Edited Transcript of BFIT.AS earnings conference call or presentation 10-Mar-20 1:00pm GMT

Of course, this is our current take on the situation and things might change. It is difficult to predict how events will unfold the coming weeks and months. If we would see significant negative effects from the coronavirus on our business, we will take appropriate action at that time and be sure that we are prepared. And this might include, in a worst case scenario, the reduction or complete stop of our investments in new clubs and bringing our maintenance investment to a minimum. We have this flexibility, and having signed a lease contract does not mean we will have to build a club. This is not something we expect or want. And currently, there’s no reason why we would have to do this, but it’s good that you understand that we have that in our toolbox.

Most importantly, and that is what we’re going to do right now, we continue to apply our policy related to hygiene and cleaning within our clubs, and we provide our members and employees with hygiene recommendations. In addition, we inform our members of the opportunity to do a workout at home by using the Basic-Fit app, and we also see an uptake in that area.

We continue to monitor the situation in the countries where we operate, and we follow any guidelines from the government regarding the coronavirus that apply to Basic-Fit. We have not had to close any clubs to date. Further, good to know that a number of people in our clubs, on average, clubs of 1,500 square meters, at any given time, is relatively limited, and we have high hygiene standards. So there’s not a lot of people in our clubs at the same time on a 1,500 square meter club. We are in regular contact with the other large fitness chains in the world and share information on how to handle the corona situation. We are on top of it. At this time, this is all I can say about the coronavirus and will now return to the topic of the full year results.

We had a very successful year in which we grew our club network by 25%, taking the total number of clubs to 784. The number of memberships in the year grew by 21% or 378,000 memberships to 2.2 million. Revenue and adjusted EBITDA increased by 28% and 25%, respectively. All in all, a good set of results and a continuation of the growth path of the past year.

On the next slide, Slide 3, you can see the growth of Basic-Fit over the past 5 years with 4 of our main KPIs. The number of clubs increased on average by 24% a year, from the start, 5 years ago, 264 clubs in 2014 to 784 in 2019. We see similar growth rates for memberships, growing from 792,000 to 2.2 million. Revenue and adjusted EBITDA more than tripled over the past 5 years. With this fifth consecutive year of strong growth figures, we are building on our track record as a growth company, which is sustainability, high margins.

Slide 4. Next, I would like to talk a bit more about the development of our club network. In 2019, we increased our network by a record of 155 clubs to 784. The number of net openings is the result of 162 openings and 7 closures. Most of the closures were due to the ending of the contract period, which we could or did not want to extend. The 155 clubs opening is an increase of more than 40% compared to the 108 clubs openings in 2018.

In line with our expansion strategy, we opened the vast majority of our new clubs in France. In France, we increased the network by 105 clubs, ended the year with 357 clubs. In the Netherlands, we opened 38, of which 30 through the acquisition of Fitland. In Belgium, we opened 10 clubs. In Luxembourg, we had 1 net club closure due to a site development project, which prevented us from staying in that location. In Spain, we added 3 clubs to the network. I’m proud of the people and of the continued strong performance of our club company. We have been able to keep up with the strong growth while at the same time improving the operations and quality of our services at our clubs. Also, the successful swift integration of the Fitland clubs within budget was a great achievement. For this year, we have set ourselves another ambitious target of 150 club openings. With 40 club openings in the first 2 months of the year, we are well on the way to achieve this.

On the next slide, we see the development of the memberships in 2019. Last year, we grew our membership base by 387,000 memberships to 2.2 million. There is an increase of 21%. This growth was largely due to France, where at the end of the year, we had close to 1 million members. I’m happy with how we have evolved our marketing activities, and we seem to be increasingly effective in reaching the right target audience to the right social channels. Especially in the second half of the year, we have increased our effectiveness and spend significantly less per new member than in the first half of the year, a strategy that we aim to replicate in 2020.

The demand of Premium memberships remain strong. Throughout the year, we have seen the demand for the Premium membership increase from 20% to 30%, and we’ve seen demand stabilize at this level. At the end of the year, 18% of our member base had a Premium membership. The new membership structure that we introduced at the end of 2018 and the consecutive indexation of existing memberships has resulted in the further growth of the average revenue per member by 6%. The average number of memberships at the mature clubs were stable, with 3,343 members a club compared to 3,288 members at the start of the year.

Slide 6. This slide, you might recognize. I would like to repeat our growth ambition for the medium term. In 2019, we grew our network by 125 clubs organically and in line with guidance we gave with our full year results last year. In addition, we added 30 clubs to our network from the Fitland acquisition. In November, we announced that we would further accelerate the pace of club openings to 150 a year for the next 3 years. This will result in an expected revenue growth of at least 20% a year. We continue to have ambitious growth plans, and we expect to build further on our track record of growth for the coming years.

And this concludes this part of the presentation, and I would like now to hand it over to Hans.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [4]

——————————————————————————–

Well, thank you, René. I would like to start with the income statement, which we present on a pre-IFRS 16 basis. Group revenue increased by 28% to EUR 515 million. This strong growth was the result of 28% higher fitness revenue and 36% higher other revenue. The main drivers for this growth were the 21% growth in memberships, mainly at our immature clubs and a 6% increase in average revenue per member.

The average revenue per member per month was EUR 20.56 compared to EUR 19.39 in 2018. This increase was mainly the result of the new membership structure and a high uptake of the Premium membership, which more than compensated for the increase of France in the mix. In addition, the optimized mix of our promotions of free products and free months had a positive contribution. The demand for add-ons remained solid, with 22% of our membership base having added a sports water subscription to their membership, a further 2% increase year-on-year. The percentage of our members that pay for live group classes was stable at 6%. The increase of other revenue was largely due to the further rollout of the personal trainer concepts, higher sales of web shop products, including NXT Level sports nutrition and increased promotional revenue.

All countries showed solid revenue growth compared to 2018. The growth countries, France and Spain combined, increased revenue by 50% to EUR 223 million. The Benelux segment increased by 16% to EUR 292 million. At club level, adjusted EBITDA increased by 26% to EUR 222 million. The adjusted club EBITDA margin decreased slightly to 43.2% from 44% in 2018. This is the result of the Fitland acquisition and the larger number of new club openings. Both have a limited or negative impact on the group EBITDA and year of opening due to the initial losses. This is specifically the case for the more expensive clubs that we have opened in the centers of large French cities.

Our overhead expenses increased by 28% to EUR 67.3 million. The increase is mainly the result of higher international overhead due to the expansion of our headquarters to support initiatives in the development of new revenue streams and cost savings, initiatives we elaborated on during our half year results and the Capital Markets Day in November last year. As a percentage of revenue, our overhead costs were 13%. And in the medium term, we expect this number to gradually come down to between 10% and 11% of revenue. This includes marketing costs, which will stay as a percentage of revenue at around 4%.

Exceptional items amounted to EUR 2.3 million and are mainly related to preopening costs and costs related to the retention share plan awarded to the key people after the IPO. Adjusted EBITDA increased by 25% to EUR 155 million, representing a margin of 30.1%.

Operating result or EBIT increased by 35% to EUR 42.8 million. Depreciation costs were EUR 93.7 million. Excluding the EUR 1.2 million in impairments, depreciation was 17.9% as a percentage of revenue, and this is in line with our guidance. Amortization costs in the period were EUR 16.4 million compared to EUR 15.5 million in 2018. Of this amount, EUR 11.1 million is related to purchase price allocation at the time Basic-Fit was partly acquired by 3i. It is for that amount that we adjust for our adjusted net earnings. In 2020, this PPA amount will come down by around EUR 500,000. In 2021, it will decrease to less than EUR 5 million. This is mainly due to the fact that membership will be almost fully amortized at that time.

Corporate tax expenses amounted to EUR 9.3 million, representing an effective tax rate of 30.5%, in line with our expectations. The relatively high effective tax rate is the result of nontax-deductible expenses, like retention shares and the growth of France in the mix with a higher corporate tax rate and the CVAE tax. In the longer term, we expect the ETR to decrease to around 25%.

Basic-Fit recorded a net profit of EUR 21.1 million in 2019, up 20% from the EUR 17.6 million recorded in 2018. Adjusted for PPA-related amortization, interest rate swaps valuation differences, exceptional items and one-offs and the related tax effects, earnings were EUR 32.8 million, an increase of 20% compared to the EUR 27.4 million reported in 2018.

Now we go to the next slide, my favorite topic. At the half year result presentation, I elaborated about the introduction of IFRS 16, as I did at the Capital Markets Day. It is good to repeat some of that. IFRS 16 introduces a single on-balance sheet lease accounting model for lessees. This means we have to recognize a right-of-use asset representing the right to use the underlying asset and a lease liability representing the obligation to make lease payments. Within our income statement, lease costs are no longer part of the EBITDA. Instead, the depreciation charges of the right-of-use assets and interest charges on the leases are now included. Also important to repeat is that IFRS 16 does not have any impact on our bank covenants, as they are based on frozen GAAP. And as you know, we report leverage ratio based on the bank covenants definition.

On the next slide, we show you our 2019 income statement on pre-IFRS 16 basis, the restatement due to IFRS 16 and the income statement on post-IFRS 16 basis. As you can see on that slide, IFRS 16 excludes property rent and as a result, according to IFRS 16, our adjusted club EBITDA increased by EUR 109 million to EUR 331 million, representing a margin of 64%. Our adjusted EBITDA on a post-IFRS 16 basis increased by EUR 111 million to EUR 266 million, which represents a margin of 52%. At the same time, we see depreciation of the right-of-use assets appear in the income statement at an amount of EUR 106 million and interest on lease liabilities at an amount of EUR 25 million. Combined, the restatements have a negative impact on net earnings of around EUR 10 million. Because of these accounting mechanics, we are confronted with a strong front-loading effect. This means that on a post-IFRS 16 basis, the P&L cost of the full lease period are initially higher than in the second half of the period, lower than the stable lease cost on a pre-IFRS 16 basis. The front-loading effect is particularly strong for fast-growing companies like Basic-Fit and gives a skewed view of our underlying business.

An even larger impact can be seen on the balance sheet, which brings me to the next slide. This slide, we show you the summary of the balance sheet, showing the main impact of IFRS 16. As I mentioned, on a post-IFRS 16 basis, we recognize a right-of-use asset and a lease liability, which represent the largest part of the restatements and which are increasing the balance sheet by EUR 923 million. The income statement and the balance sheet on the post-IFRS 16 basis are not in alignment with how we, as a management Board, look at our business internally. We therefore want to communicate a new set of KPIs that better portray the underlying performance of the business, KPI definitions which are closely aligned to actual cash returns.

And on this slide, I’ll show you an overview of the KPIs that we will use, how they look like under IFRS 16 and how we adjust the definition to include IFRS 16 and show the underlying performance of the business. We show the full year 2019 numbers for each metric. Adjusted club EBITDA will become underlying club EBITDA. With the new definition, we want to report on the development of the performance of our open clubs on a post-IFRS 16 basis, from which we substract the cash rent costs of these open clubs. Revenue and cost of sales that are nonclub are not included in these numbers. Underlying club EBITDA margin will be based, as just explained, on club-related revenue and costs of open clubs. Based on the full year results, we see similar results on margins with the new definition as for the reported pre-IFRS 16 numbers. Adjusted EBITDA, our main KPI, will become underlying EBITDA and is defined as the EBITDA minus cash rent cost and adjusted for exceptional items. Exceptional items here are things like reorganization costs and other one-off costs. The preopening rent costs are no longer included in exceptional items, which is logical, considering IFRS 16 and the cash rent adjustment we do.

Based on the full year results, the underlying EBITDA is slightly lower than the pre-IFRS 16 number. This is the result of smaller adjustments for exceptional items and the difference between cash rent and the prior P&L rent. Adjusted net earnings will become underlying net earnings and is the same as prior definition but now adjusted for the impact of IFRS 16. Based on the full year results, the underlying net earnings are slightly higher than the adjusted net earnings due to a mix of small accounting differences pre and post-IFRS 16. So to be clear, as of the first half 2020 results, we will no longer report our adjusted results but our underlying results and provide you with a reconciliation with the reported IFRS 16 results.

I would now like to go to the mature club side. As you probably know by now, our definition of a mature club is a club that is at least 24 months old at the start of the year. In 2019, we had 405 mature clubs. The vast majority of those clubs, 307, are located in the Benelux. The 405 mature clubs achieved a revenue of EUR 343 million, which is 2/3 of total revenue. Adjusted club EBITDA was EUR 173 million, which represents a margin of 50.5%. The increase in margin is mainly the result of the higher average revenue per member, which become clearly visible in the second half of the year. Also, the increase of the number of members per mature club had a positive effect. At the start of the year, the average mature club had 3,288 members, and this has grown by 1.7% to 3,043 (sic) [3,343] members on average at the end of the year. So I think I can say that we have seen a solid development of our mature clubs in 2019. When we look at the current year, we started 2020 with 530 mature clubs. So unless we close any of those mature clubs, we’ll use this set as the mature club base for the rest of the year.

Then going to the next slide, cash flow and capital expenditure. Total CapEx in the year were EUR 282 million, an increase of 59% compared to 2018. The increase is mainly explained by the 162 gross club openings compared to 110 club openings in 2018, an increase of 47% and a larger club network, which resulted in higher total maintenance CapEx. Expansion CapEx was EUR 229 million compared to EUR 140 million in 2018. Expansion CapEx includes acquisitions, expenses for the enlargement of existing clubs and expenses for clubs that are not open yet, which, in total, amounted to EUR 80 million in 2019 versus EUR 13 million in 2018. The initial CapEx per newly built club was on average EUR 1.19 million compared to EUR 1.17 million in 2018. The increase is mainly due to more expensive club openings in the larger French cities. The coming year, we will continue to open clubs in these more expensive cities, including a handful of larger flagship clubs. Regardless of the initial CapEx for a club, we only sign a lease contract if we expect to achieve a return on invested capital of at least 30% at maturity.

Maintenance CapEx was EUR 39.9 million (sic) [EUR 39.1 million] in 2019 compared to EUR 31.8 million in 2018. This increase was the result of the growth of our club network. On average, we spent EUR 55,000 per club on maintenance, the same as in the prior year and is in line with our guidance.

Other CapEx amounted to EUR 13.8 million and mainly consisted of investments in innovation and software development. As mentioned above, we have started a number of initiatives, including the smart camera system, which resulted in an increase in innovation spend. We also had an additional spend due to the expansion of our head office and the launch of a new website. We expect other CapEx to be around EUR 10 million going forward.

Then to the next slide, net debt and working capital. Net debt was EUR 451 million at year-end 2019 compared to EUR 333 million at year-end 2018. This increase was mainly due to the large number of club openings and the investment in maintaining the current club network, which cannot be financed from net cash flow from operating activities yet. The leverage ratio based on the bank covenant definition was 2.5 compared to 2.3 at year-end 2018. Net working capital was EUR 140 million negative compared to EUR 113 million negative at year-end 2018. As a percentage of revenue, working capital was stable at minus 27%.

And now back to René for the final slide.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [5]

——————————————————————————–

Well, I would like to conclude with the outlook for 2020. The club opening pipeline continues to be strong, with 41 clubs under construction, 88 contracts signed, 136 sites for which we are negotiating contracts with property owners, and more than 250 locations are in the research phase, a total of more than 500 clubs. We have further accelerated the pace of club openings and expect to open around 150 clubs in 2020. With 40 clubs already opened in the first 2 months of 2020, we are well underway to reach our goal for this year.

For the medium term, we expect to continue this pace of club opening and reach the 1,250 club marks in 2022. As a result, we expect revenue to increase by at least 20% a year. At all our mature clubs, we expect the underlying club margin to remain strong and be between 49% and 50% and a return of invested capital to be at least 30% in the medium term.

This concludes the presentation. Operator, please open the lines for questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) We will now take our first question from Mr. James Rowland Clark from Barclays.

——————————————————————————–

James Rowland Clark, Barclays Bank PLC, Research Division – Research Analyst [2]

——————————————————————————–

A couple of questions, please. The first one is just on your 7 club closures. Could you just discuss why you decided not to renew those contracts and what the discussions were like with landlords? Was there any sort of pushback on price from them?

Secondly, club margins. You just said you expect 49% to 50%. Do you think you’ll be able to nudge forward club margins in 2020? And then finally, on the coronavirus. If you were forced to, would you rather close clubs? Or would you rather operate clubs at a much lower membership uptake, just hypothetically speaking?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [3]

——————————————————————————–

Okay. Let’s start with the 7 clubs. Well, 2 clubs we wanted to continue but couldn’t because there was a redevelopment on those promises. And the other 5 clubs, we wanted to close were still part of the old takeovers. So overall, that was too bad. We had to close the 2 clubs down that were at the end of the lease contract. And we are happy that we closed the 5 clubs that were not the right size for our model.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [4]

——————————————————————————–

And to add to that, James, those closures we had to do, we opened another club very close by in the same area. So the members are not gone. They’re converted to the new club that we opened a few hundred meters next to that.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [5]

——————————————————————————–

Yes. Because, of course, a year before they’ll let you know when the contract after 15 years stops. So we had plenty of time to look for a new location in that direct area.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [6]

——————————————————————————–

Around the club margins, yes, we managed to increase the club margin on the mature clubs of 50.5%. Of course, we are very happy with these margins and also to keep that on a stable level the last years is a small growth. So we’re not going to promise that it will be much higher for the coming years, and we would be very happy if we could stabilize these margins on our mature clubs.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [7]

——————————————————————————–

So around 50% is something we’re happy with.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [8]

——————————————————————————–

To add to that, for instance, we changed our opening times in France. So now we are open in France from 6 to 6 in the morning already to — and also in the weekends to half past 8, which was really a wish from all the members. That was received very — and specifically by all the French members and nonmembers, so that really helped us. But of course, that means that we’ll have more personnel costs in France for all those openings hours. So with that, that has a direct impact on our margins, you can understand. So with that, if we can keep our margin on the maturity at 50%, then we would be very happy.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [9]

——————————————————————————–

And the corona question about closing or having clubs open. What you see already in other parts of the world where the fire is more intense, what you see there is that clubs close half of their equipment, so that you have, let’s say, if you have a line of, say, 10 treadmills, that 5 of them are taken and 5 of them you can’t use. So you never have somebody left or right next to you working out. So that 1 meter in between people working out is the case. If we had to choose between close or do that, then we’d rather have our clubs open and have taken, let’s say, 40% or 50% of our machines out. But because of the long opening hours, we can still help a lot of people to work out. So no, we would not prefer to close.

——————————————————————————–

Operator [10]

——————————————————————————–

We will now take our next question from Mr. Charles Mortimer of Citibank.

——————————————————————————–

Charles Mortimer, Citigroup Inc, Research Division – Senior Associate [11]

——————————————————————————–

Just a couple of questions. On that 4-weekly memberships, how many — are all of the members now converted to that 4-weekly? Or are they still pushing on the old contracts and on monthly contracts?

Secondly, on pricing in Spain. I’m not sure whether yet or it was going to be in 6 months’ time, you’re going to start to reporting back on what the eventual outcome was of the dual pricing model, though — the lower cost pricing model in Spain was going to be, but anything on that would be interesting.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [12]

——————————————————————————–

Well, the 4 weeks, we still have a big percentage of our members on the monthly contracts because when we changed the pricing, we kept our old members on the old system. So it will take at least another year or maybe longer for everybody to be in the 4-week system.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [13]

——————————————————————————–

At this moment, around 70% of our members are paying the new system, so on the 4 weeks, and around 30% are still — 30% of our members are still paying the monthly membership. And of course, we’ll always have sticky members. So a big group of that 30% will stay pay — keep on paying that monthly membership. But of course, we index that amount so it will be closer to the amount that the 4-week members are paying.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [14]

——————————————————————————–

And then the question about the pricing in Spain. It is pretty much too early to tell. The lower price that we initiated, the EUR 14.99 for being a member of 1 club, we did because we wanted to attract more younger people that works and because we have to compete with Netflix, gaming monthly fees or music memberships, so we wanted to lower the monthly fee to see if we would attract more younger people. That is the case, of course, that costs money. If you take EUR 5 off the price, that costs money. But it’s a bit too early to say if it’s a success or not. Again, short term, it costs money, but we expect the younger members to be sticky members. So we’ll test it at least until the end of the year before we make any decisions about putting it in other countries.

——————————————————————————–

Charles Mortimer, Citigroup Inc, Research Division – Senior Associate [15]

——————————————————————————–

And the flagship stores that you were talking about, I assume they are the same pricing model? Are they simply bigger, better Basic-Fits in big city centers? Or what are the key differences with the flagship stores?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [16]

——————————————————————————–

Well, the flagship stores are bigger clubs, more expensive rent, pay locations. So investment is higher, rent is higher, but the pricing for the members is the same. So it’s a combination of a bigger club and a higher — better location, yes.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [17]

——————————————————————————–

And because of the bigger location on a very good area, we still predict that we will have a 30% return on that investment.

——————————————————————————–

Operator [18]

——————————————————————————–

We’ll now take our next question from Marc Zwartsenburg from ING.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [19]

——————————————————————————–

First of all, can you give us the percentage of flex contracts that you currently still have sold?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [20]

——————————————————————————–

Yes. Yes. It’s around 10%. Let me check exactly.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [21]

——————————————————————————–

Well, it’s less than 10% of the total base.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [22]

——————————————————————————–

Less than 10%. And if you — just coming back on corona, Hans, did you perform, say, the sort of sensitivity calculation on what happens if, say, France and Spain shut down because of corona? What will happen if they are months closed, there are forced closures like Italy? Have you done a sort of calculation what can happen there in terms of your cash flow, how you can mitigate that to stay within the conference? Do you have anything like that?

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [23]

——————————————————————————–

We calculate several scenarios, Marc, on — based on all those starting points that you just mentioned. Of course, you have to look at what countries the clubs will be closed. France is divided in several department. We are very independent, so they can make decision 1 department and have another decision in other departments. So you have to look at where the virus is spread. So we calculated based on the closures of some clubs in the more affected regions in all France. And of course, important is to calculate the period that the club has to be closed.

The incubation time of the virus is around 2 weeks, so how long must the clubs be closed before you can really say that something will happen? The contracts in which we have with our customers, if there is a force majeure, as they call it, so it’s the decision of the government to close the clubs. We can still continue with charging the payment of the members. So they’re not allowed for compensation, but because there is an impact on our joiners and also the leavers, so it won’t help us. So we did a lot of scenarios already. What we can change, of course, and we can directly influence is the CapEx. So in those scenarios, we also calculated with not opening clubs anymore and also limiting the maintenance CapEx on that, all those clubs, not a change in equipment. To calculate liquidity, that’s necessary to cope with that situation. So we have several scenarios ready.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [24]

——————————————————————————–

Because we are so — thank you. And what is also — sorry, Marc.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [25]

——————————————————————————–

Yes. I’m just wondering if any of those scenarios would get you a bit in trouble in terms of your covenant.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [26]

——————————————————————————–

Well, at the end, if the clubs are closed for 12 months, we will be in trouble for sure. But what we see now is that in some countries, if clubs had to close, for instance, in England, we had a few clubs that had to close. They could reopen again after 72 hours. So different countries, different rules. Different areas, again, different rules. I think the good thing about our 800-plus clubs is that they are not all in 1 area and not all in 1 countries. And we do not expect all clubs that have to be closed in all countries at the same time. And if that is the case, as it looks now, it is not for a long time. And the membership income will not suddenly dramatically change in 1 or 2 months because it is in our contracts that they have to continue to pay.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [27]

——————————————————————————–

So 1 or 2 months is all digestible?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [28]

——————————————————————————–

Yes. Yes. About your question about the flex contracts, to be exact, it’s 6.4% of our members have a flex membership.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [29]

——————————————————————————–

And can you give us also an idea of the percentage of members that joined specifically in March and April, which I assume were smaller months compared to January and Feb.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [30]

——————————————————————————–

You mean in that last year?

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [31]

——————————————————————————–

Yes. For instance, yes. The average of last year’s percentage of joining.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [32]

——————————————————————————–

Well, it’s too detailed, this information. Yes.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [33]

——————————————————————————–

Yes. I think what we — we have 2 big seasons. That is January and February. So we had the first big season. We are very glad we didn’t have to close clubs in January and February. So we made a very good step-up in the first 2 months in total members. And that second phase will be in September and October. So hopefully, by then, corona will be more under control. Something will be found for it or whatever. But the first big phase of growth is behind us. We did well in January and February. And the summer months are, of course, more — less joiners than in those 4 months I just mentioned.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [34]

——————————————————————————–

It’s good to emphasize that what we saw in the first 10 weeks, also with corona that our member intake is still better than on target, and we still see a lot of visits. And also in the affected areas, like in Tilburg, we had a lot of visits at that club. So people still work out because they want to stay fit. And if you go to our club, it’s a 1,500 square meter box where, at most, 150 people are working out. So there’s a lot of space where you can work out without interfering with other people. And we do a lot about cleaning, hygiene. Our employees are really on top of it, so people see that the risk is much limited.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [35]

——————————————————————————–

All right. And then maybe for you, Hans. Looking at the yield per member, it was very strong in Q4. Is there an explanation for the — well, according to my calculations, the acceleration in the yield per member growth in Q4?

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [36]

——————————————————————————–

Well, the — there’s a lot of reasons for that. But the biggest reason is that our September campaign was very successful. So there were a lot of new joiners. If you look at — normally, the new joiners are for the new clubs but with a very good working campaign. There, you have all new members also in our mature clubs and also in the mature countries like in the Benelux. And there, of course, they have the lowest VAT, just so the impact on the yield is more positive. And if you only grow by opening new clubs in France, then the VAT impact is higher so that has a negative impact on yield. So if you have a really good campaign like we did in September, then it affects all the countries in all the clubs, and especially on our mature clubs, you saw the growth on the mature clubs with 1.7%. So that really helped our yield as well.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [37]

——————————————————————————–

And 30%, of course, of the people paying 50% more, right? So 30%. And now it is December — end of December was 18% had a Premium membership. So every time a new month comes, we have 30% — around 30% people paying EUR 10 extra, which is a big difference, of course, in the yield.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [38]

——————————————————————————–

And what I explained at the Capital Markets Day, it took some time to get all those — that also that yield improvement will — running at the mature clubs. And now you see by changing the members also on the mature clubs that it also works there for the mature club. So that — it was a logical development.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [39]

——————————————————————————–

Yes. That was a strong result. And then lastly, maybe on Fitland. Can you give us a bit of an update on the performance of the clubs there?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [40]

——————————————————————————–

Well, Fitland is, of course, a brand that has been in the market for a long time. So they had, let’s say, sticky members. I think, overall, the conversion went smooth. It is not that they are full, but they are more or less at the same level as opening a new clubs. So overall, it’s not better than we expected, but it’s also not worse than we expected.

——————————————————————————–

Marc Zwartsenburg, ING Groep N.V., Research Division – Head of Benelux Equity Research [41]

——————————————————————————–

Okay. Well, congrats guys on the strong results.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [42]

——————————————————————————–

Thank you very much.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [43]

——————————————————————————–

Thank you.

——————————————————————————–

Operator [44]

——————————————————————————–

We will now take our next question from Mr. Hans Pluijgers from Kepler Cheuvreux.

——————————————————————————–

Hans Pluijgers, Kepler Cheuvreux, Research Division – Head of Research of Benelux [45]

——————————————————————————–

Yes. Most of my questions have already been asked, but first, going back on the yields for the mature clubs. Could you give maybe some feeling on what was the increase and if the main driver then the shift to the Premium membership? Or is it also underlying, let’s say, improvement in the yield due to other factors?

Then secondly, on — sorry, on Fitland, you indicated that it is in line with expectations, but could you give maybe a little bit indication on the trend for the development in the members? And also there, with respect to the yields, do you also — do you already see the yield there also improving? If you give some maybe some background on that?

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [46]

——————————————————————————–

If you — I’ll answer the question about the yields. And then René will come back to the Fitland. If you look at the yield improvement, of course, it hasn’t — I explained already that it had an impact on the mature clubs because it takes some time to change the existing members to the new memberships. So we see the — yes, we see the members growing in the mature clubs, so also new members and they, of course, paid 8% more because they pay on a 4-weekly basis. Then we see the better intake of our Premium memberships, and that’s also starting to kick in more on the mature clubs because we’re growing members there at our mature clubs. And as you’ve seen, 30% of our joiners, and that’s also in the mature clubs, take the Premium membership. So a lot of those FX has an impact on the improvement of the yield of the mature clubs.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [47]

——————————————————————————–

The question about Fitland, I think over — in 2019, it did not contribute a lot to our EBITDA. So it was like a loss-making takeover in 2019, but we see — of EUR 1 million. So EUR 1 million negative EBITDA in 2019. But if you look run rate, if you look at the month of January, it is already now making money. So we see a good growth in membership. So overall, it looks very good.

——————————————————————————–

Hans Pluijgers, Kepler Cheuvreux, Research Division – Head of Research of Benelux [48]

——————————————————————————–

And maybe one last question then from my side. On the new initiatives that you also announced on the Capital Markets Day, what was, let’s say, your first experience, especially with NXT Level nutrition bars and the media policy? Could you give some feeling on that, how that’s developing?

And lastly, on sports water. In the past, you indicated that for the new members that the uptake was about 30%. So — and of course, that means the growth for a total base. Is that new membership order still taking about — 30% of them are taking up the sports water membership also? So could you give some feeling on that if that’s changing?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [49]

——————————————————————————–

Yes. So the nutrition and, as said, the TV screens advertisement, that’s going okay. I think we definitely will see that grow in 2020. It is still not in a lot of clubs. So that means the TV screens are still being rolled out. So the real big change, you will not see in 2020 but hopefully in 2021. So that will not be a huge profit driver this year. But you will definitely see it grow faster than the 20%.

The nutrition, same story. We still don’t have it in all our clubs with the vending, but we see growth every month. It is — we’re selling more. So there’s a lot of customers that already have a supplier of nutrition. So it’s especially the new members that come in that we’re trying to get on our nutrition. And once they’re on that label, they will be sticky and stay longer. So it is not a sprint. It will take a long time, but we think it will be a good revenue growth for us and will help our results as well.

The sports water, I’m not sure — or I’m pretty sure we didn’t say 30% but more between 20% and 25% that the new members have an uptake. But it is — for us now, it is on the base, 22%. I personally will not see it go up to 30%. I think that number is too high. We do see 30% for our Premium membership, but the younger membership, I think 22% is a good number. And with the strong growth that we have with opening clubs, I think if we keep it around 22%, 23%, I will be happy with that.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [50]

——————————————————————————–

And I — and also I understand where you get that 30% up. What we said is that we — of the new joiners, around 20% to 25% take the sports water. But in France, we see them — the take is getting higher. So around 30% of the people in France are taking the sports water subscription. But if you look at the total company and illustrate from the joiners, it’s around 20% to 25%. And we managed to increase the base with 2% to 3%. So it went from 20% to 19% at the end of ’18 to 22% of the base members at the end of this year — last year.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [51]

——————————————————————————–

2019, Hans.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [52]

——————————————————————————–

Yes. We’re talking about this year.

——————————————————————————–

Operator [53]

——————————————————————————–

We will now take our next question from Mr. Robert Vos from ABN AMRO.

——————————————————————————–

Robert Jan Vos, ABN AMRO Bank N.V., Research Division – Analyst [54]

——————————————————————————–

A couple of questions from my side. You just mentioned that 6.4% of the membership base holds the flex contracts. Could you please also say, in addition to this percentage, what percentage of the memberships could cancel their contract on a monthly basis because their current contracts allow for that? That’s my first question.

Maybe a bit related to this, I’m not sure whether you commented on length of stay. If not, could you please elaborate a little bit on the length of stay, how it developed?

And my final question, you mentioned that you will accelerate new club openings in Spain, is it possible to be a bit more concrete there? How many clubs do you expect to open in Spain, for example, in 2020?

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [55]

——————————————————————————–

To start with the most easy question, the length of stay is around 22 — 23 — I said the wrong number. It’s 23 months now. So 23 months is the average length of stay of a member. So improved it by 1 month. Spain, also an easy question. This year, we expect to do around 20 locations. And next year, we will expect to do around 40 locations in Spain. So by the end of next year, we will have around 100 locations in Spain open.

The other question is something we cannot answer or do not want to answer what the flexible membership are, at this moment, the people who are out of a contract. But of course, if you — if the average length of stay is 23 months and 6% is — you can more or less calculate it yourself, but we do not want to share that.

——————————————————————————–

Operator [56]

——————————————————————————–

(Operator Instructions) We will now take our next question from Alan Vandenberghe from KBC Securities.

——————————————————————————–

Alan Vandenberghe, KBC Securities NV, Research Division – Head of Research & Equity Analyst of Food Retail [57]

——————————————————————————–

One question left from my side. I was wondering if you could share a bit more insights into the Basic-Fit at home app. You seem to indicate that you have been promoting it due to or thanks to coronavirus. If you could share some details there, that would be useful.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [58]

——————————————————————————–

Yes. I think what we see is that we have a very big group using it on a weekly base. So that group has grown with hundreds of thousands of people. So we also see the amount of films being played at home or — we don’t know where they are, of course. But out of the club is grown dramatically, like 3x as much as 6 months ago. So overall, it is like 1 million downloads per week. So overall, it is a huge uptake compared to where we came from. And we also — what we also see is that we have more people using it on a regular basis because, of course, we can see which member is using it, if they’re using it for 10 minutes and stop or using it the whole class, let’s say, 30 minutes and do that on a weekly base. So we see that we have more weekly followers. We are a big believer of the combination of the 2. Because working out at home, you need a lot of discipline and that is very to do for many years. That’s why you see people bought a bike for home or a treadmill often used to hang your coat, because it is very difficult to be disciplined and keep doing that on a weekly basis. So the combination of going to clubs, seeing other people work out, that motivates you and also doing it at home is a good combination, especially with the coronavirus. Everybody heard that they should travel as less as possible, and we see a big uptake in film. I’m not sure if it’s completely related. But we think it is.

——————————————————————————–

Operator [59]

——————————————————————————–

Ladies and gentlemen, as we have reached 3:00, this will be our last question. We will now take our final question from Mr. Paul Hofman from the IDEA!

——————————————————————————–

Paul Hofman, The Idea-Driven Equities Analyses Company – Research Analyst [60]

——————————————————————————–

One question on the CapEx. You mentioned an amount of EUR 80 million, broken down by M&A, enlarging existing clubs and expenses for clubs not opened yet. Can you further break that down? I guess, at the M&A, you had 30 Fitland clubs. I think, you also said that — what is it? Refurbishing it and acquiring it costs around EUR 1.19 million per club, so that’s EUR 35 million. And the rest of these 2 reasons for that EUR 18 million, can you break that down? And a follow-up question on that is, yes, there was quite a jump in this kind of CapEx. How do you see that developing going forwards and especially the EUR 140 million enlarging the existing entities or clubs?

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [61]

——————————————————————————–

Well, if you look at the explanation, the EUR 80 million that I mentioned is, you’re absolutely right. Part of that is the Fitland acquisition, the 30 club that we built and refurbished. So that’s the EUR 36 million. It’s based on the EUR 1.2 million that we spent on — then, we did — in France, we did an acquisition of Gymstreet. That’s also included in that EUR 80 million. And one of the biggest parts of that EUR 80 million is all the prepayments that we did for the clubs that we opened in the first 2 months of this year. So we opened 40 clubs. That was a record-breaking number for us, opening 40 clubs in the first 2 months of this year, because last year, we opened much less clubs. And of course, a lot of those investments are already paid in 2019. So that was also a big chunk of that EUR 80 million that was the [amount] that we have.

——————————————————————————–

Paul Hofman, The Idea-Driven Equities Analyses Company – Research Analyst [62]

——————————————————————————–

Okay. It was a big amount, EUR 80 million, but yes, of course, M&A is something not recurring or you kind of planned that. But enlarging the — or rejuvenating the existing clubs, yes, has that also increased materially? Or is that more or less an amount which is stable year-on-year?

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [63]

——————————————————————————–

That’s a stable number year-on-year. So we do that several times, and it’s also a small number. A small part of that EUR 80 million.

——————————————————————————–

Richard Piekaar, Basic-Fit N.V. – Head of IR [64]

——————————————————————————–

Okay. Well, then I would like to thank everyone for joining today’s call. I saw that there were still a couple of people in line for the call. I will call them back. If you have any question at any time, please don’t hesitate to give us a call, and we’re happy to talk to you, and hope to speak to you soon. Thank you. Bye-bye.

——————————————————————————–

Hans J. van der Aar, Basic-Fit N.V. – CFO & Member of the Management Board [65]

——————————————————————————–

Thank you very much.

——————————————————————————–

René M. Moos, Basic-Fit N.V. – Chairman of the Management Board & CEO [66]

——————————————————————————–

Thank you.

——————————————————————————–

Operator [67]

——————————————————————————–

Ladies and gentlemen, this will conclude our conference call for today. Thank you very much for your participation, and you may now disconnect.