Edited Transcript of GYM.L earnings conference call or presentation 19-Mar-20 9:00am GMT

As a business, we’ve taken decisive action to reduce our cost base to ensure we can operate sustainably through this period of uncertainty. We’ve performed substantial stress testing that shows, in most reasonable scenarios with these mitigating actions, we can keep within our current levels in liquidity and covenants. Unlike some other businesses, we’re yet to see any material impact on membership and revenue. The financial impact for us really comes if we are forced to close our gyms in a shutdown, which, of course, remains a real possibility. Thank you for that.

And I will now hand over to Mark on the financials.

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [2]

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Thank you, Richard. Good morning, everyone. As Richard said, 2019 was another good year for the business, with encouraging progress across all our main metrics. Revenue growth of 23.6% was driven by volume growth of around 10% and a 7.6% increase in average revenue per member per month. Our key profit measures all increased with good progress in EBITDA, PBT and earnings per share. And our return on invested capital in our mature sites, which is an absolute key metric for us, has once again met our target of 30%, in fact, edging up slightly from last year to 31%. .

Net debt of GBP 47.4 million is in line with our half year net debt of GBP 47.2 million, demonstrating that in 2019, we’ve reached a point at which we could fund our expansion through our operational cash flows. We had planned for a final dividend for the year of 1.15p, making a full year dividend of 1.6p per share. But as I’ll come on to later, we have decided not to pay this dividend as one of the mitigating actions in our revised business plan for 2020.

Just moving to the group income statement. Our P&L reflects growing profitability being driven by a maturing estate. The shape of the income statement is influenced this year by the move to our new operating model for personal trainers, New Gym Team. As you can see on this slide, our site EBITDA grew at 23.3%, which was faster than our revenue, excluding the New Gym Team personal trainer rental income, which increased by 20.8%. This improving margin profile was driven by the maturation of the estate overall, and in particular, improving profitability of the sites acquired from Lifestyle and easyGym, which are making good progress. Central costs as a percent of revenue fell slightly, resulting in a small increase in overall group adjusted EBITDA margin despite the dilution effect of the New Gym Team model.

Moving now over to yield. A key driver of our revenue performance was the strong growth in average revenue per member per month, which, as I mentioned, increased by 7.6% in the year to GBP 16.02. And it was driven by the 3 factors shown here on the chart. The growth in personal trainer income as we move to the new operating model, increase in LIVE IT penetration and average price increases across our estate. I won’t dwell any further on this slide as we shared much of this in our January trading statement.

Turning to EBITDA now. As you can see in this chart, our growth in EBITDA in 2019 was delivered with good contributions from right across the estate. Our mature sites contributed GBP 1.7 million of the growth. With our 2017 cohort of sites be included as mature for the first time. Our new sites, those opened in 2018 and 2019, contributed GBP 5.4 million of the growth in EBITDA. And the sites acquired from Lifestyle and easyGym contributed a further GBP 4.4 million, noting, of course, that the easyGym sites were only in the numbers for 6 months in the previous year. So encouraging to see all areas doing well.

Turning to capital expenditure. Our CapEx in 2019 was focused primarily on organic growth. We opened 18 standard gyms and 2 small box sites, investing GBP 24.9 million overall in the expansion of our estate. We paid GBP 2.1 million in deferred consideration relating to the easyGym acquisition from 2018 and a further GBP 0.4 million on the final 2 easyGym conversions. Investment in technology increased to GBP 3.9 million as flagged at the beginning of the year, as we step up our investment in our website, app and data analytics capability. We invested a further GBP 0.9 million in LED lighting across the estate, which not only improves the gym environment for members, but also reduces our power consumption and utility costs.

And then, finally, maintenance CapEx of just over GBP 10 million was in line with our guidance at 7% of revenue. As you can see from the group cash flow chart, the business generated very healthy cash flow in the year, with a cash flow conversion in the mid-80s percent. And as mentioned earlier, our net debt position grew just GBP 1.4 million over the year and was broadly flat in the second half.

Turning now to funding. In October 2019, we refinanced our bank facilities with a GBP 70 million revolving credit facility, replacing the GBP 60 million of bank facilities we held previously. Within this agreement, there is also an accordion option, which is for a further GBP 30 million, which, of course, is subject to lender consent. As you can see on this chart, the terms of the new deal are considerably more favorable based on current leverage ratios. There are 2 key covenants on the RCF. We have a net debt-to-EBITDA leverage ratio. And against this metric, ended the year with a leverage ratio of 0.98 versus a limit of 3x. The second covenant is fixed charge cover, defined as EBITDAR divided by cash rents plus bank interest. We ended 2019 with a fixed charge cover of 2.6x, well above the covenant floor of 1.5.

So finally, just to outline our response from a financial perspective to the emerging COVID-19 crisis. Our intent is clear, to be able to get to a position where we are cash flow neutral at a much lower level of revenue. We plan to preserve cash by immediately suspending our rollout program, putting IT and maintenance CapEx to minimum levels and finishing the 2 refurbishments that are currently on site, but not doing any further. We’ll finish the 4 new openings that we have on-site under construction at the moment, and this would mean we’ll reach 8 openings for the year, as we have 4 already opened. We’ll also be cutting back on discretionary expenditure, and we’ll make further savings if we’re forced to shut down gyms for an extended period.

We currently have a cash buffer — cash amount of GBP 29 million at hand to fund this during a period of nationwide closure when we may have a number of weeks without revenue. To further protect our cash position, we are now planning, as I mentioned earlier, to not pay our intended final dividend, thereby retaining GBP 1.6 million. As we said in the disclosures of our RNS this morning, we expect to be able to sustain the business through a number of downside scenarios within our existing liquidity and covenant thresholds. Beyond this, there are a number of further potential options open to us to improve liquidity in the case of an even more extreme downside scenario, most likely resulting from an extended nationwide closure.

For example, we currently have drawn down the GBP 470 million within our financing facilities, and that’s given us the current cash-on-hand position that we have. We’ve kept our lending banks appraised, of course, of our current situation. And they’re very supportive of the actions that we’ve taken. We’ve initiated conversations about additional support. The starting point for these discussions, of course, will be the GBP 30 million accordion in the existing facility. But of course, that access to that accordion would require lender consent. Another potential source of support is the government. And as you’ll be aware, the Chancellor announced earlier this week a plan to give leisure businesses rates relief. And this will be worth around GBP 13 million to us in the coming year.

And finally, other additional sources of funding may also be an option for us. So although there is material uncertainty regarding the outlook for the next few months, we have taken decisive action to set up the business to preserve cash and to enable us to operate through this challenging period. Thank you. We’ll now open up the line to questions.

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Questions and Answers

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Richard Darwin, The Gym Group plc – CEO & Executive Director [1]

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Thank you, Mark. So first couple of questions came in from — 1 from Tim Barrett from Numis, who asks, “You’ve had 1 closure so far. Have you had others, what actions did you take?” I think I’ll deal with that question.

And there’s 1 from Doug Jack from Peel Hunt, who asks, “When did you draw down the remainder of your existing facility?” So Mark, if perhaps you deal with that one.

So Tim, the only closure we’ve had so far was in Poole. It actually happened about 10 days ago, which seems quite a long time ago now, in the duration of this crisis. And actually, we chose to close because we had a confirmed case of coronavirus. Actually, what we subsequently learned from Public Health England was that they wouldn’t have required us to close. So actually, we were only closed for around 36 hours, and we did a deep clean.

In subsequent cases such as that, actually, their advice to us would be not to close. And so that’s why you haven’t seen additional closures so far. However, we obviously do take our lead from Public Health England and ultimately from the government in terms of their instructions as to whether we would stay open or not. Clearly, we have stayed open. As I’ve said in my statement, we’re beginning to see the impacts on reduction in usage, particularly in the city centers and particularly in some of those London sites.

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [2]

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Yes. And to Doug’s question about the facility, yes, we have drawn it down to a maximum facility. The extra GBP 20 million we drew about 10 days ago. And it wasn’t because we had a specific imminent requirement, as you can see from our net debt position as of today, but we just felt it was prudent in the current environment because that facility was available to us, that we would take that opportunity and have the cash in our bank balance.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [3]

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Okay. Next question is from Christine Zhou, RBC. Christine’s got 3 questions. How significant is your business rates’ build? Should the Chancellor’s recent announcement help you in that regard? What percent of your pipeline is committed? And if you were to slow down your pipeline rollout this year, how much leeway do you have? And would it be possible to disclose your banking covenant levels? It sounds like about 5 questions actually, isn’t it?

So business rates, quickly. Yes, we do believe that the Chancellor’s announcement will help us because, clearly, we haven’t seen the definition yet. But we classify ourselves as a leisure business, which is in that categorization. Business rates, just over GBP 1 million per month. So it would be significant for us to get that business rates holiday.

And in terms of the pipeline, so as Mark says, we’ve opened 4. We’ve got 4 on-site already, which just makes sense to finish. And we’ve got a number of other sites, probably about 8 or 9 that are exchanged. Now importantly, were exchanged, but there is no commitment to start building out. So we would have the option to start the lease.

Typically, we have a rent-free period of between 9 and 12 months. And obviously, if we get the business rates holiday as well, that would help. And so we wouldn’t be incurring costs associated with having entered into those particular leases for at least a year or so, at which point we’ll hope to have more visibility. And then the banking covenant question?

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [4]

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Yes. In terms of covenants, maybe this question was posted before I finished my presentation, but just to reiterate, we’ve got 2 key covenants, a leverage ratio at 3x and a fixed charge cover ratio at 1.5x.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [5]

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Okay. So question from Mark Walker at Tollymore Partners. What has to happen to memberships and revenues before the servicing of lease commitments and maintenance CapEx becomes a problem? Mark, do you want to…

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [6]

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Yes. So if you’ll forgive us, we’re not going to give very specific answers along the lines of what you have suggested. But what we can say is that we have run a number of scenarios and, obviously, just finishing our year-end process. We have to go through liability and going concern analysis to do that. So we have stress tested our model. .

And our goal, as I mentioned earlier, is to be able to get at a run rate of lower cost in both OpEx and CapEx, such that we can absorb a lower member number. And I don’t want to disclose all of those various scenarios, but we feel comfortable that in a reasonable scenario, we can get to that cash flow neutral or slightly positive position.

And then in addition, we’re envisaging as part of a scenario or most scenarios that there will be a period of closure, where we will have a certain number of weeks with no revenue whatsoever. And that’s where our cash buffer at the moment will come in. So it’s — we don’t really want to be drawn on the specifics of that. I think what we are able to say is that we are looking at about — aiming to get down to about GBP 9 million to GBP 10 million a month of outgoing to after around mitigating actions. It doesn’t mean we can get there in month 1. But our aim would be to get to that point so that we’re operating at a very lean level.

Now obviously, we’re quite a lean business. Anyway, we’re a low-cost model. So most of the cash savings versus our original plan would have been from capital expenditure, which would have been spent primarily on growth. But of course, at the margin, there are also things you can do from an operating cost point of view particularly if you’ve got lower usage in gyms.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [7]

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Okay. So a related question coming from Owen Shirley at Berenberg, who says, “What do you think monthly cost would be in a full-closure scenario?” I think you covered that one. And in that event, have you considered reducing fees to, say, GBP 5, a level at which consumers are unlikely to cancel in providing them with home workout videos. So Owen, let me just perhaps cover our thinking about full closure. What we’d like to do is emerge from full closure with as big a membership base as we possibly can.

And so that is why, at the moment, we’ve implemented free freeze, and we’re seeing a decent amount of take-up of that. And in a closure scenario, we would look to actually extend that free freeze, whereby we would effectively, from the next direct debit of the member, give them back the amount of the closure period.

Now the advantage of doing that is that — what it enables us to do is make sure not too many people cancel just because they’re waiting for the end of the closure period. And that is probably sector-wide in terms of we’re seeing any sort of consensus and mergers to what other operators would do, they would do something similar.

So actually, we used to charge GBP 5 per our freeze. We’ve actually taken it down to free freeze. And I’d say we’re seeing good member take-up of that at the moment. Have we thought about doing home video workouts? Actually, we have got a partnership with a virtual company for us to be able to do that, and we’re looking to accelerate that. That was going to be part of our GroupEx rollout later in the year. But one of the things we’re looking to do is accelerate offering that through our website, and it should be certainly kind of weeks rather than months.

So next question comes from — actually, another 1 from Tim Barre, Numis. What’s the process for agreeing the accordion? How long would you expect the process to take?

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [8]

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Yes. Now obviously, this is — if it happens, will be a commercial discussion, so I don’t want to prejudice that. The advantage of the position we have is that we already have an agreement with 3 lenders, who we’ve recently had a transaction with. They’re very supportive. They understand our business very well, having just done the due diligence on the refinancing in the autumn.

As you know, from an accordion, it requires bank’s consent. So it’s certainly not a done deal by any stretch of imagination. But the advantage we have in terms of speed and perhaps acceptance from the banks would be that we have a good relationship with them, and they understand as well, and we have a mechanism already agreed. But of course, that negotiation discussion hasn’t taken place yet, but we’ve started the conversation. And our banks remain very supportive, generally.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [9]

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So a question from David — forgive me with the pronunciation,(inaudible) from [Gastion]. And first question was what’s the year-on-year growth in February in order to eliminate the seasonality of new memberships? Second one is about what are the conditions to stop paying one’s membership. And thirdly is that you mentioned you want to be cash flow neutral, is it before or after CapEx? What CapEx should we expect for FY ’20?

So in terms of seasonality, clearly, January and February is the most significant period of people joining a gym. That’s not just low-cost gyms, that’s across the whole health and fitness sector. And what we saw in January and February in terms of the percentage uplift was very similar to what we’ve seen in previous January and Februaries, so 12.2%.

I think you can look back — and we’ve been about that sort of level, obviously, because our membership base is now bigger. That’s quite a big absolute number overall. And I think we were very satisfied with the level of take-up that we saw in January and February. I would say it was setting us up for a good year until COVID-19 really began to take hold.

What are the conditions to stop pay one’s membership? Well, we’re a no-contract business, other than for some students who pay 9 months upfront in around September. So generally, to stop paying a membership, you cancel your direct debit. Obviously, if you time that wrong, then — and you just paid your direct debit on previously, you’ve effectively paid for a month. But that is the model that we’ve run since day 1 of this business, and it’s one of the reasons why we’ve been so successful in terms of growing membership and growing the low-cost gym market.

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [10]

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[Channel] do to the one on CapEx. So yes, cash — when we describe cash neutral, that would be after CapEx as well as OpEx outgoings. And in terms of what CapEx you should expect for financial year ’20, so the first quarter of expenditure would be similar to what you would expect at normal run rates because we’ve got commitments already in train, and we’re following through with any site where we started development. But then it would quickly drop off thereafter. As I said, we would not be opening any new sites. And we will reduce IT CapEx and maintenance CapEx down to a bare minimum. So the shape will be very different across the 12 months of the year with the first quarter more normal.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [11]

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Okay. Another one for you, Mark, from Sahill at N+1 Singer. So with regard to the GBP 29 cash buffer, how many months would this last if you’re forced to close clubs? What is the breakeven membership level?

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [12]

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Yes. In terms of the cash buffer, Sahill, as we said, in terms of monthly burn, when we’re able to get down to that lower level after mitigating actions would be GBP 9 million or GBP 10 million a month. Obviously, you’re looking weekly and just divide by 4-ish. And — but the GBP 29 million cash buffer, obviously, at that point, if we are required to close, we may or may not have GBP 29 million. Obviously, the longer before we get to that point, the more opportunity we have to earn EBITDA in the meantime, and we’ve also got some capital commitments outstanding as well.

So the — some of the GBP 29 million is earmarked. So it’s not a very straightforward answer, but assuming that cash buffer is a reasonable guide of our current position, we’ve indicated that it would be about GBP 9 million to GBP 10 million of cash burn at the point we get down to our lower level.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [13]

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Okay. A question from [Anna Barnfather at Liberum. It appears that the hospitality industry has been quite united on its approach to landlords are a 50% rent deferrals holidays, what’s your approach? And let me answer that one. So if you look into our statement, what you see is that we talk about the immediate mitigation factors that we’ve put in place, reducing CapEx, halting the rollout, reducing discretionary expenditure.

And then we go further to talk about some of the other things, that in a potential scenario that we could do, and we’d put in that around deferrals of rent, but we’re not getting into specifics, it’s not something that we’re saying we’re doing at the moment. And as I say, I think the reason hospitality industry is quite so united, they’re probably a little bit further ahead of the health and fitness market in terms of the impact of COVID-19 because, as we said in our statement, it’s really only beginning to impact us in the last couple of weeks. And even at this point, clearly, we still got very substantial membership base and our gyms are all open. So nothing really kind of further to add on that one at this point.

Another question from Erin Sherley of Berenberg. So apologies if this was discussed in the presentation, but could you discuss your views on the impact this will have on the broader market? Have you seen any smaller operators failing yet?

Well, again, as I just said, I think because it’s really only begun to impact health and fitness in the last couple of weeks in terms of people beginning to cancel memberships, put them on freeze and the impact on joiners, not yet. But what I would say is that under the body of ukactive, which is — represents the sector, then there’s been a good coming together of the sector. And that’s one of the reasons why it’s been able to agree the broader measures in terms of how we do social distancing, for instance, and drawing on some of the experience, I think, from some of the other health and fitness clubs in other parts of the world that got impacted earlier.

I mean, I think, and I — as we said in the presentation, we go into this with a pretty strong balance sheet, one of the kind of the lower-leveraged players in — certainly in the low-cost gym market. And so therefore, what we’re really focused on is how do we emerge from this. Clearly, we don’t know how long this goes on for. How do we emerge from this in a very strong position. That’s why we’re pretty determined that actually — that the right strategy is for us to retain as much of our membership base as possible. So that as things get back to normal, people can restart their usual routine of going to the gym. Now what the landscape looks like at that point, nobody really knows, and I think it would only be speculation on my part.

Next, just a couple more questions, and then I think we’re probably done. So from [indiscernible]. You had stated you intend to run the business as efficiently as possible to be cash flow neutral with falling revenues. Can you share with us what assumptions in terms of number of revenues and costs and investments you assume in your cash flow neutral scenario? And then you’ve also mentioned possible weeks with 0 revenues for that to happen, everyone should freeze their membership. Or if gyms are closed, are you actually going to stop charging the clients?

So I think we probably answered that last 1 already. Mark, do you want to take the first part?

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [14]

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Yes. So without getting into too much detail, the shape of the year that we are envisaging in our plan and with scenarios around that in terms of severity, is that there will be a period in the relative short term where we expect to be closed for a number of weeks. And of course, we can’t be sure what that is. But then we would expect our membership level, generally, to be lower than it is now on the basis that there will be less activity in the population and some concerns around being out. And of course, some people actually being set.

So we believe that we can absorb a reasonably significant reduction in the number of members we have and therefore, revenue and still be cash flow neutral by taking these strong mitigating actions. But we don’t want to run through the various scenarios that we’ve looked at. But we’re comfortable that in most reasonable downside scenarios, we have a model that can work within our current liquidity and covenant positions.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [15]

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Okay. And then I think just looking at the remaining questions, they’re both ones that we’ve already answered actually held them. So 1 more from Sahill, N+1 Singer. Can you give more color around cost-saving measures? and please try to quantify also can we have a more definitive CapEx guidance for this year?

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Mark George, The Gym Group plc – CFO, Company Secretary & Director [16]

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So I mean, in terms of the CapEx guidance, I think we said in the statement, we’ve committed GBP 10 million of expansionary CapEx. If you think of the 8 sites, 7 standard sites at about GBP 1.3 million and a small box site at GBP 0.75 million, you get to about GBP 10 million that we’re committed to on openings. And then if you were to expect a quarter of normal spend on maintenance CapEx and IT CapEx that you might have had in your forecast for the year, Sahill. The first quarter would be at those rates that you would have expected, for both maintenance and IT CapEx, but they would then fall back very sharply to a small amount each.

And then expansionary CapEx beyond the GBP 10 million, we’ve already talked about would be minimal just as we finish some refurbishment projects. We’re probably — probably a couple of million, something like that. All told, and also would expect, as you might remember, lease extensions on easyGym sites is another couple of million that we would have in the plan for that.

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Richard Darwin, The Gym Group plc – CEO & Executive Director [17]

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Okay. Thank you, Mark. And looking down the questions, I’d say the 2 remaining ones are ones that we’ve already answered. So just like to say thank you very much for joining the call this morning. Clearly, after what we saw was a strong start to the year, it’s been a challenging couple of weeks, but we’ve been able to outline in the presentation is that we’ve taken fairly quick and decisive action to position ourselves for what will be, no doubt, a very challenging period over the coming weeks. Thank you for joining.