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

Good afternoon, and welcome to The Gym Group plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself. However, the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO Will Orr. Good afternoon to you, sir.

Hi there, everyone, and thanks for taking the time to join us. My name is Will Orr. I'm Chief Executive of The Gym Group, and I'm joined by Luke Tait, our CFO. We each have 30 years-plus experience in consumer businesses, including subscription-type business models like this one and multisite retail like this one. So hopefully, some good experience to be running the business. The Gym Group was founded in 2007. Today, we have 245 gyms. We have around 900,000 members, and we're the only U.K.-listed gym business. Like premier inn and hotels, for example, we are a high-value, low-cost proposition. So that's really from foundation being about focusing on the things that really matter when it comes to a gym. So in particular, 24/7 access, great equipment, big, clean, safe, well-equipped gyms with friendly expert people in them and then engineering out some of the more peripheral items in order to present a fantastic gym at a really affordable price. So that's essentially what we are. What we'll do is present for 15 minutes or so and then take your questions, and we'll be presenting from the annual report and annual results deck that we recently shared with the market. We're not going to present and talk to every slide in every detail, but you'll find the full materials on our Investor Relations website if you want to look in more detail. We'll cover the latest results, a snapshot of where we are today and then just pick out a few aspects of the market, the proposition and the investment case as we see it. So we'll go first to just the headlines of what we shared last week in our annual results presentation. And we're very pleased to say that we had a very strong 2024. We grew our membership by 5% to 891,000 members at the end of December. We grew revenue by 11%, and we grew profit, EBITDA less normalized rent, by 24%. We're also very pleased to see a 4 percentage point improvement in the returns on our mature estate, and that's an absolutely critical metric for us. It's important to understand that as a team, we are absolutely as focused on the returns we get from our current sites as we are about opening new ones. And I think that's one of the things that will make this growth story very sustainable. Strong cash generation is a very important part of our proposition. We generated GBP 37.5 million of free cash flow last year, up 39% year-on-year, and reduced net debt by GBP 5 million in the same period. That free cash flow is funding our organically funded rollout of new sites. We opened 12 in 2024, which was the top end of our guidance. And we're on track to open circa 50 new sites over the next 3 years, as I say, all funded from free cash flow. And finally, we reported really good progress on our next chapter growth plan, and it's that growth plan which is driving the fantastic improvements we're seeing in returns from the existing estate and also the very strong performance of our newest gyms. So that's the overview, and then Luke is just going to cover the headlines from the financial results.

Good afternoon. So starting with the key revenue KPIs, which are the first 2 on this page. Both have shown good growth year-on-year. We had average members of 906,000 during the year, which was up 4% versus last year. And average revenue per member per month was GBP 20.81, up 7% on prior year. As a result, revenue for the year was GBP 226.3 million, up 11% on prior year. The strong revenue growth has dropped through well to profit with EBITDA less normalized rent of GBP 47.7 million, up 24% or GBP 9.2 million year-on-year. Profit before tax was GBP 2.5 million, and it was up GBP 10.8 million year-on-year. As Will mentioned, free cash flow of GBP 37.5 million was up GBP 10 million versus prior year, enabled us to open 12 new gyms and also pay down debt by GBP 5 million to GBP 61.3 million, reducing the net debt to EBITDA leverage ratio to 1.3x in the year, down by 0.4x versus the same time last year, December 2023.

Okay. So that gives you a snapshot of where we are right now today and the strong growth that we're seeing. And next, we're just going to give you some headlines from our strategy and the progress that we're making in terms of the way that we intend to grow the company sustainably. And I'm just going to start with the investment case as we see it and why we think it's so compelling. So starting at 12:00 on the circle. Health and fitness is a very large market with structural growth tailwinds. And in gyms, it's the low-cost part of the market that is growing fastest. As with other categories, I think we really benefit from that kind of appetite for no frills, great value for money proposition. So we are in the fastest-growing part of a fast-growing market, and we see real structural tailwinds when it comes to fitness in the U.K. as we'll go on to show. That low-cost model, which is based on an advantaged business model in terms of the way that we operate our sites, means that we can deliver high value at a low cost, which is a winning proposition for customers. And our proposition gets extremely high ratings for value for money and customer satisfaction. Moving around the circle. This is not a complicated business. There are multiple drivers of growth, and we have detailed plans on each of those drivers across pricing, the way we acquire new members, the way we retain them and also the way we pick new -- pick and build new sites. With the progress against those multiple growth drivers and the sort of detailed data-driven plans we have in those areas, we are able to generate more cash flow, which we're doing. And as we said, that enables us to reinvest in opening more sites around the U.K. And PwC did an independent report about a year ago, suggesting that there's 10 years or more of white space for U.K. low-cost gyms to roll out into. So we think the opportunity is sustained. And at the center of all that, we're very, very data and tech driven so that -- particularly using data to derisk any decision-making and give us high certainty when it comes to our growth plan. So just turning to a couple of the elements from that wheel. If we just talk briefly to the market, we are -- the market continues to grow. 10.7 million of us are members of gyms in the U.K., and you can see that growth continues. Penetration of the U.K. population in gyms continues to rise, and it is the high-value, low-cost part of the market that is growing fastest. You can see that in the green part of those bars on the right-hand side. And then within that high-value, low-cost part of the market, ourselves and PureGym account for over 80% of the members. So we have a very strong competitive position in the market. And why is the market growing so relentlessly? We unsurprisingly do a lot of surveys, focus groups. We observe behavior in our gyms. And we see a number of sort of macro consumer trends, which I think are all enormously helpful to our business. So I'll go through them quickly. The first we call Fitness IQ, which is to say that U.K. gym goers are more and more informed about the benefits of physical health and also more sophisticated in the way that they work out. They use a range of equipment from cardio to weight, which means they get great value from the gym. And also, they have to just have a high understanding of how to get those benefits. When it comes to -- so that's physical health. There's also mental health, which now our members in surveys will say that the mental health benefit for them is as big a motivator as the physical health benefit. So that's a big change versus, say, a few years ago. And then I think there's some more kind of cultural aspects whereby for sort of newer generations of gym goers, the gym is really part of their identity. It's part of how they want to look, how they want to feel, how they want to socialize, how they want to project in social media. And so the net of all that is we see our customers and our average customer is about 30. They go to the gym because they want to, not because they feel they should. And again, I think that's a very helpful tailwind for this business. And then, of course, as we said before, people like the no frills proposition because it's great value for money. And they also -- our model is no contract. So really overcoming one of the things that people historically didn't like when it came to gym. So we're doing it. We're meeting a need in a very affordable way and also in a very flexible way. So all those trends really help us. And I think in particular, Gen Z, which represents around 40% of our base, I think that group really particularly embodies the sorts of trends that we are talking about. And I think that generation is giving us a generational opportunity to introduce people to something that they really value, something that they really want to do and then to help them build habits that last a lifetime. So the sort of consumer tailwinds and the market tailwinds and the value proposition, I think, all give us great confidence in the investment case. And then just I think one more sort of data point in this area is this is a survey. It wasn't looking just at the Gen Z. It looked at the population as a whole. But this is a recently refreshed annual survey, which asks consumers which areas they would consider cutting back on if they needed to. And as you can see on the chart, after our children and our pets, the thing that we're least willing to cut back on is fitness and well-being. So we think this is a very, very resilient picture when it comes to demand. So yes, as I say, that's some of what we think makes the market very attractive. And then just briefly in terms of our strategy, just a high-level summary of our strategy to sort of maximize that opportunity. We set out our next chapter strategy around a year ago as a business. We've been working on it. We've been executing against it for longer than that, for sort of 18 months. But it's in 3 simple parts. The first, we call strengthen the core. And this is about increasing returns in our mature estate. And this program is what's driven that 4 percentage point improvement in our mature site returns, and we think there's more to come there towards -- as we go towards 30%. And then within strengthening the core, there's strategies around pricing, around digital marketing, around retaining customers for longer. And we think there's a huge amount more to come from that program. The initiatives in it are kind of multiyear and all gathering pace. What strengthen the core then does is it generates more like-for-like revenue and more cash flow into the second cog of our strategy, which is to accelerate the rollout of quality sites in the U.K. And as I said before, we are expecting to open around 50 new sites over the next 3 years from free cash flow. And then finally, broaden our growth. We're extremely focused on the U.K. at the moment and those first 2 cogs. But periodically, we will look at what opportunities there might be to broaden our growth, whether that's in new territories internationally or new adjacent revenue areas. But essentially, that's the plan, and we will be sticking very consistently to it for some time to come. I'm going to do one last chart, and then I'm going to take your questions. So it's really a summary. And as I say, there's a lot of detail in the pack about that next chapter growth strategy and how we're progressing with it. But just to summarize, this is a really large -- so fitness in the U.K. is a really large market with structural growth tailwinds as we've described. Second point is we have an advantaged business model. We have an employee-light business model, which enables us to deliver high value at low cost and also insulates us significantly against changes in National Insurance and Living Wage. And I think among leisure stocks, we're almost in a universe of one when it comes to that protection that we have. Thirdly, there's multiple like-for-like growth opportunities, and we are unlocking those, and we'll continue to do so. And there is 10 years plus of white space for low-cost gyms in the U.K. And we are making really good progress that we hope to see continue. We grew profit by 24%. As I said, we improved our mature site returns by 4 percentage points, and we'll expect further progress on that in 2025, all of which is accelerating a self-funded rollout of quality sites. And as a result of all that, we took the opportunity when we presented last week to again revise our analyst forecast range up to the numbers that you can see there on the screen. So we think this is a sustainable sort of cash and returns-driven investment case. And we're confident about it as we look to the future. So I'll pause there and see what questions we have.

[Operator Instructions] We have received a number of questions, and I want to start the Q&A session. The first one reads as follows. How have you been impacted by the changes in National Wage and National Insurance?

Yes. So it's a good question. So taking National Living Wage first, we -- I think the changes there were well trailed. And so we had budgeted more or less exactly for what came to pass in the budget. So that's that piece. And then the second piece is around National Insurance, which was more of a surprise. The impact to us in 2025 of that -- the addition to our cost base is about GBP 1.3 million. For many multisite leisure businesses, the impact is, as you probably know, tens of millions. And it didn't change. So that number didn't change our forecast. It didn't change the fact that we've again updated the guidance. And just to very briefly explain the kind of core operating model is -- among our fitness trainers is a combination of a contract with a small number of hours to maintain our gym, support our members. And on a separate contract, those guys then pay rent and build their own personal training book. So that operating model is sort of net cost neutral and also means that we're not exposed to National Insurance in anything like the same way as many others.

Turning to the next question. Do you think you can carry on raising prices?

The short answer is yes. And we might just dip into a slide, which I think is critical to understand sort of -- yes, I think I'm saying the investment case. So Slide 26 in our pack. What this shows is it's a sort of big quantitative data set that we refresh each year with an external company called Simon-Kucher & Partners. And what it does is a number of big quantitative methods to plot perceived value against perceived price. And what you can see is that the low-cost gym market, so us and our 2 key competitors, are all underpriced essentially. So consumers perceive more value than they pay. If you do go to one of our gyms, you'll see a big, well-equipped, clean, safe gym with some friendly expert people in it for, let's say, GBP 25 a month. And it's just demonstrably good value, and you see that in that data. And then on the right-hand side of the slide, you can see that we have sort of 8 out of 10 value for money scores. And those value for money scores have been consistent despite some upward pricing over the last couple of years. And it's also worth saying the percentages of price increase are material when it's applied across a business of our size. But in absolute terms, they are quite small. That's money. And then finally, our proposition is less than half the price of the mid-market and -- mid-market operators. So for many reasons, I think we have a very favorable sort of landscape when it comes to pricing, and that's why we're guiding that we will price ahead of inflation -- ahead of our own cost inflation for the foreseeable.

And it might be worth just mentioning on that point that we are anticipating reasonably low cost inflation again this year. So last year, it was 2.4%. So we have a number of cost lines which are actually reducing to offset the minimum wage increase. And we expect in '25 to be in the same sort of place. We're expecting site cost inflation to be around 2%. And therefore, we are expecting price inflation to outstrip cost inflation quite significantly.

Turning to another question. With plans to open 16 new sites in 2025, what criteria do you use to select locations? And how does this align with long-term expansion goals?

Yes, sure. Again, we're just sort of putting up a slide that hopefully helps to illustrate. So we have 245 sites. So we have a big sort of data set to analyze in terms of the ingredients of the sites that have the best returns. And so we looked at that, and then we try and really sort of distill the formula for what works. And essentially, that is finding areas of -- unsurprisingly of dense population, so in Greater London and other urban residential areas. And then it's about site-specific things like convenient access, good visibility for the gym as well. And then you sort of see that reflected in the 12 sites that we opened in 2024. So if I take the likes of Orpington, Surbiton, Plaistow, Shepherd's Bush, they're in sort of significant greater London in and around of sort of suburban areas. And then there are equivalents in places like Manchester, Gillingham and so on. And then if you go forward one more slide, it's sort of fine-looking slide, but this shows the growth in membership from day 1 of each of those 12 sites. And you can see that each one of those is performing ahead of our historical average when it comes to membership numbers. So we will continue to open gyms like that. We'll open around 16 in 2025 and around 20-odd in 2026. So it's sort of measured speed of expansion, but it will be those kind of dense population, good-sized sites, and we won't deviate too much from that formula. And as I say, we'll do it all from free cash flow as well.

The next question here. How has recent trading been? And are you seeing any slowdown in demand from consumers?

So we actually included in our results announcement in our RNS that we had traded -- so January and February is clearly a key time of year for us. And we were pleased to be able to say that we traded well through [ '23 ] results, but then we could also update to say that 2025, January and February have traded well and that we're not seeing any slowdown. And I don't know, Luke, if you want to...

Sure. No problem. So we -- as usual, with our full year results, we give trading for the first couple of months of the year because they're a key acquisition period. Revenue for the first 2 months of the year was up 8%. That was driven half by increase in average members and half by an increase in average revenue per member per month. We are also guiding to like-for-like revenue continuing to grow nicely for the year at 3%, as we mentioned earlier. In the middle block there from the point of rollout, Will just mentioned our plans for 14 to 16 sites. And we now have 3 sites which are currently under construction, and we have a further 5 where we have legal commitments. And then on the right-hand side, as I mentioned earlier, we were also guiding to like-for-like site cost growth of 2%. And so when you combine that with a 3% like-for-like revenue growth, it gave us the confidence to up our guidance -- profit guidance range to the city to the top end of the analyst range, i.e., around GBP 51 million.

The next question we have here is really around competition, I guess. You mentioned that The Gym Group and PureGym have 81% of low-cost members. What is the split of the 81%? And how do you differentiate yourselves to PureGym?

Yes. I mean I think probably the first thing to say in terms of that sort of differentiation point is, I think, from a sort of consumer's point of view, if you visited 5 PureGyms and 5 Gym Groups and worked out in them, something that I have done, you -- I think your overall impression would be a relative similarity in truth. They are both 24/7. They're both affordable. They both have similar sort of equipment laid out in a similar way. So honestly, there's probably more differences than -- sorry, more similarities than difference, but both deliver extremely well versus a growing need. So in a sense, that's okay. And then we seek to differentiate in various ways. But I mean in particular, it is -- it tends to be about the local trade area. And therefore, where we do compete on sites that are more close together, it's really about each individual site and making sure it's got the right local management in place, that it's clean, it's well presented, the kit is well maintained, the class timetable is good, the personal trainer is good. So actually, it kind of comes down to just making sure the offering is as well presented and executed as possible at a local level. And then over time, we also sort of obviously try and build out our brand to be distinctive. And then in terms of the sort of split, they have around 400 gyms, and we have around 250 gyms. And then in terms of the sector, there's a sort of another 100 or so low-cost gyms in the sector. JD Gyms is the other sort of significant player. And yes, as I say, PwC's view is that the U.K. has the potential to have another 750-plus low-cost gyms. So the sort of -- and penetration is growing. So there's a sort of significant opportunity for us and PureGym. And I think compared to many other sectors, say, retail, the competitive intensity is actually relatively low.

We've got another question here. How are you navigating the broader macroeconomic environment, including potential consumer spending slowdowns or inflationary pressures?

Yes. I mean it touches on some of the things that we talked about. On the inflationary side, we are, as I said, quite well advantaged in terms of our business model. So -- and energy increases abated some time ago post Ukraine. So we are guiding that our own cost inflation will be around 2%, and we will be pricing ahead of that at around 3% for this year. So -- and I think that's on the sort of supply side. We have that very advantaged business model. And on the demand side, because -- essentially because the because going to the gym is becoming less and less discretionary and because we are a low-cost player, I think we're pretty resilient on the supply side as well, and as we said, didn't -- haven't seen any consumer slowdown in terms of demand for our proposition.

Yes. Probably worth just putting it in context. If you use our gym once a week, it's not costing you much more per visit than a cappuccino from Starbucks.

Just turning to the next question. When do you think you'll reach saturation in the U.K. market?

Yes. I think as I sort of mentioned before, I think it's sort of 10 years plus for sure. We are -- I think we're doing our 50 over 3 years, and then I think we expect that to become a kind of rolling 50 for some time. There's a lot of white space in the U.K. There are -- there's a continual flow of new people coming into the market because -- again, because of the price point and because of the younger demographic that we tend to attract and penetration overall of gyms in the U.K. is growing. So I think we are, frankly, many years from saturation.

Is there any opportunity to further monetize the existing member base through premium services or potentially digital offerings?

Yes. I mean we -- so we have a sort of range of products. We have Off-Peak. We have Standard. We have Ultimate. So we do sort of somewhat premiumize within our product range. And we also have 1 or 2 add-ons like a sports water add-on and so on. But yes, I think over time, there will be and is opportunity to add new value-added services. But I think we will seek to stay firmly in the, I'd say, kind of high-value, low-cost part of the market. Actually, the mid-market, which is a bit more premium, is having -- has a much more difficult time. So I think back to that sort of premier inn analogy, we'll find new opportunities to sell benefits to customers. But we want to keep it simple, and we want to keep it affordable.

Just switching gears slightly. How do you plan to retain the return on invested capital targets, especially as the new sites are rolled out?

Sure. So I will put up a slide that was again in our results deck. So in 2023, we reported a return on invested capital of 21%. And then last year, driven predominantly by that very strong profit growth that we saw, return on invested capital was 25%. So we moved it forward by 4%, which meant we hit our midterm target early. We have about 13 gyms that were quite impacted by change in working patterns post COVID. And if we exclude those, the underlying return on invested capital was actually 27%. So getting very close to our target for new sites, and we look at the sort of performance by annual cohort. And the gyms that we opened in 2021, which we now have proper trading history on, have actually already achieved that 30% ROIC target. And then over the page, we just show the revenue evolution of the following cohorts. And the 2022 cohorts are very close now to their target mature revenue. And therefore, we have high confidence that they will deliver the 30% ROIC. And you can see that actually the 23 sites are performing slightly ahead of the 22 sites. So again, I think we'll end up with 30% ROIC. And then finally, the sites we opened last year, which is still very early in their sort of maturation, have -- as Will took you through earlier, have shown very strong initial volume. So I think that we are pretty confident that with the sort of gently accelerating rollout framework that we will be able to deliver 30% return on invested capital on that -- on the new openings. And at the same time, given the very strong forward momentum we had last year and we anticipate further momentum this year, it gives us good confidence that we'll get back to 30% in the mature estate in due course.

Another question we have here. I noticed you use EBITDA as a metric. How does that convert to cash?

So again, we will pull from one of the slides in the results deck. Let me just pull it up. So this chart shows the waterfall of EBITDA. And we use EBITDA less normalized rent. And what we mean by that is EBITDA including the actual rent charge, the cash rent that we pay to the landlords in that time frame rather than being confused by the latest change in accounting, which replaces rent with a depreciation and a finance charge, which frankly does make it a little bit more difficult to see what's going on in cash. And this slide attempts to reconcile genuinely the sort of cash -- the cash generation of the business. So the cash profit on the left-hand side was GBP 47.7 million. We then had cash inflows from working capital of nearly GBP 9 million. And we have a model that means that as we grow, we do actually generate working capital. So our members pay us at the beginning of their time period, and our suppliers pay us -- or we pay the suppliers 30 days or 45 days later, depending on our agreed terms. So as we grow, we actually generate working capital. We then spent GBP 12 million on maintaining our existing sites, and we take the maintenance of the existing sites very seriously. It's important to maintain a top-quality portfolio. So once those 2 are taken off the cash profit, you can see the sort of operating cash flow is about GBP 44 million. So still the majority of the cash profit is intact. We then spent last year about GBP 6 million on interest. This year, it will be a bit lower. But after we deduct interest, free cash flow was GBP 37.5 million. It's also just worth saying at this stage that we had some significant tax losses during COVID. So we don't anticipate paying any cash tax until at least 2027. So you can see that the cash profit of GBP 47.7 million translated to free cash flow of GBP 37.5 million. And that is the cash generation that we then can choose to deploy as appropriate between rolling out new sites or paying down debt or potentially making returns to shareholders.

The next question. Can you explain your debt profile? When is it due to roll over? And any likely refinancing rates?

Sure. So again, I will flick to a slide from the pack. So last June, we renegotiated a new banking package with our syndicate. We have 3 banks in our syndicate, so HSBC, Barclays and NatWest. So obviously, very strong banks in the U.K. market. And we moved from a rolling 1-year RCF to a 3-year split term loan and RCF. And it also comes with 2 1-year options to extend. When we renegotiated last year, we also reduced the interest rate over SONIA from 2.85% to 2.75%, and we also removed any restrictions on returns to shareholders.

And we have one final question. Do you expect to generate cash beyond the spend on your opening program? And if so, will you pay down debt, look to diversify or give it back to shareholders?

So this time last year, we set out a capital allocation policy that started with ensuring a sort of minimum debt coverage was in place, but we're well below that now. So we don't feel like we need to pay debt down any further than where it is. Our second priority was organic growth and new sites as long as we felt we had high confidence of achieving 30% ROIC. As I think we've shown you on those earlier charts, that we believe we are doing so. So we will continue to prioritize new sites in the short term. But if we do have excess free cash flow or if we see significant change in the share price and we believe we can match the returns that we're getting on those new site openings for buying back and canceling of shares, for example, then we're very open to do it.

That's great. Will, Luke, thank you very much for answering those questions from investors. You've been very generous of your time. Of course, the company can review all the questions submitted today, and we will publish the responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is particularly important to you both, Will, could I just ask you for a few closing comments?

Yes. Well, I put the sort of summary and outlook slide up there on the screen. Again, I won't sort of seek to repeat every point in there. I think the things to think about are essentially the size of this sort of consumer trend around health and fitness and this quite unusual business model that enables us to deliver that demand in a way that's great, great value for money. And I think those 2 things should make it a very resilient growth path. And then we're about execution, consistency, cash generation and then organically funded rollout with 10 years plus of white space. And as Luke says, we will also be disciplined and deploy our cash in the way that is best for our shareholders, whether that's the organic rollout or at some point, for example, buybacks. So I've been in the job for a bit less than 2 years, and I certainly feel greater confidence than ever that this is a fantastic business and a fantastic investment proposition as well.

Will, Luke, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? It's going to take a few moments to complete but I'm sure will be greatly valued by the company. On behalf of the management team of The Gym Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you very much.

Thank you.