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

Good morning, everyone. Welcome to The Gym Group's year-end presentation. I'm Richard Darwin, the CEO. And with me is Mark George, our CFO. We've got just over 3 weeks until our gyms are expected to reopen. And as a company, we expect this to be the last lockdown. And from the April 12, we can commence our recovery of membership. Certainly, we're planning on that basis. And that's very different to the last update that we did when there was very much an element of preserving liquidity in case of a second wave. We needed to be able to accommodate a further lockdown. And of course, sadly, we proved to be correct in that. I think on Page 2, we show how we're now positioning our business to look forward to the future with confidence. And the majority of this presentation, we'll spend talking about 2 things. Firstly, recovery and how we will seek to recover on the back of financial resilience. And then secondly, growth, how we plan to take advantage of what we see is a very unique situation, particularly over the next couple of years. In terms of financial resilience, Mark will show how we have very manageable levels of debt, GBP 58 million at the end of February. And when we were open last year, we traded at cash flow positive. We expect from this latest lockdown to reopen our membership levels such that we can trade approximately at cash flow breakeven. And I don't think any other company in our sector in the U.K. can say that. And secondly, how do we take advantage? Well, we think we do that by growing our estate and our pipeline and also continuing to invest into the infrastructure that will enable us, as a business, operate very effectively at scale. So it's a business we're now very much forward-looking, taking decisions with confidence to position ourselves for the future. I'm now going to hand over to Mark, who will take you through the financial section.

Thank you, Richard. Good morning, everyone. I'll start with a summary of the key financial headlines. Obviously, this year was very severely impacted by the pandemic, and you can see that in the revenue number this year. We were close for 45% of the year. And then when we were open, our membership levels were lower. So those 2 things combined meant that revenue was 47% down year-on-year. And we took a number of cost-mitigating actions through the year, and we'll talk about those in a little moment. But notwithstanding these actions, we still made a loss, but our EBITDA less normalized rent level of GBP 10.2 million. And the next wave, of course, that meant a loss at the PBT level as well. Now the trading environment as it was, our primary focus, of course, was cash and liquidity. And as a result of the careful cash management and a well-supported equity placing in the year, we ended 2020 with the same level of net debt as we started the year. And after extending our debt facilities from GBP 70 million to GBP 100 million with our banks, we ended the year with GBP 52.7 million of liquidity, which means we're really well placed going into the latest lockdown with a manageable level of debt. Just turning here to the income statement, and I'm not going to go through this in detail. There's plenty of detail in the annual report. But what you can see here is how the loss in revenue fed down to a PBT loss. I just wanted to touch on a few areas of cost. First of all, we obviously reduced operational costs where we could and particularly in the periods when we were closed. We were really able to reduce cleaning and maintenance and other operational costs down to a bare minimum. We also benefited in the year from government support, about GBP 16 million worth, which was split between GBP 10 million of business rates relief and a further GBP 6 million in further income. And then finally, on central costs, we were expecting that in 2021 we would be increasing our central costs year-on-year, because we made quite a large investment in people and technology both in 2019 and that at the beginning of 2020. When the crisis hit, we took the decision, a difficult decision really, to restructure our central support team and reduced headcount by around 20%. And now this meant that central costs will remain flat year-on-year in absolute terms when otherwise it would have increased. So we talked a bit about member volumes reducing. But what about average revenue per member per month. So just coming on to the yield slide here. What you can see is that the average revenue per member has remained strong in the year and have been increased. From a combination of 2 things, steady increase in headline prices and good joining fee collection, but also the higher proportion of members that are taking our premium membership, LIVE IT., which has continued to grow, now up to 22.5%. So it's important for us to see this and important for you to see this. Because while we reopen in a few weeks' time, we'll be reopening with these high levels of yield. Now we anticipate that the recovery of our member volumes in our business will be driven by the pent-up demand of people looking to come back to the gym, combined with the growing comfort visiting gyms as the wider economy opens up. So as we see it, because we're already in the lowest-priced, high-quality gym operator in the market, we don't expect that demand is going to have to be stimulated by price other than normal promotional mechanics, of course. So in this chart, you can see the year-on-year movement in our key profit metric, group adjusted EBITDA less normalized rent. Now obviously, we talked about the drop in revenue. And then in terms of the cost changes through the year, first of all, there are a number of natural cost increases that we had from growing the estate, of course, which was growing from 2019 and the full year effect of that, plus the full year effect of our new employment model for personal trainers, which was launched halfway through 2019. But there were also some cost increases, albeit relatively modest, that were related to COVID itself, such as higher cleaning costs. And you can see here how the cost-mitigation measures that I talked about a moment ago, including the government support, helped to minimize the losses to GBP 10.2 million. Our CapEx investment in the year was very different between the first half and the second half, particularly in relation to new sites. We started the year with ambitious rollout program and opened 4 new sites in Q1 and also had at that stage committed to a further 4 that were partially completed as we entered into first lockdown. We took the decision early on in the crisis that we would hold our pipeline rollout other than the completion of these sites. And as a result, the new site CapEx in the second half was much lower at GBP 1.6 million versus the GBP 9.2 million in the first half. We continue to invest in technology throughout 2020. Some of the investments were focused on the crisis itself, for example, the contactless entry system and the gym business tracker, which has been really well used by our members. But much of the activity it was on continued investment in our broader technology platform and data team. Now we know these capabilities will be key to recovering our membership, so we are very keen to maintain investment in these areas throughout the year. The other thing I wanted to pick up on this slide is the CapEx associated with easyGym acquisitions. Now the acquisitions, of course, happened in 2018, but we still have some expenditure related to it. First of all, having agreed new leases on the 2 sites from the acquisitions that were on short leases when we acquired them, we now have to start paying the GBP 2 million deferred consideration for these 2 sites, which we're paying in installments across 2020 and 2021. In addition, we've effectively rebuilt 2 former easyGym sites, Oxford Street and Fulham, which will be very successful sites for us in the future. And finally, you'll see on this slide that the cash outflow and CapEx was greater than the CapEx investment for the year. This is because at the end of 2020 we have very little in the way of outstanding CapEx payments compared to the creditor position at the end of 2019, following what had been a busy Q4 in that year. And you'll see that cash flow effect in this next chart, where we look at cash flow overall for the year. So what you can see here is that the GBP 14 million that we raised in equity offset the losses and investments made during the year. We talked about the GBP 10.2 million loss in EBITDA, less normalized rent. But then looking at the other major features here, we had a working capital benefit from a rent perspective of GBP 4.4 million, and most of that was driven by the deferred rental payments that we've made and agreed with landlords. Then the other element of working capital were negative GBP 3 million. That was primarily driven by the fact that our membership level and revenues were lower. And therefore, we had a smaller monthly deferred revenue each month. The maintenance CapEx and expansion CapEx on the previous chart is shown here is GBP 29 million. And when you see all of that together, you realize that there's a considerable amount of investment we still made in 2020 despite everything that we were facing as a business. And then the final investment is shown here is GBP 1 million of investment towards the right-hand side of the chart, and this was our investment in January we made in Fit, our partner for digital fitness. So in summary, from a cash perspective, the combination of a well-supported equity placing and careful management through the year meant that we exited the year with a very manageable level of debt, and that puts in a good position to see us through the current lockdown and then later to start growing again during 2021. I just wanted to leave you with some thoughts of 2021. So our whole estate was locked down on the 4th of January. And in fact, much of the estate have been closed in December. And just as with other lockdowns, we don't acquire new members while the gyms are closed, but we do continue to see cancellations. And as you can see on the chart here, though, what we've seen in each subsequent lockdown is that the rate of attrition has been getting less and less. The green line here shows the latest lockdown. And as you can see, we're losing far fewer members than we did in the initial lockdown. At the end of February, our membership level was 547,000, and that was a loss of 31,000 since December. Our net debt at the end of February was GBP 58.2 million, and that was in line with our expectations, about GBP 10 million higher than at the year-end. Now to understand the full picture, it's also really important that we explained to you what the major deferrals or receivables are as well as that net debt number at that point in time. So we listed them here. So deferred rent at the end of February was GBP 6.9 million, up from GBP 3.8 million at the end of December. And we've also got GBP 1.9 million of VAT deferred from March 2020 that will be paid over the course of 2021. Offsetting these deferrals, we had an outstanding receivable of GBP 1.1 million in February's further income, which has subsequently been collected, I should say. Now other than these factors, there are no other major working capital elements to consider in terms of unwind. So you've got the full picture there. We continue to have a very positive relationship with our lending banks. And as a result of the extended current lockdown, a waiver was agreed for our March quarterly covenant test. We've agreed with the banks that we will have subsequent review of covenant tests in May once we've reopened following the mid-April reopening and have established a new pattern of trading. In other updates. In March, the charts that are announced in the budget 2 measures that will provide us with further financial support in 2021. First, business rates relief, which is worth around GBP 1.1 million per month to us, is going to continue in full for 3 further months to June, end of June and then part of that will be subject to a cap of GBP 2 million in the second half of the year. So in total, the additional rates relief will be worth GBP 5.3 million to us. We also announced new local one-off grants of GBP 18,000 per site for multisite businesses like ours. And this will give us GBP 3 million of one-off further support. So in total, about GBP 8 million of benefit from the budget. We want to thank the government for this support and also for the support throughout 2020, which has been incredibly valuable to us. The measures we've taken to preserve cash over the last 12 months have also enabled us now to start out our rollout program again. We've got 4 new sites that we'll be opening in April and May soon after we're allowed to open gyms again and another 4 that we're going to start on site before the end of H1. Now we'll provide an update to you later in the year on how many further openings beyond these 8 we will have, but what I can say is that we're seeing a very strong and growing pipeline with 6 additional leases already extended with several more in advanced negotiations. So in summary, we're ready to emerge from the crisis as a well-capitalized business with very manageable levels of debt. We expect to operate at around cash flow breakeven initially when we reopen, and we'll rebuild our membership levels and revenues from that point. We're ready to invest again and we see it as a management team that the long-term potential of this business is as strong as ever. With that, I'd like to hand over to Richard.

Thank you, Mark. I want to cover 3 things. Firstly, how the actions that we took in the crisis were taken to make sure that we can emerge in a stronger position as possible, and we'll look at membership and the actions surrounding our people. Secondly, the reasons why we believe the future opportunity is very strong. And that's, in particular, looking at membership demand, market dynamics and the supply of properties and then also actions to improve our infrastructure. And then finishing on sustainability, as we know, The Gym Group has always been one of the sustainability leaders in health and fitness. And we think we've made real significant progress over the last 12 months. So moving first to Page 12 and looking at membership. We expect to emerge from lockdown with a level of membership that will be approximate to cash flow breakeven. It's very clear for us that, that wouldn't have been the case if we hadn't frozen membership levels during the lockdowns. And I think the chart that we put on here show the impact of lockdown overall. So as Mark said, 45% of trading days where we've been in lockdown in 2020. And in those trading days, we had very few joiners. With each lockdown, what we saw was a spike in leavers, but that has diminished as we've gone through the various lockdowns such that in the latest lockdown we've seen relatively small amounts of leavers. I think today I said 547,000 members. That means we've lost just 31,000 since December. And therefore, from April 12, we expect to start to recover our membership. And actually, we expect our sites now to go through a maturation process, pretty similar to what we've seen previously with new sites. And I think our strength and recovery can be judged by the speed of that maturation process. On Page 13, we talked about the actions we've taken with our people, and we have really put our people at the heart of our recovery. And those people will be energized, infused and engaged by the actions that we've taken. We have supported them through furlough. We've set up an employee forum so that we could listen to them. And we also invested into a new communication platform so that we could actually directly communicate through things such as podcasts and videos. In fact, we were never afraid to communicate even when the news was quite difficult, for instance, such as when we reduced support office numbers. I've spoken before that our fitness trainers are a real key part of our ecosystem. And we've also supported our fitness trainers through things such as e-learning and also rent deductions so that they can rebuild their business just as we seek to rebuild our business. And then finally, we've invested into the government Kickstart program. We've got 30 in our first intake. And Kickstart is where we take unemployed 18 to 24 year olds who are on universal credit and train them for a role in our business. And we're going to go much bigger on this because actually we've got permission for an additional 120 places with the government. So why is this all important? It's because companies will, we think, rely on the engagement of their employees and their teams to drive the recovery post the crisis. And that engagement will partly depend on the actions taken by companies during the crisis. Certainly, I'm very grateful for the way that our teams have responded, and we're currently seeing higher engagement levels across our teams than we thought even in the autumn. And then on Page 14, I set out why we feel very confident that demand levels will be strong. And that's for a couple of reasons. Firstly, because the nation's had a health shock and it now really understands the importance of regular exercise. And then also from some of the survey data that shows, members actually want to go back to the gym. So in terms of the health shock, our key demographic is 18 to 34 year olds, and that's 65% of our membership base. Around 45% of those from a PwC survey expect to exercise more regularly post COVID. And when you look at overall on all demographics, that's about 80% either expect to exercise at the same level or more than before. And then secondly, the question really is how quickly will members come back to the gym. So whilst many members will look to come back straight away, that same PwC survey said about 48% would only come back when cases came down and the vaccine was rolled out. And clearly, we are in the midst of that scenario right now. So we do see overall potential for very significant demand upside compared to pre-COVID levels. And then on Page 15, we set out why The Gym Group, in particular, is very well positioned to take advantage of that market demand. I think we've explained previously that the low-cost sector has been the dominant part of growth in the last 5 years. And because of COVID now, what we've seen is other private sector and public operators significantly impacted. And clearly, within the low-cost sector, which we expect to be the dominant sector, The Gym Group is the second-largest operator. For us, the advantage of low cost are very clear. We have a competitively-priced proposition. That's a very high-quality offer at a low price, but without expecting people to enter into a contract. And within the market overall, in terms of our pricing, we still see ourselves as being very competitively-priced. I think this chart will look very different in 6 months' time when the remaining Xercise4Less sites have been converted and then they've repriced at the same sort of level as JD Gyms. So within the low-cost market overall, the growth of sites have stalled, but it hasn't reduced. We're up to 735 low-cost gyms in the U.K. right now. All the organic growth has come from either ourselves or Pure. And what we've seen is something that I've spoken about before, which is the emergence of JD Gyms as the third player, but their growth mainly coming from acquisition. On Page 16, we set out how we are very focused not just in terms of taking advantage of the demand potential, but also the fallout from what we've described as a supply shock. In fact, I'd go as far as saying that I've never seen a more favorable landscape for growing our estate, particularly because of the availability of retail sites, which for us means being on business parks, and also the difficulties of some of our competitors. So I want to say about just how we're thinking about that opportunity, and it really comes in 3 elements. Firstly, we'll look to find locations where previously it's been very difficult for us to get sites because the rents have been too high. That places in our pipeline that we're opening such as York, Cambridge and Oxford. Secondly, we will continue to expand our large box format. These will be really solid opportunities, good levels of return, typically in residential areas of towns and cities. And then certainly, there's a small catchment opportunity. That's locations of less than 70,000 adult population in a 15-minute drive time. And we already have a number of small catchments. In fact, we've got 7 that we would classify as a small catchment. And in those locations, we can put a choice of the format. Either we can put 9,000 to 10,000 square feet boxes or we can put our small box format of 7,000 to 8,000 square feet. So we very much positioned our business to take advantage of what we see as a unique opportunity over the next couple of years. And as Mark said today, we've announced that we will be opening 4 sites. We've got another 4 where we're starting to construct, and we've signed an additional 6 leases. That is just the beginning of our expansion. And then one word just in terms of infrastructure on Page 17. We think that the businesses that can take advantage of both this demand opportunity and, obviously, the supply shock that I've spoken about will be ones that continue to invest into their infrastructure and their product. So just in terms of infrastructure, we've always had a very strong CRM capability. And obviously, in a digital world, it's really important that we have strong search engine optimization, strong pay per click, marketing and other multichannel marketing capability. Our next development will be -- we're going to build a new website this autumn. That's going to give us improved flexibility in how we can create products and our speed in terms of doing web merchandising. And then just in terms of the product, the immediate priority is going to be for us to seek to normalize our product. Now what I mean by that is when we opened in April, we will offer in the majority of the estate 24/7 once again. And when we're able to, which will be in May, we will reintroduce GroupEx. And then we're going to go further on GroupEx by making some improvements. We're going to look to improve the consistency of the classes as well as trial a Fit virtual GroupEx product in both Oxford Street, which Mark mentioned that we've just reopened, and White Hart Lane. So this Fit virtual product will be both a combination of virtual and in-person classes. Really important, I think, that in a landscape where some of our competitors have been weakened, that we, as a business, continue to invest and develop our capability. So for instance, in this lockdown, I've actually kept most of our central staff working on projects that we think will give material improvements to our ability to achieve and trade very successfully at scale. I'm going to finish this section just by spending a short while on sustainability on Page 18. I think, as many of you know, sustainability has always been at the heart of our business. Our first site was in Hounslow in an area with a low-income demographic. And actually, today, 1/3 of our estate is in the economically most deprived areas of the U.K. We've always made strong financial returns in these areas. So we've already demonstrated that we can mix financial return with social value. That's the S in ESG that you see on this chart. But we've also traditionally been very strong in governance. We have strong levels of reporting and risk management. And as you'll have seen, we've also appointed 2 new NEDs, and we made an announcement today about the new committee responsibilities and that each of our nonexec directors will fulfill. And then finally, in the environment, those that came on the site a bit too, New York which was probably now 18 months ago, will recall some of the developments that we made, how we use water from the air conditioning to flush a toilet or have sensors to turn off the air conditioning. So that such that it's not been used in areas where the gym has not been used or where we use the air expelled by our air handling units to heat incoming air. So again, very strong on environment. What we're going to commit to today and going forward is to report on the underlying strength that we have already in ESG and show how we're making progress each year. And on Page 19, we set out the progress that we've made in 2020 across 4 focused areas that are aligned to UN Sustainability Goals. Now I'm not going to go through all of the details on this slide. You can read that at your leisure. But let me just pick out a couple of highlights in 2020. On good health and wellbeing, we already have grown the access that we provide to the U.K. population who have access to one of our gyms. It's up to 49%. And with the extension of the format that I spoke about, we expect to see that percentage increase in future years. On good jobs, quality, education and lifelong learning, again, I would call out the role of Kickstart. We're really proud that we are at the forefront of the government's efforts to give 18 to 24 year olds a new start. On diversity and inclusion, in 2020, we launched our first-ever diversity manifesto. And that's because we really believe in the benefits of a diverse workforce brings to any organization and particularly diversity of opinion. And on environment, we're now at a stage where 100% of the energy that we purchase comes from renewable sources. So great progress, but more to come. But perhaps the most exciting development in the last year has been on Page 20, where with some work done in collaboration with Sheffield Hallam University and 4Global, for the first time ever, we've calculated the social value that we've generated. And here, the headlines are very strong. GBP 1.8 billion of social value created in the last 5 years, increasing every year up to 2019, obviously, pre pandemic, to over GBP 3 million per site. And we are very strong at social value as a business because, in simple terms, people use our gyms. The methodology that Sheffield Hallam developed only counts gym users who have regular use. And that's typically defined as going at least once per week. And then that drives value in terms of wellbeing, a reduction in disease, educational attainments and reduction in crime. So this work on social value really puts us in a leading position in the U.K. health and fitness sector. It's actually the same analysis and same methodology that the government has been using with local authorities to allocate GBP 100 million recovery fund for leisure centers. And we're now at the stage where social value for us sits alongside financial returns in our decision-making. So just to wrap up on Page 21. I hope that Mark and I have demonstrated over the last half an hour or so, why we feel so confident about the future. I just want to finish by bringing this back to what this all means for the investment case. And if anything, why we think the investment case has been strengthened post-COVID. We see a great market opportunity. That's been strengthened as post-COVID some of our competitors have been weakened, and we absolutely believe that the low-cost part of the market will emerge as the dominant sector. Ours has always been a high-quality estate, but now we get the ability to take advantage of the easing of supply, better availability of properties at a time when, as we've demonstrated, we have low levels of gearing and are well set up to be able to take advantage of that opportunity. Ours is a compelling member proposition. We may see a change in the work environment as we move to a more hybrid working environment. If that's the case, we only have 10% of our estate that we would define as city center sites. And many of those are really strong student sites. But again, in this environment, we think scale will be even more important than ever, particularly through our ability to offer a multi-site offer with a gym close to where you live as well as close to your workplace. And we will continue to demonstrate innovation in tech and marketing. It's going to be more important than ever over the next few months to be able to drive high levels of member acquisition very efficiently through our website. And as I've said, we plan to invest further into this area. And then sustainability, which is really new for this year, we really think we have a head start versus the rest of the health and fitness sector as a result of the type of locations that we've gone into and our heritage. And what we're now committing to do is really communicate that well and the progress that we're making. And finally, on our financial returns and our financial model, nothing that we've seen makes us believe that our ability to achieve the sort of 30%-plus return on capital that we historically achieved will be in any way diminished as the market recovers. So for us, this last year has all been about timing. We went early, as you know, with debt and equity raises and then really sort to preserve liquidity as the crisis played out. But in this third lockdown, we've actually moved from managing the crisis to being a lot more forward-looking. And we are now ready to emerge and take advantage of this unique opportunity over the next couple of years. So that's all I want to say. Thank you for listening. Let's now move to the Q&A.

Richard, Mark, thank you very much. As you say, we now turn to the Q&A section. [Operator Instructions] And the first question comes from Douglas Jack.

Yes. The first question is about openings really. How many do you think you might open in 2021? And then also in 2022, what sort of level of openings do you think you'll get back to? And to what extent do you think they'll be in sort of smaller box, smaller catchment areas as well? That was the first question. And then the second one is in terms of getting members back, what's the strategy in relation to marketing spend?

. Doug, thank you for the question. In terms of openings, I mean, obviously, what we've announced in the statement today is 4 opening in April and May and then further 4 going on site, but we're continuing to build the pipeline. And as we get opened, understand the flexibility that we have in financing, I expect that we'll make further announcements exactly the scale of the opening plan for 2021. But clearly, what we are doing is building a good pipeline, and that will continue through into 2022 as well. I think in terms of your question on small catchment is a very good one. Initially, in those 8, 1 of those is a small catchment area. And you'll have noticed I draw a distinction now between small box and small catchment because we have a lot more flexibility in terms of the type of format that we can put into a small catchment area. So we are able to either put a 9,000 or 10,000 square foot box or put a small box site as well. So small catchment increasingly will be an important part of our rollout, and it's one of the ways that we increase our addressable market overall. I think in terms of member recovery -- and obviously, that is absolutely our first focus when we do get to reopen -- is to start recovering some of the members that we've lost over the past year. The way that we see it is that we clearly missed January and February. So that was always a key time for us. We do see good levels of pent-up demand. People say that they want to come back to the gym. So what we're effectively going to do is, when we open, we will do some of the marketing that we would have otherwise done in January and February. And so that will be across all our different channels, everything from digital through to SEO, PPC and obviously, some of the more typical TV and out-of-home as well. So we're certainly going to make sure that we hit the ground running and we take advantage of what we see will be some demand in the market.

The next question comes from Tim Barrett.

Can I ask firstly about expected returns? Your enthusiasm for the pipeline comes to us very, very clearly. Just thinking about how returns might look in the future. Can you walk us through what's happened on rents through the downturn? And anything on the kind of denominator of the equation on rent-free periods or landlord contributions that would help? And then a second topic that you've touched on a bit, but in terms of how you'd expect yield average member -- average revenue per member per month to look in the shorter term. Any drivers of that you'd want to call out?

Do you want to take this, Rick?

Yes. Morning, Tim, and morning everybody. Yes, in terms of returns, obviously, our key target that we aim for is a 30% return on invested capital for mature sites. And we have not seen anything so far that would suggest that we can't return to those levels of financial performance when recovery and membership happens. We're certainly expecting that. I think, from our point of view, the only question really is the timing of when that return happens. But certainly, we believe that the economics are going to be just as good as they were pre pandemic. In terms of the rent freeze, you talked about, the impact of that is going to be more in the short-term in the recovery phase, where we have agreed with landlords and continue to agree with landlords actually some rent-free periods, either purely in terms of a relief for rent during the period that we've been closed or in exchange for extending the leases in certain sites. And the benefit of that we talked about in our release, and some of the agreements that were done in 2020 would be a benefit of about GBP 2.1 million. GBP 1.4 million of that fell -- was a benefit in 2020, and the remainder comes into 2021. But in addition, since that point, we've also been involved in a number of other discussions with landlords, which is going to give us more benefit above that in 2021 from further rent-free deals. However, by the time we get to sort of reporting our return on capital in mature sites in a recovery situation, perhaps to '22, '23, it becomes more normalized versus where we were pre pandemic. Those rent freeze will have largely rolled out by that stage. Coming to your second question on yield, as we mentioned in the presentation, we are seeing a firm position in terms of yield. And the 2 key drivers are headline rates and LIVE IT. penetration. And on headline rate, we're not expecting that to change. If anything, there's more upward pressure than downward. As I said in the presentation, clearly, promotional mechanics will take place. This is normal. But we're already the lowest-priced operator in the market. And we don't think that price is going to be the main stimulant for people who are coming back to gym. It's going to be returning confidence in coming out and coming to the gym. So you could expect the headline prices to remain firm. And then LIVE IT. penetration, we would continue -- so that continue to grow. The rate of growth will inevitably slow down because we've already now reached a pretty high penetration level, but we would expect that to be higher in 2021 than 2020.

Okay. Those increases you show on Page 6 in headline rate, was that very selective or across the Board?

Yes, selective. And increasingly, using our data tools, we are being more selective and more specific in where we are increasing prices, both in the headline rate, the new members space and also selectively in raising the prices of our base membership, where perhaps a member has been a member for 3 or 4 years and is on a much lower rate. We'll look to increase their price back towards closer to where the current headline rate is for that year. So a combination of all of those things are becoming much more dynamic and focused in how we're pricing, and it's more selective site by site rather than big changes across the estates.

The next question comes from Anna Barnfather.

I've got 3, please. Firstly, returning to the question on membership recovery. I wonder if you could just remind us of the normal seasonal peak to trough of members at a club basis and also the expected maturity curve of new sites historically. The second question is just on the base level of CapEx. You mentioned prioritizing the importance of technology and everything else. Is that a higher base level of kind of annual CapEx on that? And then the final question is just I know that the industry was pushing for VAT relief. Is that now not a possibility or lobbying assets still continuing on that?

Let me take the one and three. And then, Mark, if you do the CapEx question. So you're absolutely right. The normal seasonality in a year we'd see strong gains within January and February, and then it will kind of flatten out through the rest of the year. We then -- depending on the type of site may see a bit of a spike in September and October, particularly those sites that got students. And then it begins to just tail off towards the end of the year. So that's what we normally see. I guess the difference that we see this year is that we haven't seen the January and February. So we haven't seen that uplift. And therefore, we do believe, and we saw this back in -- when we opened in July that, initially, there will be some pent-up demand. And what we're really focused on with our marketing efforts is to make sure that we can take more than our share of that pent-up demand as well as taking advantage of any displaced members, particularly from either local authorities or other competitors haven't opened. So that's very much in our thinking. And we think it may be a slightly unusual year in terms of seasonality before perhaps we return to something more normal back in 2022. I think in terms of VAT relief what the industry was lobbying for was a level playing to be alongside hospitality. And clearly, it hasn't got that as much as the reduced rates on hospitality have been extended, but haven't moved across to health and fitness. That's obviously kind of disappointing. It's not a level playing field industry enough, obviously, within health and fitness anyway because the local authorities don't pay VAT because of their trust status. And so therefore, this is really a private sector, health and fitness lobbying effort. I wouldn't say it's finished. But equally, we're certainly not assuming that we're going to get anything other than the current levels of VAT.

Yes. Anna, your question about base CapEx, 2 components of base CapEx, technology and maintenance CapEx. On technology, we're going to continue to invest as we have done and grow the investment there. And I think you should assume GBP 4 million to GBP 5 million of investment in technology CapEx in 2021. Maintenance CapEx, a little bit lower than that this year. We've taken the position that, for the moment, maintenance CapEx will be scaled back a little bit and focused on essential repairs and maintenance. When previously, as you know, maintenance CapEx for us also included all the major refurbishments of sites in U.K., introducing new functional space, that kind of thing. And one of the benefits we've had of many years of consistent investment at around 6% to 7% of revenue of maintenance CapEx is that we can before to take a couple of years where that is lower, and we will return to those levels over time. But this year, it will be lower than it normally would.

The next question comes from Christine Zhou.

Thanks for the presentation. A couple of questions, please. Firstly, when you reopen on April 12, are you planning on offering free freeze for members who may not want to return immediately who say you want to delay their return for a couple of months? Or will that not be available? And my second question is just on the local authority side. So you mentioned that you expect 20% of them to close. And I believe U.K. Act has mentioned last summer that it was concerned about the future of about half of their local authority sites. So I wondered, is the 20% an updated figure from them? Or is it your estimate? And on estates where does the differential come from? Is there anything to do with the GBP 100 million recovery fund that I believe you alluded to towards the end?

Good morning, Christine. So free freeze was something that we introduced really where we felt like we were going to be in a world of lockdown, reopening lockdown. So our intention is not to continue with that. We want get membership back on to an even keel. Obviously, we still offer an ability to freeze membership for GBP 5. So that will be available to members. I think the legal authority, actually, the reality is nobody quite knows at the moment as to what the number, clearly, you get to talk about 50% at risk because they're trying to lobby for more money. And obviously, in some respects, they were successful in that in terms of getting the GBP 100 million. The 20% is a number that they equally talked about in terms of those that haven't reopened. And I think that's probably the best estimate, but there may be some -- an increase in that number over time as the pressure on local authorities increases overall. I mean, I think what we've always said about local authority is that, even pre-COVID, quite often, they were loss-making. And so therefore, what you'll have seen is with reduced membership, there's even more pressure on the local authority, which is why there may be some upside to that percentage overall.

The next question comes from Richard Taylor.

Two questions, please. One is on VAT. Why do you think this has fallen on deaf ears given the obvious health benefits of incentivizing people to come into a gym? So what are in your discussions other than yet another cost for the government, is it? And secondly, on your balance sheet, you're obviously very strongly capitalized versus pretty much all your peers, but your debt will obviously be higher versus pre crisis despite your raise. So I guess my question is, do you think you can do 15 to 20 sites next year, given where your current balance sheet is? And where you expect members to return to? And if you can't, would you consider raising further funds to ensuring you capitalize on the opportunity?

Richard, I'll take the VAT one. Then Mark, if you can do the balance sheet. So I mean, it's a really good question as to why it's fallen on deaf ears because, obviously, the health benefits of our sector are really clear, both in terms of impact on physical activity in terms of prevention of disease and recovery from disease and mental wellbeing. Now those arguments clearly have been listened to, but I think it probably comes down to that hospitality has greater employment than health and fitness. I mean, typically, there's about 400,000 health and fitness professionals, I think, across the different 7,000-plus health and fitness facilities. And so, I guess, in terms of, in a world where everybody has been asking for VAT relief, I'm sure we're not the only ones, they felt they had to draw the line somewhere. There is still some lobbying going on. I'd say, I'm not particularly hopeful, but we'll have to see how that plays out.

Richard, yes, in terms of your question about balance sheet and funding for growth. So yes, I mean, our level of debt at the end of February was GBP 58 million. That will grow probably GBP 7 million or GBP 8 million further before we reopen in the middle of April. And then in addition, there's the GBP 8 million of effective unwind that we've disclosed today in terms of rent deferrals and VAT deferral that will be paid over the next year or so. So yes, our debt level will rise into something into the 70s. Now a business like ours, pre pandemic, we did GBP 48 million of EBITDA in 2019. And actually, even just the maturation of the estate that we had then in normal conditions would have meant would have been doing more than GBP 50 million of EBITDA the following year. So those kind of levels of debt, once we return to that level of profitability, will be very sustainable. However, of course, because we'll be opening at the point when we're approximately cash flow breakeven, and it will take us some time to rebuild that cash flow positivity, initially, the capital expenditure for new sites is actually going to extend our debt further beyond that point. So for us, the place we're at, at the moment is that we need to reopen in April, confirm our new pattern of trading. We need to establish what kind of pipeline we think we've got, and that's growing all of the time for the reasons that Richard discussed and then agree our financing position with our banks. Obviously, the position that we have at the moment with our banks was established in a refinancing exercise we did in December. And we've got a covenant waiver for the March covenant, but we do need to reassess that and agree a new plan and new covenants with the banks once we reopen, and we've agreed that we'll do that with them in May. And at that point, we'll be able to establish what we can fund through our ordinary bank arrangements. But at this stage, all the financing options are on the table and all of those factors need to come together before we're able to confirm how much we can open fully in 2021 and in 2022.

[Operator Instructions] And with that, it appears there are no further questions. So Richard, perhaps I could hand back to you for your final comment in the room.

Yes. Thank you for joining this morning, everyone. I think as I said at the outset of our presentation, in this third lockdown, we've really moved our focus from being backward-looking and managing the crisis to looking -- forward-looking and looking how we recover our membership and also how we take advantage of what we see as a unique opportunity. And in that, we're very much focused on the future. So we look forward to updating you after we've reopened and we could begin that recovery overall.