Viva Leisure Limited (VVA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Viva Leisure Limited FY 2023 Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Harry Konstantinou, CEO. Please go ahead.

Good morning, ladies and gentlemen, and thank you for joining us on the conference call today for Viva Leisure's FY 2023 Full Year Results Presentation. I'm joined today by our CFO, Mr. Kym Gallagher. This morning, various documents, including an investor presentation, which we will be referring to today were uploaded to the ASX. This presentation is being webcast on openbriefing.com and will be available for replay on the Viva Leisure investor website later today. The agenda for today's presentation will commence with some highlights and general commentary on the full year results, followed by Kym providing more detailed information on the actual financial results and details on our capital allocation strategy, following which I will provide an update on our business strategy and outlook following some impressive results following a successful strategy review and trial in FY 2023 that we expect to expand on in FY '24. And finally, we will complete the presentation with a quick run-through on our brands and segments. At the back of the investor presentation from Page 42 is an appendix with additional information, which we will not be going through during this call. Included in this appendix is a reconciliation of the statutory profit and loss to the traditional X-AASB16 numbers. Following the completion of the presentations, there will be an opportunity for questions. I remind you that if you wish to ask a question, you will need to dial in as questions cannot be asked by the webcast. I now look forward to taking you on the Viva journey for the full year FY 2023. Today, we present to our shareholders and investors the results of our journey for the year. However, our journey and goals really started in 2004 when we opened our first location. Our success is borne from hard work and belief in our strategy reflect our commitment to innovation, collaboration, technology and being able to do something that nobody has done before in our industry. The future is bright, and we stand poised to reach even more new heights. Viva has always been more than just a Health Club Group. We have a diverse range of revenue and income streams. We manage and control as much of the member experience process as possible, including the back-end systems. To do things differently and to achieve the results we have achieved today means we need to be different, and this is what our business is. Though nearly all gym facilities may seem identical offering just equipment in a box, Viva's approach sets us apart by controlling a diverse ecosystem with multiple brands, ensuring technology is at the forefront of everything we do, we can cater to changing fitness needs and allow members easy flexibility to switch between options or an app or a portal, as their needs change. This comprehensive and adaptable approach is what truly distinguishes us in the market. As the founder and CEO of Viva, it is exciting to be here today reporting back to our investors a period of performance, which truly reflects what this business can achieve, notwithstanding external factors, such as the significant inflationary pressures and economic headwinds being faced. It represents a period, which shows the true lifestyle nature of our industry and where our members put their health and fitness first. This does not mean that inflation and rising costs does not affect us. What it means is that our model is flexible enough to adapt from our dynamically adjusted pricing model for new members to our ability to increase yield to cover rising costs by simply increasing pricing by $0.50 or $1 per week per member, something that I think gets lost in translation when investors consider our business. Recurring 14-day fortnightly revenue is very powerful. When we get into the details, you will see that our average revenue per member for June 2023 was 7% above the figure for June 2022, covering inflation without impacting our member growth. There are not a lot of businesses that can do this as swiftly as we can. As I said in our half year presentation and previously, we are a lifestyle business and consumers are absolutely prioritizing their personal health, wellness and fitness into their daily lives. There's a lot of noise that comes and goes about how this industry is discretionary spend. It simply is not. There is nobody alive today that does not want to be fit and healthy. Nobody is happy to be unfit to struggle with energy levels and do not have the ability to enjoy life. I've said this in the past, and I'll say it again, these results that are presented to our shareholders and investors today will highlight to those, who believe this industry is discretionary, how wrong they are. We now turn to the results we are here to present a year that has presented some remarkable results that are laying the foundation for even more growth in FY 2024. I will start the presentation on Slide 5, which is a summary of our guidance. You will recall that in October 2022, well before the 7 interest rate rises that we did not expect, we provided our guidance to the market. In that guidance, we pointed to a few key drivers that would achieve what looks like an unachievable results at the time. We guided to a range of revenue of between $137 million and $140 million. This represented an increase in revenue of nearly $1 million per week or 52% above the FY '22 revenue. We then guided to an EBITDA range that this would generate between $28 million and $30 million of traditional EBITDA. The key drivers to achieving this was straightforward to us and are as indicated on the slide on your screen. In July 2023, we confirmed our revenue number and narrowed out the guidance on EBITDA to the higher end of the range. Today, we present an overachievement on revenue, corporate members, corporate locations and average revenue per member per week or ARPM. We achieved the higher end of guidance on utilization and the end result was $29.2 million of EBITDA and $141.2 million of revenue. This is what I would consider a robust result. Moving to Slide 6, what is remarkable from this result is that revenue for FY 2023 represents an increase over FY '22 of 55.4%, and EBITDA represents an increase over FY '22 of 429.2%. For me, knowing that our business achieved over $560,000 of EBITDA on every -- on average every single week with inflationary pressures and interest headwinds is a testament to the resilience and agility of our business. Other points to highlight from this page include NPAT increased by $14.3 million from a loss in the previous year of $5.5 million to increase to $8.8 million in FY 2023. And statutory NPAT also reversed from a $12.1 million loss in FY '22 to a $3.4 million profit in FY '23, a remarkable $15.5 million turnaround. Membership at owned locations closed the year at 181,950, an increase of over the previous corresponding period of 14% or [ 22,400 ] additional members were added. Network membership, which includes Plus Fitness network was up 7.2% to 343,325 members. Moving to Slide 7. We have presented this data before, but it's important to show that this was not a one-off lucky year performance. Our revenue has grown at a 4-year CAGR of 51% even with COVID in between all of that. And our EBITDA, as expected, has grown much faster at a 4-year CAGR of 69%, again with COVID interruptions affecting a significant portion of that period. Moving to Slide 8. In this slide, we present our June 2023 run rates to assist you with your modeling. Key points to highlight on this slide. Annual revenue run rate. In June 22, we highlighted our run rate for revenue was $124.5 million, and we achieved $141.2 million. Based on June 2023 revenue, the run rate for FY '24 now shows $156.4 million. Monthly revenue run rate. We report monthly revenue run rate, as well as daily, as we count revenue on a daily basis. Monthly revenue run rate based on June 23 is $12.9 million. This is an increase of over $2.7 million per month over June 2022. In terms of daily revenue run rate, our business now averages $428,000 per day, a significant increase over FY '22. Like-for-like membership, which represents the growth in membership for the same clubs that were opened pre-FY '23 shows a 5% increase. This means we are still seeing maturing of our clubs, more on this later in the presentation. System-wide sales, which represents the revenue accumulated for each franchisee of Plus Fitness is now over $107.6 million, an increase of $12 million over the previous corresponding period. This statistic shows that the network is growing from strength to strength. I would now like to pass on to our CFO, Mr. Kym Gallagher, to run you through the financial results starting at Slide 10.

Thank you, Harry, and good morning all. I'm on Slide 10, as Harry mentioned. This chart shows the bridge between the revenue in FY '22 and the drivers of growth to FY '23, which is an impressive 55.4% for the year. The most important statistic here is the strength of the return of members and associated revenues to our organic club base, that is those clubs on foot, as at 30 June 2022. When comparing the revenue numbers at 30 June '22 versus 30 June '23, these clubs exhibited growth of nearly 90% of the 55.4% total growth. This growth has been achieved by our mix of yield improvement and strong membership growth on these clubs. The remainder of the growth is split between FY '23 greenfield sites and acquisitions, as well as an uplift on Plus Fitness gross revenues. Moving on to Slide 11. Following on from the previous slide, where it was noted that one of the key drivers of the organic growth was yield, we've improved our yield across the member base at 7% during FY '23. This roughly equated to the rate of inflation we experienced across the year, which unfortunately kept our margins in check. In addition, we imposed a member fee increase across many of our legacy clubs and members in May 2023, that is those clubs or members that hadn't seen increases for many months. This will see a full year benefit across FY '24. The resilience of our members was demonstrated by not only absorbing the fee increases, but also continuing to grow our base, which provides us a great springboard into FY '24. It's also worth noting that as members churn, they come on at a higher rate. That is any member that joins typically remains on their joining rate until they quit. New members coming on join at the rack rate, which is higher, so there's a natural accretion in yield. Moving on to Slide 12. Note that we have grown the membership base by 7.2% across the financial year on a combined group basis. This has led to a combined member base of just over 343,000 in June '23 versus 320,000 in June '22. This growth has continued into the new year with further growth of 1.1% for the month of July '23. ACT, you will see is no longer the dominant market for us membership wise with New South Wales now taking the helm. This has led to a good diversification across key geographies. Finally, Viva corporate members now exceed the Plus Fitness franchise member numbers for the first time. Moving on to Slide 13. This chart shows the bridge of Viva owned club members between June '22 and June '23. As mentioned previously, with key organic revenue drivers, member base for clubs at 30 June '22 grew by just over 5%. Notably also, FY '23 acquired members account for approximately 7% of the increase in members, but only 4% of the revenue growth, suggesting that FY '24 will include a reasonable uplift for these sites on a full year basis. Moving on to Slide 14. For those unfamiliar with our business, one of our key metrics is utilization. This is a measure of members per square meter of floor space at a facility used to monitor capacity. We assume that 2 members per square meter of health club floor space is at capacity and 1 member per square meter Hiit Republic's and boutiques. The realistic long-term target of the Group is an average of 75% to 80%. We're currently sitting at 72.7% utilization, which is up from 69.3% in the prior corresponding period and flat with where we sat in December. As we opened 3 clubs in the month of June, this dampened the utilization rate slightly. We were actually sitting above 73% during June prior to this. As mentioned, this is one of the key drivers of our business, particularly for our EBITDA margin. Each new member improves utilization creates revenue and most of this falls to the EBITDA line. For perspective, every 1% increase in utilization improves revenue by between $1.8 million and $2 million at our current average revenue per member, with most falling to the EBITDA line, which also creates a significant improvement in margin. So in summary, we have record member numbers combined with record yields and high utilization, and we see this momentum continuing into FY '24. Moving on to Slide 15. Firstly, the results shown throughout this section are predominantly based on an X-AASB16 basis, which is also consistent with prior periods. As Harry mentioned, the financial year has ended with revenues of $141.2 million and EBITDA of $29.2 million. This compares with our guidance ranges of $137 million to $140 million revenue and $28 million to $30 million in EBITDA, as announced to the market in October '22. As Harry mentioned also, it's important to note that since we put our guidance into the market, we've experienced another 7 interest rate rises. This is on top of the 5 we'd already experienced with inflation running at somewhere between 6% and 8% across this period, and this created a broad-based impact on our cost base. We had no further increases in our member fee base to counter this until recently at the end of May 2023. So we have managed our cost base effectively such that we maintained our margin recorded in the first half of 20.7%. In other words, despite what would otherwise be significant headwinds, we managed to achieve or exceed all key guidance drivers. In summary, this equated to growth on the revenue line of 55.4% and a massive 429.2% on the EBITDA line. NPAT improved a significant $14.3 million to a record $8.8 million. This equates to approximately $0.098 per share under the old metric. Moving on to Slide 16. A strong opening cash balance of $10.1 million and a load that drawn in our senior facility allowed us the opportunity to continue to pursue rollouts, acquisitions and refurbishments. Accordingly, we invested in a total of 11 separate acquisitions and opened 9 greenfield sites and underwent 16 refurbs in the second half of the year, which is reflected in the movements between property, plant and equipment and intangibles and the right-of-use assets and liabilities. Total debt has remained under control, in fact, reducing by approximately $1.4 million across the year. From a leverage perspective, net debt to EBITDA, which includes total senior facilities and equipment finance has dropped across the year, as EBITDA has improved significantly. We have considerable headroom in our senior facility available for future acquisitions. Moving on to Slide 17. Cash flows from operations improved by 90% over the prior corresponding period. As mentioned, this allowed us to deploy funds into greenfield sites and acquisitions, as well as some strategic projects, which Harry will discuss in a minute. In addition, we had an overall reduction in our debt balances and that the lease principal reductions line is the principal reduction of our equipment leases and rental leases, so it also includes the rent payments component. Moving on to Slide 18. Our location or 4-wall EBITDA margins have maintained around 42% for the half despite the inflationary pressures we mentioned. In addition, our corporate costs or cost of doing business have also declined, as a percent of revenue across this period. Our EBITDA margin was consistent with the half at 20.7%. We anticipate that our margin should improve with the maturation of sites and utilize increases in the second half FY '23 opened locations, subject, of course, to raining in inflationary pressures. Moving on to Slide 20. The Group generated free cash of $12.3 million for the full year, with $5.4 million generated in the first half and $6.9 million generated in the second half. This resulted in just over 42% of EBITDA falling to free cash. This is up from 38.7% in the first half. We remain well above the internally set target of a conversion of 35% of EBITDA to free cash before tax. As mentioned on the previous slides, the free cash generator was largely invested in greenfield sites, acquisitions, and site upgrades, as well as $3.2 million spent on technology projects, such as the Hub and Viva Pay. Moving on to Slide 21. This shows some further analysis on how our CapEx has been spent for the year. The new site CapEx is CapEx spent on greenfield sites over the period, site upgrade CapEx is the major works performed on existing sites, which Harry will go into detail on this on subsequent slides. But essentially, it forms part of our strategy to enhance the value of existing clubs through reinvestment. These upgrades are undertaken to target an increase in membership and therefore, utilization, as well as yield rather than simply maintaining the premises. Of these projects, we spent $5.6 million, of which the bulk was spent across the second half, and we anticipate a return on this cash investment of around 75% within 12 months. Maintenance CapEx is simply the CapEx spent on existing sites, but does not include equipment replacement, which is lease financed and therefore, not a cash outflow. Now on Slide 22. Very briefly, this slide shows the principles behind our allocation of capital. These have not changed since the last reporting period in total. And while not noted here, we would, however, expect upgrade funding to be a priority for FY '24, which Harry will go through in a minute. And we're in discussions around setting up a separate facility to accommodate this, at least in part. Accordingly, we anticipate that the bulk of the upgrade funding will come from debt with the balance coming from -- between maintenance and growth CapEx areas. I'll now hand back to Harry.

Thanks, Kym. Now we are -- now we get to the exciting part of the presentation, discussing business strategy and outlook for 2024 and beyond. Moving to Slide 24. In FY '23, amongst other things, we conducted a strategic review of all our brands and locations. There were several reasons behind doing this. However, the biggest catalyst was a trend we were seeing, where members Fitness IQ had increased and their fitness experience together with this. What this meant from an engagement perspective was members had shifted from class-based instruction to basically doing it themselves. Such a shift meant our Hiit Republic brand was not performing through our high standards and expected returns. In addition to that, our decision point was becoming necessary on all our upcoming 5-year lease renewals. Would we stay? Would we go? Would we refurb?Would we repurpose? So we started our review with a primary focus being on returning the best result for our shareholders. We wanted to ensure we capitalize on our tech, and we have more on this later in the presentation. We wanted to ensure we kept delivering exceptional service and products, we needed to consider our full portfolio of brands, our team and how we could diversify our income streams. For those that I've presented to you in the past, you know, I believe in data-driven decision-making processes throughout the business. We create data and we use it for everything. I find the quote on this page fitting in that if you can't measure it, you can't manage it. Moving to Slide 25. Our key focus points and considerations for our FY '23 review were our upcoming expiring leases, our underperforming to our requirements Hiit Republic brand, our shift in member usage patterns reducing the requirement in group fitness studios, optimizing performance, capitalizing on the Plus Fitness refurbishment program for our corporate-owned locations and managing locations, which we're operating over our preferred utilization metric, essentially over trading. Moving to Slide 26. In FY '23, we completed 21 upgrades as part of this review. 16 of the upgrades were conducted in the second half. The total cash cost of the upgrade was $5.6 million, as Kym indicated, and created in the short time since completion, less than 3 months for some location and additional 4,200 members. I should point out that since the end of financial year, this has continued to increase as expected. This increase in members was 11.9% growth and essentially on a run rate basis, has created an additional $200,000 per month of EBITDA, which results in a return on invested capital of 43.4%. Our target within 12 months is for each refurb to be returning somewhere between 70% and 75% ROIC. Not only that, what we saw in terms of churn amongst the selected sites was a significant decrease from an average at these sites of 6.1% down to 4.5% across the entire 21 locations. These results encouraged us. They were more than just simply speeding up the refurbs. These changes were all strategic, data-driven decisions based on thorough analysis and varied between each location. The upgrades ranged from $100,000 to just over $1 million each to complete. So there was a broad range. Notwithstanding this, we are extremely encouraged that we had found the correct mix and approach. Moving to Slide 27. So in FY '24, we are accelerating this refurbishment program. I'd like to make it clear that we simply aren't refurbishing locations we fell behind refurbishing, we are strategically analytically and systematically upgrading locations in a manner to achieve the best return. So for our FY '24 Accelerator Refurbishment plan, we have essentially 6 options we have placed each identified opportunity into as listed on this page. I won't go through them all, they are self-explanatory. What I'm more interested in going through is management's expected results from these FY '24 refurbishments and upgrades. Moving to Slide 28. We have identified 27 locations to form part of this program. Some of these locations were selected because of their upside probability, others selected because they were underperforming and some are on the list because they have an upcoming lease expiry, which creates a decision point. We want to make it clear that we do plan to close some locations. The first 3, all of which were acquired as part of a larger acquisition, are expected to close this quarter being One Plus Fitness and 2 Rebalance [ GDOs]. These closures will have a positive impact on EBITDA for the Group immediately due to the underperforming nature and the fact we started to wind them down in FY '23, as we knew this was likely to -- was the likely outcome. Now on to the opportunity. 27 locations identified, $7.5 million in cash costs for the upgrades. We're expecting 5,200 members within 12 months, and we are expecting cost savings. These cost savings arrived at from closing of group fitness and repurposing high staff cost locations such as Hiit Republic. The end result, a $6 million annual lift to EBITDA is expected from the works to be completed in FY '24. To be clear, these works, including 27 locations will be completed throughout this financial year and will progressively start to contribute as completed. However, the full $6 million is not expected to be realized until FY '25. After all, we have 2 to 2.5 locations to complete each month, which is no small job. These upgrades, refurbishments and closures are expected to take this pool of locations from an average EBITDA of $220,000 to double at $442,000 on average. This increase may seem high. And since we have provided some data on this presentation, which shows the current average EBITDA for mature and non-mature locations. This result, once complete will result in a return on invested capital, which, as mentioned, is expected to be $7.5 million in cash with the balance being equipment funding of 80%. As mentioned on this slide, we expect to fund these works with a combination of existing cash reserves and facilities and a possible new fit-out finance facility currently being considered. Slide 29, what this means is that we have these projects to deliver in FY '24, where we expect an incremental uplift in EBITDA, as well as they are completed, but expect these projects to fully contribute in FY '25 of about $10 million. To make it clear, we are not providing this as any form of FY '24 guidance. We are simply saying these projects will be delivered in FY '24 and some of these contributions from these projects and initiatives will be banked in FY '24, but the full benefit will not be seen until FY '25. For example, we expect about half the upgrade program to be completed in the second half of '24, which means these locations will only get a few months to start to contribute. Moving to Slide 30. Notwithstanding the significant projects we planned for FY '24, and as per our previous slide, it is still business as usual on our original growth plans. We have signed 11 new leases and expect all of these locations to open throughout '24. Of the 11 locations, 7 are Club Lime locations and 4 are GroundUp locations. In addition, we have 12 leases and potential acquisitions under negotiation at the moment. We have a busy year planned, one that is made possible by the free cash flow the business is now generating, as highlighted in our half 1 FY '23 presentation. Moving to Slide 31. I mentioned earlier about the increase in EBITDA we expect from the accelerated upgrade program we have announced. We are providing this data for the first time, but it is very interesting data. What you see here is that in our portfolio, we currently have 63 non-mature locations, contributing to our EBITDA at $124,000 per annum average. In addition, we have 108 mature locations which, on average, contributed $395,000 each. Note that this is the 4-wall location-based EBITDA, excluding any corporate overheads. For clarity, we consider a location to be mature at 24 months or greater than 70% utilization. Any location, whether it be greenfield or acquisition under 12 months is not -- under 24 months is not yet considered mature. This slide paints a very interesting picture on what the lapsing of time and the increase in utilization does on a large sample size. Moving to Slide 32. We wanted to introduce this slide to highlight that we are more than just a mom-and-dad gym business, like you see on every corner like [ IMF] and [indiscernible]. We derive significant amount of non-membership revenue, and that is expected to increase. A summary of that revenue is on this page. But in essence, when Viva Hub licensing fees, Viva Pay processing fees and our Digital Signage initiatives are in full swing, we expect to be generating $20 million annually from non-membership income. All other figures on this page representing income, as it stands today. In other words, we are already receiving about $16 million per annum of non-membership revenue. We expect further upside to this with some other opportunities we are considering [ to be tuned ], as they say. Moving to Slide 33, brands and segment update. I will only go through the first 3 slides of this section, the rest are self-explanatory. Moving to one of my favorite slides, competitive landscape on Slide 34. What you see here is 50% of fitness businesses in Australia according to the IBIS World report referenced. These brands represent 50% of all fitness business locations in Australia, but do not confuse this with 50% of the membership in Australia as that is very different. For example, whilst we rank third in terms of club numbers in our network, we have more members than the second placed group. We estimate about 500% more members to put that into perspective. What this slide also shows is a diverse multi-brand and modality group that Viva Leisure is. We are not simply a fitness group with one brand, a few stores and no options. This doesn't even take into account our tech division, which is creating amazing experience that none of our other competitors on this list have. This slide also shows the extreme fragmentation in the market. Notwithstanding there are a lot of brands in gyms on every corner, the control and reach that each of them have vary significantly. I hope you enjoy the data points presented here. Moving to Slide 35. This slide is more for our new investors or those who haven't heard the story. It depicts in a graphical sense, where we came from and what we look like today. While our origins were always with a hub-and-spoke, multi-brand, multimodality business, our portfolio reach and opportunities have expanded significantly. Our Viva Labs team will shortly run rate at generating $4 million a year profit. That's more than some of the IT companies listed on the ASX are doing. And we aren't even stopping there. Our data tells us members are focusing on wellness and recovery, and we are exploring our options in this space. Moving to Slide 36, this is the last slide before we go into Q&A. This slide again is more for our new investors, but has been updated to provide newest data points, including target price and locations. As mentioned, this is my last slide to be presented on the webcast. The appendix and subsequent slides have some detailed information, but not necessarily relevant to go through on today's webcast. Thank you, everyone, for your time today to listen to what we have to say for your support of our business and for your belief in what we are building. The results speak for themselves, and we expect them to continue to grow and improve. We operate within a lifestyle industry, focusing on genuine healthcare through a unique and diverse recurring revenue model. Our business is to equip individuals with tools needed to obtain and maintain good health recognizing that no one desires to be unhealthy. Our agility and ability to pivot quickly, combined with our control over the entire ecosystem and experience sets us apart. We are Viva Leisure. I would now like to open up for questions.

[Operator Instructions] Your first question comes from Nicholas McGarrigle from Barrenjoey.

Just a question around EBITDA margins, obviously picked up year-on-year. Just wanted to get a sense of how that's tracked into July, given the minimum wage increases?

Yes. So July, Nic, as you know, it's always a difficult month seasonally for us because not from a membership perspective, but from a cost perspective because the award increases came through on 1st of July that were handed down and there are about 6% increases across the entire award base, which is about 70% of our employees. In addition to that, all of the annual uplifts also hit simply because as you change over years, you give the pay increases, any accrued annual leave also gets uplift above the same amount. So there was a 6% hit on balances there as well. And in addition to that, we've got a 0.5% increase in superannuation. So from that perspective and then very similar to last year, the margin kind of dips across July then picks up into August and then into Christmas.

So in terms of year-over-year, I know you put through some price increases in June, but would July month year-on-year margins still be up?

Yes. Yes, it's marginally up on last year.

Yes. Okay. And then the [ remaining ] terms of managing some of those cost pressures going forward, I think in the presentation, you alluded to some further yield improvements, but just the road map on that?

Yes. So we've done a fee increase on 20 -- I think it was about the 25th of May. So that was impacted about 104,000 members and was on average about $1.50 a week per member. So that generated about $7 million a year in additional income, which from a budgeting perspective or forecasting perspective will cover off much of the current inflationary pressures that we're seeing across the base. So much like we did last year, we planned it just prior to the start of the financial year to cover off inflation hopefully maintain the margin that we currently have. We still have a lot of flexibility given that we only hit 100 -- just over 100,000 members out of the 180,000 corporate members that we have. So there's still some flexibility to get some of the legacy members impose increases on them at some point in the future when the timing is right.

Yes. Okay. That's good. I mean, it helps to ease some of the pressure from the cost base. In terms of -- it feels like we've never heard you talk about closing sites in the past. Can you just talk us through maybe the Rebalance and some of the Hiit just exactly why those haven't worked out, what's the downside of maybe closing them is? I mean, it sounds like there's EBITDA profit to be gained from that reorganization according to that Slide 28, but just talk us through what didn't work, and I guess, particularly with the Rebalance clubs, [ where ] they envision to be closed when you acquired that network?

Yes. Okay. Yes, you're right. We haven't closed. We've only closed 2 sites in our 20-year history prior to this. One of them -- well, actually, they were both acquisitions again, and they're acquired, as part of a larger group. The one scheduled for Q1 this year are a site in Shepparton -- our Plus Fitness in Shepparton, and we've just migrated the members to the existing Club Lime in Shepparton. The lease came up, the decision point that we refurb, and it was simpler for us to migrate those members. The 2 Rebalance sites, they were bought as part of the package of 8 that we initially did. We attempted to turn them around in the short time we had left on the lease before expiry. We detected that the locations weren't right. They just weren't the right demographic and the market that we wanted to reach. So we made the decision at that time to start winding them down, not promote them to put more members in when we knew, we were most likely going to close them, and that's the end result. So as the leases come up and just before the leases come up, we don't renew them, and we make [ good ], and we move on. And that's why you sort of see a positive EBITDA contribution when they happen. In regards to -- look, the network is 27 clubs strong. We have some very, very good sites. What we're finding is the sites in regional areas just simply don't attract the superstar instructors, which is what the model is based on to be able to attract the right amount of people. So while these clubs weren't necessarily losing buckets full of money, they weren't returning the return that we need, and they provide an extra level of complexity. And when you take into account the simplicity of the Club Lime model and the way that works, it was more simple for us to either close them at the end of the lease, some of them or merge them into Club Lime's that were adjacent locations. So you'll see a combination of some of them closing, as the leases expire later this year, but you'll also see some emerging. We also see it as a distraction on management [Technical Difficulty] at times, trying to work out why these 1 or 2 clubs aren't working. And when we delve into it, we like it, well, it's easier for us to grow the Club Lime brand. And as I mentioned in the presentation, the shift we're seeing, and this occurred pre-COVID and we've mentioned it a few times, it just hasn't recovered as quickly post-COVID. Members are doing their own thing because they weren't able to get back into group classes, as quickly as they were into the gym. There was always restrictions on how many people in the room and things. They established the habit of doing things themselves. So we're seeing that in our group fitness classes in our Club Lime brand, but also in group classes in Hiit Republic. So you put all these factors together, and I guess that's what's happened. So you're not going to see the -- Hiit Republic brand disappear because we have some very, very successful sites returning some good numbers. You're just going to see the outliers, and as the leases come up, noting that a lot of these were signed 3 years, 4 years ago, so they do have the decision point coming up in FY '24 or FY '25.

Yes. Okay. I mean, we continue to roll them out in areas that might make sense like in suburban areas around Sydney or Melbourne or [indiscernible]?

It's -- we may, if we do that. But in the appendix, we repeated a slide that we have presented previously. It's on Slide 44. And you can see the return on cash invested and the return on invested capital. When we did this, we identified -- well, the Hiit Republic has actually returned half of what the GroundUp and Club Lime's are. So a prudent use of capital is, why wouldn't we put it into the ones that are returning twice as much with an estimated Club Lime returning 82% on invested cash and our GroundUp at 78%, but our Hiit Republic returning on average 48%, which 48% is still good, but it's not 80%. So we'll look at that. If we see that the data is telling us that Hiit Republic would go well there, then, yes, I don't think we'll roll out stand-alone locations, they'll either be joint locations or they just won't -- they won't roll out.

Yes. Okay. And then, can you give us an update on Viva Pay, I thought -- just in terms of timing on that?

Yes. So we've completed the actual Viva Hub software, which Viva Pay needs to rely on. And we've been working with the existing data provider for the data transfer. We've done about 5 or 6 data transfers, as tests, to run parallel testing. This week, actually, we identified that we've matched all the data for our WA sites, and our ACT site in the Plus network. So those sites will migrate onto the Viva Pay platform most likely within the next 3 weeks. We will then do Victoria and Queensland, as Stage 2, most likely within 4 weeks to 6 weeks after that, remembering the way the process has to work is we let the current provider do the last DD and then we transfer the data and take over from there. So there's 1 or 2 DDs that take place every fortnight. We match that up to make sure the parallel testing is right and then we migrate. And then we'll do New South Wales. So we expect sort of within the next sort of 90 days that they'll all be on the platform, but progressively, they'll come on board very quickly now that we've got the data matched.

And the sort of the incremental EBITDA uplift on that from an annualized basis, you estimated there kind of was $2.6 million?

Yes. I think [ it's ] $2.4 million. And that's simply the processing fees that are charged. So we're reducing the processing fees for our franchisees, so they get a benefit. But obviously, the systems and everything that we've built means that we can get a benefit from that, too. So when you look at the upside, that's what we estimate it to be on a net basis.

And in terms of the upgrade program, does that [ fit ] within your kind of normal maintenance CapEx that you're expediting that? Or is it sort of beyond what you think about as maintenance?

No, it's beyond maintenance. So maintenance is more making sure the clubs are at the right level. This is like a full refurbishment. And some of them are very simple, like you might just be removing group fitness, putting in more strength, training floor and some weight. And so that's why I said in the presentation, they range from really $100,000 up to $1 million, which we recently did with a relocation, a refurbishment at Blacktown.

I'll let someone else ask some questions, and if not, I'll come back.

Your next question comes from Ed Woodgate from Jarden.

Hi, Harry, Hi, Kym, can you hear me okay?

Yes. Can hear you? Thanks, Ed.

Just on the store network guidance. With the acquisitions in greenfields, they're under negotiation, are there any Plus Fitness's in those?

Yes. I think there's 1 or 2.

Okay. And then how are you thinking about those going forward? Is -- are you going to slow the pace of the buybacks? Or is it just case-by-case basis?

Case by case basis because, I mean, when we started this process 18 months ago of the buybacks, and we now own 24 locations, anyone that wanted to sell at the time has raised their hand. So we're not trying to force people out of the network. We're just a willing buyer at an appropriate price for good quality sites if they want to sell. But what we're seeing is that with -- and this is listed later on in the presentation, closer to in the brand section, but on Slide 41. We're targeting about 50% of the network being upgraded to the new design. And the clubs that have already upgraded to the new design are the best-performing clubs month-after-month. So existing franchisees are looking at that going, well if I upgrade again, we're going to make more than I'm not really in the market to sell. So the pipeline of those coming to us as opportunities has reduced, so -- and the strength of the network is relying on a good quality third-party franchise operators, not just Viva owning all of them. So we're here to buy at the right price for good quality sites, but we want to expand the network as well. And I think if you look at Slide 41, you'll see that we expect 14 new locations this year, which is more than we've done in the last 2 years. When we bought the business, it was averaging somewhere between 10 and 18 sites a year, and then COVID absolutely [ slaughtered ] that. But this year, we believe we're back to about 14 new locations to grow the network. None of those are corporate. They're all third-party franchisees.

Okay. Yes. It's helpful color. And then, just on, I guess, as a general comment, I mean, some might say that you budgeted a lot of discretionary CapEx in a tough economic environment. I guess, is that a sign that you're quite confident about the outlook. I mean, given what you've seen in the year-to-date? And maybe just to follow on [ for the ] next question on refurb CapEx. Can you just call out how much of the refurb CapEx in FY '23 was related to acquisitions, as opposed to existing sites?

Yes. Okay. Yes. We are pretty confident about the program. I mean, we tested it significantly 16 locations in the second half of FY '22 and essentially immediate results. We're [ booking ] some clubs added 500, 600 members within weeks. And there's no additional cost to do that. So the contribution that it provides is significant. And I mean, we're seeing on an annualized basis already 3 months after a lot of the clubs were refurbished in the second half of FY '22, over 40% return on invested capital. So we think that's going to continue. And that all happened in a time when we were all holding our breath on whether the interest rates were going up this month or not. Now whilst I'm not an economist and there may be more increases, you would think that they probably have slowed down for the next 6 months. So our program is built on the next 12 months. What we see in front of us. The returns are significant and essentially pretty immediate. So yes, we're very confident in continuing to do this. I mean there's more people in the market want to be fit and healthy rather than less each month. You got to remember that the penetration in Australia and the data is, and we're trying to get some updated data, but the data shows 15%, 16% of the population hold the gym membership. It's 21% in the U.S. That means we've got another 5%, 6% of the population to -- and we normally follow those trends. And we're talking Europe to 19% normally follow those trends, 5%, 6% more of the population to join. But the volume of fitness businesses is not necessarily growing other than boutiques, and boutiques only add 150, 200 members. They're not scale. So when you add 5% of the population over another 1 million customers over the next couple of years going to join, they're not going to be fulfilled by going to boutiques servicing 200 members at a time. The second part of your -- yes, the second part of your question was in relation to the...

The CapEx that you spent on refurb for FY '23, how much of that was related to acquisitions because I think we've talked about in the past that a lot of your refurb CapEx has gone to fixing up on to [ sites of room ], say, not up to your standards? And how much -- what was the balance related to say, existing Club Lime's or just [indiscernible] stores?

Yes. I'm not sure we have that handy right now. But the general principle around it is like if you're buying a Plus Fitness corporate buyback, there's really nothing to do. And then it just falls onto the refurb plan under the franchise agreement because we act as a franchisee every 5 years. It needs to go to the new design. If you're buying an independent, well, there's what we call yes, site upgrade or maintenance CapEx to occur there because we need to change it to our brand and bring it up to a level [Technical Difficulty]. The offset of that is the more we need to spend, the lower multiple that we offer. And this is why we're able to buy sites at low 2x historic normalized EBITDA, and then we buy other sites at 3.2x. So [and it's ] return of the dial, if we need to do less work on them than if we do. So the acquisition price is reduced to sort of offset that. We can get back to you on the details, if that's something you want to model, just reach out to Kym.

And just maybe just one more because [ which I ] laid up that just on churns that -- helpful that you called that out on Slide 26 that the churn reduced in those locations, I think from [ 6.1% down to 4.5% ]. Is it fair to say that this is -- then just across the general group that you've got churn of about 5% plus. And then can you just talk about how you're defining churn?

Yes. So churn across the Group is slightly higher. So it sits at about 5.5%. In saying that, we have locations still churning at 2% and 3% and locations churning higher. And what you find is these higher ones are the ones that we've sort of prioritized as part of this refurbishment plan. So journey is simply how many members drop off. So if you've got 1,000 member club and 50 members drop off, it's a 5% churn for us at that club. Now whether they churn internally or externally. What I mean by that is if they switch from one brand or location to another, that's a churn at that location because we're obviously looking at utilization on a location basis. It's not an additional member if they churn internally to the group. It may be more or less revenue, depending on where they churn to from, whereas -- and the other churn is the external churn where they just leave and quit. We're still seeing, interestingly, about 30% to 40% of our sign-ups every single day are returning members. So what that tells us is they are either churning because they just don't have time or they're churning to try another option, not enjoying it and coming back.

Just to clarify though, is it 5% churn a month or a year?

Yes, yes, that's a month, yes.

Yes. Thank you. Your next question comes from Daniel Ireland from Petra Capital.

Hi, Harry, Hi, Kym, well done on the result. Just on Slide 12 of the presentation, you talked through the corporate and franchise network members increasing from 343,000, 347,000. Can you give us some color as to what the split is in terms of corporate to franchise in those numbers?

Yes. It's on the previous -- I think it's on the previous slide.

There's a bridge slide in there, Daniel, which is up the first slide, I think it's [indiscernible] Slide 13.

Okay. And then with that, are you seeing -- is that coming through from promotional activity? Or is that -- are they fully paid memberships? Can you give a bit more color around that as well?

Yes. It's promotional activity. I mean this industry requires an investment from someone like it's not like buying a product online gets delivered and you use it or you don't use it. Like it's a commitment. So we need to promote to be top of mind, so that when members decide to go to a gym, they think of us first. So we're constantly promoting either brand or offers. We're down to our offers being once a month or twice a month for 3 days or 4 days like flash sales. We've been doing that for over a year now. We've mentioned that before, and that works really well. So yes, it is promotional activity. But it's no different to what we've done. So those numbers are not inflated at the last minute because we wanted to show higher numbers. They are what they are. I mean, the other day, we -- well, August numbers are still higher than the numbers presented there. That's [ why I could say that ].

Okay. And then just on the corporate membership program, can you just provide a little bit more color around that, what you're seeing with that program and what you're looking to achieve with that? Can this be quite a substantial part of the business going forward, do you think? Or yes, just a bit more color around that as well?

Are you talking about the reference we made to the circa $3 million, is that what you're talking about? Yes. So that's a program that's already existing. So for example, we have corporate clients like the strength [Technical Difficulty]. They have 600 members. We have other government departments that -- and corporates that we invoice for memberships, and they either deduct the money from their employees via their payroll system or subsidize it in such a way. So that program generates about $3 million a year. We're just working on an improved IT solution for that, that's going to automate that even further. So we think that's going to grow significantly. Essentially, you'll be able to log on to the website, open up your own corporate account, decide how you will either subsidize or not subsidize your members invite them into the corporate program. And the more members that join the corporate program, then everyone's membership price goes up or down at a set scale. So the difficulty with corporate programs is always people come to [ you and go ]. We've got 600 employees [ give us a rate ], but how many are going to join. The way we're designing the new program is that everyone joins at the rack rate, but if you hit a threshold, which might be 25 members, 50 members, 100 members, every threshold you hit everyone's rate drops automatically. So this is pretty unique. No one is doing this in the industry, and we're doing it with tech, where it's just automated. The corporates will go in, set up an account, upload their logo, the member app will automatically reconfigure to show their logo, they will invite people into the corporate program, either on a subsidy or not subsidy basis if they want to do that, and then, they're basically the agent for us selling. So we're pretty excited about that.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Konstantinou for closing remarks.

Thanks, everyone, for being on the call today. We've been here an hour listening to Kym and I talk, so I appreciate that you're devoting your time. Kym and I will be on the road for the next 2 days, seeing investors. If we haven't yet locked in a meeting with you, and you'd like to have a meeting, please reach out either directly or to our IR people, NWR Comms. And again, thank you for your support, and we look forward to catching up soon. All the best.

Thank you. That does conclude for conference for today. Thank you for participating. You may now disconnect.