if demand holds up, we're having some site closures from competitors. That supply shock is also shown by local authorities, where about 1/3 haven't reopened since the 25th of July as a result of the funding crisis that they're finding themselves in. And as you will have read, there have been company failures already. DW Sports have closed 27 sites. Xercise4Less have closed 7 sites. And on Page 23, we set out the low-cost market as at the end of June, albeit reflecting the JD Gyms acquisition of Xercise4Less. And other than that consolidation from both Sports Direct and also JD Gyms of Xercise4Less and DW, it's only ourselves and Pure that have grown their estates in the last 6 months. I mean, we obviously started the lowest price operator. And that gives us the opportunity to selectively push yield as we require, but equally drive volume where there is no capacity constraints. So the trends that are worth just pulling out here are, firstly that our market share is actually going up, even though we've only opened 8 sites this year. JD, as I've said previously, looks like it will emerge as the third player in this market, having acquired Xercise4Less. It's very unclear at the moment what approach Sports Direct will take through Everlast to the DW estate. But even if it chooses to take it low cost, and I think the early indication is that it won't be, it will take it more mid-market, there's very limited overlap compared to our estate. And as we've said, we remain the lowest-priced operator within the market. So our growth in the future is more likely to come from organic rollout. But clearly, as more consolidation happens or there are more company failures, we will continue to monitor the availability of any quality assets. And then specifically on the property market on Page 24, I think it's fair to say that the market is still evolving, following substantial number of closures of gyms, the CVAs that have happened and other company failures. Our approach is really summarized in 2 ways. Firstly, we'll source good opportunities at low rents. That may take a little bit of time to play out, but the early signs are that landlords are becoming very realistic in terms of accepting the market reality. In fact, we've just very recently renegotiated one deal that was ready to go prior to lockdown at a substantial rent discount and with a longer rent free. And then secondly, we'll also look to secure some premium sites at affordable rents. So these are the type of areas that we wouldn't have been able to get into previously because the rent weren't affordable and our business model just didn't work in those sort of areas. I think, as Mark said, the extent of our rollout will be guided by the visibility that we have over the external environment as things progress, particularly in the next 2 to 3 months. So this business, on Page 25, and the market, has clearly gone through a period of significant change. We believe that with our low-cost model and with a very well-capitalized business, the Gym Group is positioned to prosper. Our first month of reopening has been very positive. Our COVID procedures are working well. And as Mark said, we're already cash-flow positive. We are undoubtedly the strongest and best capitalized business in the sector. And we will restart our rollout program and take advantage of some of these property opportunities that I talked about when we have visibility over the external environment. Ours is a very strong business and an efficient business model. And I think they're set to perform well at a time when health and fitness has never been more important. So that's all we wanted to say. Thank you for listening. And we'll now move to the Q&A.

[Operator Instructions] The first question is from Tim Barrett.

Okay. And can I ask 2 bigger picture things? The first is probably a bit obvious, but can you give thoughts about how you think members will rebuild from the current 639,000? In particular, do you think you'll come for converting the frozen members, recruiting new people to gyms or market share? Just some thoughts on that would be really interesting. And the second area is on yields and LIVE IT penetration. You talked quite a bit and others have about people wanting flexibility and working out closer to home and their office. What do you think that means around LIVE it? And is that a new opportunity?

Good morning, Tim. Let me take those. So as you know, we haven't given detailed guidance in terms of how we see membership growing. And the number that you quote is 639,000 is that the paying membership base, which clearly, as we've said in the statement, has grown from a paying membership base of 598,000 on the 25th of July. I think we do see more people coming off frozen. The fact that we've moved frozen down to 37,000 from 60,000 is encouraging. And I think we'd expect to see that happen again over the coming months. We're going to give people the option to refreeze again for another month. But then I think we'll look at it as to whether we continue to offer that option overall. And I think generally, as confidence builds, then we'd expect to see more joiners overall. And I think you raised a really good point about market share. Already, obviously, we've seen 27 DW closed. We've seen 7 Xercise4Less closed. And in each of those localities, we've got a number of sites that are very close. And therefore, we are seeing increased levels of demand as a result of those closures. And then, of course, on top of that, you get the local authority. So we do see encouraging signs in the first month, and an expectation as we go into what is particularly a more seasonally, a good period for, which is September and October to see some continued building. I think on yield, we're encouraged, obviously, again by delivered percentage that we've announced over 22% in terms of take up. I mean I think LIVE IT is just a good well-priced product. And because we've got that critical mass of 183 sites, increasingly, we've either got one close to where you work and close to where you live or a couple close to where you live. And I think all those things add, along with the value of LIVE IT, is what's driving the increased penetration.

Okay. And just to be clear, the freeze is -- the current freeze option is until the end of August, and you think it will be a 1-month extension?

We've given people the opportunity to extend it for a future additional month, but they have to choose to actually do that.

And the next question comes from Douglas Jack.

Just a quick one. And obviously, you've done some work in terms of extending some leases and exiting some break clauses. How many sites have been involved on that in both cases? And what's the average length of freeze now? And in terms of the openings, how many sites do you think you may open next year? What seems to be the rating towards standard verse small box in terms of the opening program going forward?

I think in terms of the extension of the leases, it's in around 10% of the estate. So -- and something of the order around 19, 20 different leases that we've done, either taking out the break, that's one option or extending the lease. So it doesn't materially change our overall expiry number of years in terms of the leases because it's a relatively small amount, but obviously, it's got a financial benefit, as Mark explained. And we -- again, we haven't given detailed guidance on the opening program for next year. I think, it depends really on how we see the external environment. And that, for us, is how the COVID crisis is really moving forward. What are the chances of a second lockdown, which obviously, as we've demonstrated and seen in these results, does have quite a significant financial impact. So I think we want to get a little bit more visibility as to whether there's going to be a second wave, what that means in terms of keeping our estate open full, completely committing to exactly how many sites we'll do next year, but we are continuing to build the pipeline because we do see opportunities out there. I think you can expect us to do some more small box. And actually, the 3 small box that we've opened have been pretty encouraging. But equally, there's going to be some good big box opportunities out there as well.

And in theory, I suppose, if city centers stay quieter for longer, that would favor the small box format over the standard in terms of the orientation because the small box is more towards the smaller punitive towns relative to city centers aren't made typically?

Yes. I mean, that's certainly the case. So it's not typically a concept that we're doing in city centers. It's ones that are in smaller community towns between 25,000 and 60,000 population.

The next question comes from Owen Shirley.

I've got 3 questions, if that's okay, please. The first one just on new openings. If you -- would you be able to elaborate as to how long the circumstances you'd consider new openings and then you kind of mentioned the risk of lockdowns? But would you flex your historical views on returns on capital, i.e., sort of, if that happens to come over a long time frame? And then secondly, with regards to rebuilding the emission base. I know you're not providing guidance. But if we were to extrapolate what's been achieved in the past 5 weeks, is there anything you would say, reasons we should be more cautious or more optimistic than that run rate? And then the final one was you mentioned a couple of times that the number of local authority gyms that haven't reopened yet. I wondered if you could just expand on that point. Why do you believe they've not reopened? Have councils already withdrawn funding? And how many could we reasonably expect to close?

And Mark, do you want to take the first 2? And I'll deal with the local authority question.

Yes, absolutely. Owen, I mean, in terms of openings and the circumstances, first of all, as Richard said, it's really about judging the wider external environment and whether we feel comfortable that now is the right time to push the button. I think, nationwide lockdown is the one thing that would make the biggest difference to it. If we have localized lockdowns like we have at the moment with our 2 sites in Leicester, for example, then obviously, that's not a material impact on our business at any one time, but a nationwide lockdown would be. And I think that's probably the thing that we'll keep our eye on most. So that's with regard to circumstances. In terms of return on invested capital, at this stage, we are not envisaging lowering our 30% target for mature return on capital. Obviously, we need to see how the market develops. But there are a number of positive signs on rent already, which Richard has described, and that's a component, obviously, of our cost base. There's no need to think that capital invested will change as a result of the crisis we've just been through. That should stay the same. And then in terms of member numbers, obviously, in the short term, we're expecting a period of recovery and sites that open around the time of -- lockdown may take a little bit longer than normal sites. But in the medium to longer-term, we don't anticipate that being an issue with regards to revenue. There may be a slight difference between member volume and yield, and that's really for us to work out as we go. One of the things we've talked about in this presentation is optimizing yield and volume site by site. And that becomes even more important in the short-term as we have capacity constraints in some of our busiest sites because of the social distancing restrictions. But we don't expect to be lowering the 30% target on return on capital. In terms of extrapolating the last 5 weeks, I would be careful about that. I mean there's a number of things that are going on in August. First of all, August is an unusual month because ordinarily, we would expect member numbers to get backwards in August because people are on holiday and enjoying -- if they're not in holiday, they're enjoying working out sometimes outside, and then it picks up normally again in September and October. So obviously, we have increased membership by 18,000 between July 25 and the end of August. That would have gone backwards in a similar period last year. So the net growth of 18,000 and extrapolating that perhaps a little bit misleading because of the comparative of the year before. And also, of course, we've had a little bit of a kind of a shaking out of -- in the first few weeks of members who are very keen to get back in the gym because the gyms have been closed and other members who perhaps had frozen their membership during closure and are less keen to come back who have canceled. And I think we've seen probably more cancellations and more joiners in the first -- particularly, the first 2 or 3 weeks as that has shaken out a little bit. And I think we'll get a stronger pattern of consistency over the next 2 to 3 months.

And then, Owen, in terms of your question on local authorities, I think it's quite an interesting one. One of the reasons why the local authority site hadn't reopened is that traditionally quite a few sites that operate at a loss. So they've required funding from the local authority just to stay open. Now obviously, we're in an environment where they've got lower number of members, they're taking less revenue. So the loss is actually exacerbated. And so that's -- the local authorities just don't have the funding to be able to fund the gyms and the wider leisure centers. Now we are aware that there are discussions ongoing between ukactive and the government to see whether that can actually be bridged in terms of those losses, but those discussions have been going on for a while, and it doesn't look like it's going to be a resolution anytime soon. And I think whilst that continues, you can expect the local authority sites that haven't reopened to stay closed. And, of course, that gives us an opportunity to take some market share.

The next question comes from Charles Mortimer. [Operator Instructions]

Two question from me. Just firstly on pricing, you mentioned that there's the potential to move it up slightly to potentially limit capacity. We're going into September with member numbers where they are. What's your general view of pricing? Because I guess, there's a feeling that maybe it's not pricing that's preventing people from coming, but I don't know how the sort of competitors might see and might move. Is it a very dynamic situation? But do you have any general views on what might happen in September, October?

Yes, Charles. I think on pricing, as we've said, we're at GBP 18.55, and there's a bit of a gap between us and the rest of the low-cost sector. So that's always given us confidence that if we need to, we can increase pricing. So what would be the trigger to raise pricing, it was if we felt that we had a gym that was reaching capacity. Now we're not at that point at the moment. We've got very few gyms actually that are reaching that 1 member per 100 square foot capacity other than just very kind of short periods at peak times. But if we feel like that is happening quite regularly, then we would actually kind of move pricing. Now pricing can happen in different ways. Of course, we can increase joining fee to begin with. That's just kind of pricing by a different name or we can actually change the headline price for new members. But I'd say, we haven't done it in the first 5 weeks, but I perhaps do anticipate that we will see some upward price movements as we get into September, October.

Okay. And on the FiiT partnership, I just wonder whether you could give any more details on how that's been going in terms of members and usage? And I know it was an investment as well. So how you view that is going so far?

Yes. So we haven't given the member numbers on it. And the reason for that, it's very early days. We really haven't pushed any marketing on FiiT at this point. And that's simply because you can imagine, our absolute priority is to increase the number of paying members in our base and to increase overall membership. So FiiT has a number of different components. As you said, we took a small investment in FiiT. We also then obviously can do discounted membership to our members or FiiT that were at about GBP 7.99. And then the other kind of really interesting piece is that FiiT are acting as the supplier to us of some virtual content. And we've just built the first prototype in Tottenham White Hart Lane, which is a studio where we can use that virtual content. And so we're kind of pretty keen to get that up and running as soon as possible. Obviously, it has been slightly delayed by the COVID crisis. So there's lots of different elements associated with FiiT that we're pretty encouraged by, but a little bit early days just in terms of membership take up.

Okay. And just one final one. I know it's -- I think I saw there was a change in planning, allowing some more highest gyms to be totally present on more high streets. Does that affect you or change your plans or open up opportunities for you?

Yes. So I mean, the change in the planning legislation across the board, it doesn't just relate to high streets. I mean, what it does mean is that it should shorten the period of time that is required to get through planning. However, there may still be elements that need to go through planning. So for instance, if we need to change the time that the gym is open, particularly, as you know, we tend to go for 24/7, then equally that would still need to go through planning. So I think we're hopeful overall, it should speed up the process. But I don't think it has a material change overall.

The next question is coming from [ Martin Jones ].

Yes. I was just wondering about the franchise market and how that end of the market was developing? Sort of, do you see capacity coming out from operators such as Anytime Fitness or Snap?

So Martin, there's 3 elements obviously to the franchise marketers and Anytime, Snap and then there's énergie, and énergie had their own transaction, which was effectively an MBO. They were actually early in the year talking about quite a lot of openings, that doesn't seem to have happened so far. So it would be interesting to see how that plays out. But certainly, we are seeing some closures in other franchise operators, including some that are very close to us. So I was in Kidderminster recently. We've got a -- there was a -- Anytime, there is literally about 300 yards from our site, and that's closed down. And I think, we've seen similar kind of closures across the board. So again, I think it's just an opportunity for us to take some market share.

The next question comes from Sahill Shan.

2 questions from me. Firstly, could you share any trends or experience that you've seen in terms of London versus the rest of the country over the last 5 weeks or so? And the second question is, how should we be looking at the second half of this year in the event there is no further COVID-19-related setback? And similarly, going into 2021, how we should be looking at that from your point of view?

Mark, do you want to take those?

Yes. So Sahill, so as Richard said, the city center sites that we have got in the 21 that Richard mentioned as part of the estate of 183, we only have 4 or 5 that are London city center sites. And if you think of Monument and Chancross and Holborn, those are quiet at the moment. But actually, a lot of the sites that we have inside the M25, I think we're up to about 60 now, are in residential areas. So when you describe London, actually for us, London is 3 sites. In Tottenham, we have Walthamstow, Colliers Wood, Tooting, Stratum. And so these are sites where people live on the whole rather than work, and they commute from rather than commute to, and those sites are holding up well. So it's not so much London versus the rest of the country. It's more about very tight city center sites versus more residential areas. And then in terms of how we would think about half 2 and going through into 2021. So from a financial and trading perspective, we've described the fact that we need around 520,000 members -- paying members to be cash flow breakeven, and we're above that at the moment. So barring any widespread lockdowns, hopefully, we can build our membership from here and continue to operate from a trading perspective on a cash flow positive basis, through the second half of this year and obviously growing into 2021. In terms of expansionary capital that might offset that cash flow, we are doing the refurbishment of our Oxford Street site, which in terms of capital expenditure, is actually like building a new site. It's a pretty major refurbishment, but it will be a flagship site for us. And we may, towards the end of the year, start spending some money on new sites. It will be relatively modest and probably for sites that are going to open in early 2021. And as Richard says, the trigger for that is our feeling confidence about the external environment, but that may be a little bit of expansionary CapEx towards the end of 2020, and then we'll start to increase that through 2021, assuming that the external environment continues to be positive, which I think was the base of your question.

I think that's all. That is it then for the questions that we have in front of us now. Thank you all very much, and I'll hand back to Richard.

So thank you for everyone for joining this morning. I think as we've shown on reopening, we've had an encouraging start in the first 5 weeks of trading. We've seen absolute member numbers increase. We didn't seen the number of freezers go down. Of course, the usage growing week-by-week and cash flow positive. I'd just like to finish by paying tribute to the entire Gym Group team who've navigated, what has been a very difficult period, with great skill in the fortitude. So from here, we now look forward to the autumn trading period and as we continue to rebuild our membership and grow the confidence of our members. And so thank you for coming on today. And we will do a further update probably later in the autumn.