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Edited Transcript of BFIT.AS earnings conference call or presentation 23-Jul-19 12:00pm GMT

Half Year 2019 Basic Fit NV Earnings Call

Hoofddorp Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Basic Fit NV earnings conference call or presentation Tuesday, July 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hans J. van der Aar

Basic-Fit N.V. - CFO & Member of the Management Board

* René M. Moos

Basic-Fit N.V. - Chairman of the Management Board & CEO

* Richard Piekaar

Basic-Fit N.V. - Head of IR

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Conference Call Participants

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* Alan Vandenberghe

KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst

* Charles Mortimer

Citigroup Inc, Research Division - Senior Associate

* Frank Claassen

Banque Degroof Petercam S.A., Research Division - Analyst

* Hans Pluijgers

Kepler Cheuvreux, Research Division - Head of Research of Benelux

* James Rowland Clark

Barclays Bank PLC, Research Division - Research Analyst

* Robert Jan Vos

ABN AMRO Bank N.V., Research Division - Analyst

* Thijs Hoste

Kempen & Co. N.V., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to Basic-Fit's 2019 Half Year Results Conference Call and Webcast. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to your host for today's conference, Richard Piekaar, Head of Investor Relations. Sir, you may begin.

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Richard Piekaar, Basic-Fit N.V. - Head of IR [2]

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Thank you, Kim, and good afternoon, everyone, and welcome to our conference call, during which we will discuss our results for the first 6 months of 2019. With me today are CEO, René Moos; and Hans van der Aar, our CFO. This call is being broadcast live on our website and a recording of the call will be available shortly afterwards. It seems our (inaudible) is kind of a technical error that's why we can't show you the presentation in real life, but you are able to download it on the website and go forward with the slides yourselves. In addition, as usual, I would like to point out that safe harbor applies.

We will start with René, who will discuss the highlights and the operational developments, followed by a more detailed look at the financial results from Hans. We will then take your questions, and we will finish the call no later than 3:00.

And with that, René, I would like to hand over to you.

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

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Thank you, Richard. Welcome ladies and gentlemen, and thank you for joining today's call. We had a very successful first half of 2019, in which we surpassed the important milestone of 2 million members. In just over 3 years, we managed to double the number of members, and with that, we are fulfilling our purpose of making fitness available to all people in Europe. At the same time, we are also making progress in achieving our long-term target of reaching 5 million people by 2025. We do this by opening clubs close to where people live and work and making high-quality fitness available for a low price.

In the first half of the year, we increased our club network by 21% year-on-year, adding 53 clubs to the network, taking the total number of clubs to 682. We saw a strong growth of revenue in the period of 27% year-on-year, which is a result of growth in memberships as well as growth in yield per member and a strong growth of other revenue. Adjusted EBITDA increased by 23% to EUR 69.7 million. All in all, a good set of results for a company that has been on a steep growth path since almost a decade.

I'm really glad we have reached a point where we have the scale and financial strength to invest in new initiatives that will help us strengthen our sustainable competitive position by optimizing our fitness concept and further improve the member experience, broaden our product offering and make our operations increasingly efficient.

In the period, we set up a department to support successful implementation of the earlier communicated smart camera system in our clubs. After a couple of years of testing, we are now gradually rolling out this camera system across our network: first in the Benelux; while France will follow at a later stage. To fully utilize the potential of the camera system and reduce operation cost of 24/7 clubs, we have built a control room to remotely monitor the clubs ourselves. It will also allow us to increase the number of clubs that are open for 24 hours a day, 7 days a week: first, in the Benelux; and at a later stage, France and Spain.

In addition to the smart camera system, we have set up several new initiatives and departments. Amongst others, for the further improvement of our GX offering, our group classes, member retention and automation of our customer service. With this, I mean that we have further automated the customer support department and are handling an increasing amount of questions from our members online, which will reduce in time the handling cost per contact movement. These are just a few of the developments we are currently working on, and we plan to discuss more during our Capital Markets Day on November 7, here in Hoofddorp.

Next I would like to talk to you more about the development of our club Fitland network. In the first half of the year, we opened 57 clubs and closed 4, resulting in 53 net additions to our network. Of the 53 clubs, we opened 31 clubs in the second quarter, so we continue to be somewhat back-end loaded with our club openings, but a bit less than last year. I expect a similar weighting over the coming quarters with more clubs opening in the fourth quarter than in the third.

At the end of June, we operated 682 clubs compared to 565 clubs a year ago, which is an increase of 117 clubs. With that, we are on track to increase our Basic-Fit club network by 125 clubs this year. In addition, we expect to add around 30 clubs to our network through the acquisition of Fitland, bringing the total to around 155 clubs this year.

In April, we announced the intended acquisition of all 37 Fitland clubs, the third largest fitness operator in the Dutch market by number of clubs. The acquisition was successfully closed early July, after which we sold 5 clubs and started the integration process of most of the remaining clubs. We expect to refurbish and integrate around 30 clubs into the Basic-Fit network, and we continue to expect that acquisition will improve the earnings in 2020 and will have a limited negative impact on EBITDA of between EUR 1 million and EUR 2 million in the second half of this year.

The total acquisition consideration per club, including rebranding and refurbishing, will be around EUR 1.2 million, which equals a total investment for building a new club.

In France, we added 44 clubs to our network in the period, bringing the total to 296 clubs. In the meantime, we have announced the opening of club 300 in France, in Paris last week, another important milestone as we are quickly building out our leading position in France, making us the logical choice for people with our clusters of clubs.

In Belgium, we added 6 clubs to our network and 3 in the Netherlands. Our network in Spain remains stable as a result of 1 club opening in Madrid and a planned closure in, Córdoba, a former Fitness First club. We expect to open between 5 and 10 clubs in Spain this year.

On the next slide, we see the development of memberships in the first half of the year. At the end of the period, we had 2 million memberships compared to 1,000,084 (sic) [1,840,000] at the end of 2018, and 1,000,067 (sic) [1,670,000] a year ago. This represents an increase of 157,000 and 328,000 membership, respectively. As usual, the increase is mainly the result of the increase in memberships at our immature clubs.

Since the introduction of our new membership structure in December last year, we have seen a healthy demand for the Premium membership. Well over 25% of the new members select Premium. The 20% increase in membership is, therefore, understating the increase in the number of people that are actually working out in our clubs. More than 80% of our Premium members are actively working out with friends on their membership. And in total, our Premium members have registered more than 250,000 friends to work out together in the first half of the year. We, therefore, believe that the Premium membership with the option to bring a friend offers a lot of value to our members and could work as a lead generator for us for new members.

The inclusion of the Basic-Fit app as a standard in the subscription has resulted in a strong increase in the number of downloads and users of the app. More than 1 million members have downloaded the Basic-Fit app, and close to half of them are using the app now on a regular basis. We are very happy with this result.

In April, we introduced a new membership in Spain. The basic membership is introduced as a pilot to test the impact of a lower price dress down subscription type. With the basic membership, one person can exercise at one club for EUR 14.99 for 4 weeks. The aim is to attract a new type of member for whom we believe EUR 19.99 is too expensive. Although this might have a lowering effect on the average yield per member, we are convinced it is in the long-term interest of the company to remain low cost and be accessible for as many people as possible. We currently see a positive impact on the membership growth, but it's still too early to draw a conclusion at this stage of the pilot. We will continue to test the basic membership in Spain, and we will assess the result of the pilot at end of the year.

The 407 mature clubs that we have in our network showed a modest membership growth in the first half of the year with 3,329 memberships on average per club compared to 3,287 at the start of the year.

And this concludes this part of the presentation and would like to hand over to Hans.

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

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Thank you, René. I would first like to discuss my favorite topic, IFRS 16. As of this year, Basic-Fit has adopted IFRS 16 on a full retrospective approach. This means that we represent our IFRS 16 numbers as we have always reported under IFRS 16. IFRS 16 introduces a single on-balance sheet lease accounting model for lessees. This means we have to recognize 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 cost are no longer part of the EBITDA. Instead, the depreciation charges of the right-of-use assets and the interest charges on the financial leases are now included.

In the past years, our external reporting structure was closely aligned with the way we review our results internally. We also realize that the financial community will have to get used to IFRS 16. So for consistency purposes and to allow the financial community to get used to IFRS 16, we will continue to report on a pre-IFRS 16 basis next to the full IFRS 16 reporting in our financial statements and notes to the financial statements.

We expect that 2019 will be a transition year and that as of 2020, we will provide you with a new set of reporting and KPIs based on IFRS 16. As we have communicated before, IFRS 16 does not change our strategy or the way we do business. It does also not change our club economics or underlying cash flow. But as it is a lease accounting change and since we have a lot of lease contracts, IFRS 16 does have a material impact on our balance sheet, income statement and certain key performance indicators. IFRS 16 also does not have any impact on our bank covenants as they are based on frozen GAAP. As announced with our full year results, we will report a leverage ratio based on the bank covenant definition. The bank covenant definition includes adjusted EBITDA, which is to, some extent, increased by the expected normalized ramp up for immature clubs.

I would now like to look a bit closer at income statement and how IFRS 16 has impacted our main KPIs. Within our income statement, lease cost are no longer part of the EBITDA. Instead, the depreciation charges of the right-of-use assets and interest charges on the financial leases are now included in the income statement. As a result, adjusted club EBITDA on IFRS 16 basis is EUR 49.9 million higher than on a pre-IFRS basis. At the same time, the depreciation on right-of-use assets and interest on lease liabilities and other IFRS 16 impact combined is EUR 56.7 million, which considerably exceeds the positive effect on adjusted club EBITDA. This represents a negative impact of EUR 6.8 million on profit before tax. This is the result of the front-loading effect.

Although the total cost of the lifetime of a lease contract is the same under IFRS 16 as it was under the previous accounting method due to the decreasing interest charge and the decreasing lease liability over time, more cost our booked in the income statement in the first years of the contract term compared to the later years.

When we look in more detail to the different line items, we see a number of small adjustments. The adjustments for the international and country overhead comes from the lease contracts for Basic-Fit offices and the car leases for our employees. The exceptional line item restatement of EUR 0.9 million is due to the preopening rental cost, which under IFRS 16 are not recognized anymore. Depreciation and impairment of tangible assets is restated for amount of EUR 0.6 million, as under IFRS 16 preopening rent is no longer capitalized and depreciated.

And amortization restatements of EUR 1.3 million includes amortization related to initial direct lease cost and favorable lease rights recognized as part of the purchase price allocation, which post IFRS 16 are classified as right-of-use assets and depreciated accordingly.

On the next slide, I would like to explain the front-loading effect with the help of a single club example. What you see on the slide is the depreciation of the right-of-use assets and interest cost on the lease liability of a club over a 15-year period. The black line represents the lease payments on a pre-IFRS 16 basis. In the graph, you see that during the first 8 years of the -- after the club is opened, the sum of the depreciation of the right-of-use asset and the interest cost exceed rent cost on a pre-IFRS 16 basis. As of year 9, we will start to see the reversal of this effect, and as a result of the steady decline in interest costs, the sum of both the depreciation of the right-of-use asset and the declining interest rate costs will become lower than the lease cost pre-IFRS 16. This negative impact of IFRS 16 on the profit before tax in the first years of leasehold is the reason why the impact of IFRS 16 for Basic-Fit is clearly negative. We have a young and fast-growing club network and nearly all of the leases are in the early years of lease term.

If we would stop opening clubs, the negative impact would reverse in a number of years. But since this is clearly not our attention, the net earnings post IFRS will continue to be negatively impacted by the front-loading effect and will, therefore, be lower than under the old accounting rules.

Then to the impact of IFRS 16 on the balance sheet. As a result of the adoption of IFRS 16, our balance sheet will almost double in size. The main impact of IFRS 16 on the asset side is the recognition of the lease assets for a total amount of EUR 806 million. On the liability side, lease liabilities are included for a total amount of EUR 851 million, of which EUR 735 million in long-term lease liabilities and EUR 116 million in current lease liabilities.

Total assets at the end of the period were EUR 903 million on a pre-IFRS 16 basis. On a post-IFRS 16 basis, total assets increased to EUR 1.68 billion. The net negative impact of IFRS16 on equity is EUR 37 million. This is the result of the adoption of the full retrospective approach with this retrospective adjustments.

I would really like to close off the IFRS 16 topic now -- for now and walk you through the financial review in the same way as we have done over the past years. In the first half of 2019, revenue increased by 27% to EUR 240 million. The strong increase was a result of 26% higher fitness revenue and 33% higher other revenue. The average revenue per member increased by 5% to EUR 20.25 compared to EUR 19.26 in the same period in 2018. This increase is the result of both the introduction of the new membership structure, the indexation of members that came out of their first contract period and higher annual sales.

We have seen the uptake of sports water subscription increase from 19% to 21%. These positive developments more than compensated for the higher stake of French members in the mix where we paid 20% VAT compared to 6% or 9% in Belgium and The Netherlands. At club level, adjusted club EBITDA increased by 26% to EUR 103 million. The adjusted EBITDA margin was stable at 43.1% compared to 43.2% in the first half of 2018.

In the past year, we have started to open most of the new clubs in the more expensive larger cities in the South of France and Paris. In these cities, the rent cost are significantly higher than the average club rent. It takes longer in these cities to ramp up to a cash breakeven level. Although at maturity, these clubs will have a return on invested capital of at least 30%, and the mature club margin will be in line with that of the group. It will take longer before they contribute positively to group EBITDA.

Total overhead expenses increased by 33% to EUR 33.7 million. Country overhead increased by 24% to EUR 19 million, mainly as a result of higher marketing spend related to the national advertising campaign in France. International overhead increased by 47% to EUR 14.7 million. The increase is mainly explained by the expansion of our headquarters to support initiatives in the development of new revenue streams and cost savings as explained earlier by René. The increase of the overhead cost in the second half will be less. Total overhead is expected to increase for 2019 by 30% this year.

Adjusted EBITDA increased by 23% to EUR 69.7 million. Exceptional items totaled EUR 2.1 million and mainly consisted of the preopening noncash rent costs and other exceptional items linked to the reorganization as a result of club closures. This compares to EUR 0.3 million in the first half of 2018, when exceptional items included a couple of one-off benefits for an amount of EUR 1.2 million.

The finance expenses in the first half of the year increased to EUR 8.2 million compared to EUR 4.8 million in the first half of 2018. This increase is for EUR 3.6 million explained by temporary valuation differences of our interest rate swaps as the interest rates declined in the period.

The corporate income tax expense for the first half was stable at EUR 2.5 million, representing an effective tax rate of 30%. This compares to EUR 2.5 million tax expense in the first half of 2018, with an effective tax rate of 29%.

The underlying effective tax rate in full year 2018 was 28%. The effective tax rate has been consistently above the Dutch corporate tax rate of 25% as a result of the nontax-deductible expenses and most of all of the CVAE tax. The CVAE tax is a specific French tax that has becoming more and more increasingly visible with the growth of revenue in France. It amounts to approximately 1% of French revenue. At the beginning of the year, we introduced a transfer pricing model, which helps us in achieving a fair and realistic tax planning.

Basic-Fit recorded a net profit of EUR 5.8 million in the first 6 months of 2019 compared to EUR 6.1 million in the same period in 2018. Net earnings adjusted for amortization, interest rate swap valuation differences, exceptional items and one-offs and the related tax effects were EUR 13 million, an increase of 9% compared to the EUR 11.9 million reported in the first half of 2018.

As we announced with the full year results, we have slightly adjusted the definition of adjusted net earnings. Previously, we adjusted net earnings for the full amortization amount in the income statement. This was done because it's almost entirely consisted of the amortization of the purchase price allocation related to the reevaluation of our business at the time that 3i acquired a majority stake in Basic-Fit in 2013.

We have now reached a point that some of these assets have been or will soon be fully amortized, and the part of this PPA-related amortization of the total amortization is becoming small. As of this year, we will only adjust for this part in our adjusted net earnings. The remaining amortization consists of PPA-related acquisitions we did after 2014 and the capitalized IT and software development.

We are also now adjusting for valuation difference of our derivative financial instruments, which relates to the interest rate swap. These are temporary valuation difference that occur due to changes in swap rates. In the first half of the year, the interest rates have declined further, which has had a negative effect on the valuation of the interest swaps.

I would now like to go through the mature club slide. As you know, a club is mature if a club is at least 24 months old at the start of the year. We started the year with 410 mature clubs, of which 3 were closed during the period. 309 of the 407 mature clubs are located in the Benelux. The 407 mature clubs represent approximately 60% of the total number of clubs and they recorded EUR 168 million in revenue of 70% of total revenue.

In the period, the average mature club EBITDA margin increased slightly to 49.7% from 49.5% in the first half of 2018. On the last 12-month basis, the mature club reported revenue of EUR 808,000 and the club EBITDA of EUR 402,000. This compares to EUR 395,000 club EBITDA for an average mature club in 2018. The number of members per mature club showed a modest increase of 3,329 compared to 3,287 at the start of the year.

Then going to the next slide, cash flow and CapEx. The cash flow preexpansion CapEx defined as adjusted EBITDA minus maintenance CapEx was EUR 57.8 million in the first half of 2019, which is 25% higher than in the same period in 2018. Maintenance CapEx was EUR 11.9 million in the first half of 2019 compared to EUR 10.4 million in the same period in 2018. This translate into an average of EUR 18,000 maintenance CapEx per club versus EUR 19,000 maintenance cost in the first half of the year -- of 2018. We plan to do more maintenance CapEx during the second half of the year, and we continue to expand on average around EUR 55,000 per club for the full year on maintenance.

Expansion CapEx was EUR 84.1 million compared to EUR 53.6 million in the first half of 2018. This increase is mainly explained by higher gross number of club openings of 57 during this period compared to 44 club openings in the first half of 2018, and of course, the EUR 10 million prepayment for the Fitland acquisition, which was completed just after the close of the period. Expansion CapEx also includes expenses for enlargement of existing clubs, expenses for clubs that are not open yet and small acquisitions, totaling EUR 6.6 million. For the clubs we opened in the period, we spent EUR 67.5 million, which is EUR 1.18 million per club on average, and this compares to EUR 1.17 million on average per club in 2018. Regardless of the initial CapEx for a club, we only start building if we expect to achieve a return on invested capital of at least 30% of maturity, so in the third year in line with our target.

Other CapEx amounted to EUR 7.3 million compared to EUR 2 million in the first half of 2018. Other CapEx consisted primarily of the investment in innovations like the development of the smart camera system. We also had additional spend due to the expansion of our headquarters in the Netherlands and the development of the new commercial website. For the full year, we expect other CapEx to be around EUR 10 million.

Which brings us to the net debt and working capital. Net debt was EUR 386 million at the end of June 2019 compared to EUR 301 million at the end of June 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 2.4 compared to 2.3 at half year-end 2018. Our bank covenant for leverage ratio is set at 3.5, giving us ample headroom to continue at well par. Working capital was EUR 107 million negative compared to EUR 90 million negative at the end of June 2018. As a percentage of revenue, working capital was minus 24% compared to minus 25% at the end of the first 6 month of 2018.

And now back to René for the final slide.

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

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I would like to conclude with the outlook for 2019. Our pipeline remains strong, but at the end of June, 44 clubs under construction, 70 contracts signed and more than 170 clubs for which we are in advance negotiations with property owners or that are in the research phase. With that, we continue to feel very comfortable with our target to open around 125 clubs organically in 2019 and the coming years.

We will, of course, continue to strictly follow our site selection process and only open clubs if we expect it will achieve a return on invested capital of at least 30%. Including the 30 clubs that we expect to add to our network with the acquisition of Fitland, we expect to open around 40 clubs in the Netherlands, around 10 clubs in Belgium and between 5 and 10 clubs in Spain. In France, we expect to open up to 100 clubs, bringing us to a total of 155 locations in 2019.

We are planning to host a Capital Market Day on November 7 this year. At that time, we will elaborate further on our growth plan and the new initiative I mentioned earlier, and we really hope to see you there.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is from Frank Claassen from Degroof Petercam.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [2]

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Frank Claassen from Degroof Petercam. Two questions, please. First of all, on your new membership structure, did you see any impact on churn or average length of stay? And what kind of impact do you expect going forward of this new structure? And then secondly, on marketing cost. You did a national advertising campaign in France in the first half, do you expect that also in the second half? Or what can you say about marketing cost for the full year?

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

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Thank you. The new membership, it's too early to tell something about the length of stay, but what we do see is that more than 25% of the people are joining on the Premium membership. So that means the Premium membership will be a bigger part of our total basing time so that will also mean that the yields will go up. I think that is one thing.

If you look at the length of stay backwards, at this moment, it's around 23 months, so we can only look at it from the old clubs that are opened for a longer period. So the length of stay on the older clubs is 23 months. But the new membership will show only in 2 years to see if that really makes a difference. But what we do really expect from the new membership is that the yield will keep increasing.

If you look at the marketing spend, the marketing spend has been in France higher than normal because we did a big national campaign, national TV, national radio. We will not expect to do that again in September because the reason why we did the national marketing campaign in France nationwide is that we wanted to really improve the brand recognition. That really worked well. We didn't see a lot of new extra members because of that because we only have limited clubs in France to spend so much money on a national campaign while you do not have the locations there yet. So we will go back to more local marketing and maybe in 2020, we will do it again.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [4]

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So is it then fair to assume that the second half marketing spend will be lower than the first half? So less than EUR 10 million, is that fair?

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

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It will be around the same amount, but definitely not higher.

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Operator [6]

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Our next question is from Charles Mortimer from Citi.

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Charles Mortimer, Citigroup Inc, Research Division - Senior Associate [7]

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Couple from me. Starting with the Basic-Fit app, now it's out for members, there are 1 million people, half of those using it regularly. How would you plan on leveraging it now that you've got more larger active user base? Or is just a question of more people engaging and improving retention rates?

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [8]

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Well, that -- the app is definitely -- we spend a lot of time and energy and money on it, and the main goal is to, as you said, increase retention. Of course, with 2 million members staying 1 month longer, that's 2 million times EUR 19.99, it will be a big income change. So the focus is length of stay. But of course also in time, we will also -- we'll see the revenue streams coming out of the app with the partner program that we are building right now. But for now we are focusing on retention.

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Charles Mortimer, Citigroup Inc, Research Division - Senior Associate [9]

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Sure. And the -- and 25% is pretty good in terms of the amount of your new members who are joining as Premium members. Do you have -- is there any plan or anywhere reinvigorating all the members to increase the amount of them on Premium membership?

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [10]

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Yes. It's still early days. It's only 7 months. We are working with the Premium membership, so now it is 25% and actually, it is still growing month-by-month. So it might even go up a little bit more. We're definitely thinking about how we can keep increasing that number because I think it is also not only because it is more revenue, but also they're bringing in lot of new potential members and the 250,000 people they brought in, we saw already that some of them became a member. So we think it's also a very good lead generator. So for many reasons, the Premium is something we will focus on in the future.

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

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Sure. And just one more from me, if I may. The -- France is still a small percentage of those mature clubs. Over the next coming years, we're going to see France become sort of 40%, 50% essentially of mature clubs. So how the -- what's the profile of the clubs there? Currently, what's the profile of the clubs that will be coming on next couple years? You said that some of them are in more Premium areas in terms of margins, do we expect to see some dilution of the margins? Or is it the fact that you get more members there and a slightly lower rate due to VAT and the margins are very similar, so we shouldn't see an impact in the next 3 or 4 years?

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [12]

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Well, actually, you answered to your question yourself. What we see is that we have more members in the French club, so the -- at the mature level, we have more members than we're seeing in the Benelux. But then, again, we need to have more members because with the VAT, we need more revenue to get to the same EBITDA. So we expect that the margin will be comparable to what we see in the mature clubs in Benelux.

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Operator [13]

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We will take our next question from Alan Vandenberghe from KBC Securities.

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Alan Vandenberghe, KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst [14]

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I have 2. My first question is regarding the membership growth in the second quarter. We saw it slowing down in absolute numbers compared to the first quarter. I was wondering if you could provide some color on that. Is it only the consequence of people switching or new members choosing for Premium memberships? And then in terms of the club opening pipeline, if I look at the -- some of the clubs in research are in negotiation phase, it's significantly lower than in the first quarter, while the other are more or less in line. I would appreciate some more comments on that as well.

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [15]

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Well, the first question is about membership. Well, if you compare the first quarter to the second quarter, it will always be the case that the first quarter was more successful in getting the joiners in than in the second quarter. First quarter is -- has January in it with all the good intentions, so the growth in the first quarter is always higher -- will always be higher than in the second quarter. So that I think it's a normal pattern that we will see also in the coming years. So you can expect that same pattern in the coming years as well.

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

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Same that the third quarter will be higher than the fourth quarter. So there is the other way around. So there, we have the September campaign -- August-September campaign that everybody is going back-to-school again. So there, in the second half, the third quarter will be better than the fourth quarter, in member growth, that is. And the other question was?

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

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Can you repeat the other question about the pipeline?

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Alan Vandenberghe, KBC Securities NV, Research Division - Co-Head of Research & Equity Analyst [18]

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The other -- yes, the other question was, when I look at the number of clubs in research or negotiation phase, you mentioned above 170. If I look at the pipeline at the end of the first quarter, it was 250. I was wondering why the -- where that gap came from taking into consideration that the under construction and contract signed clubs are more or less in line with the first quarter?

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [19]

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Yes. Well, that is intended because we were a bit enthusiastic and ahead of the negotiation because you cannot negotiate for 2 years with a landlord. So since we're opening only 125 clubs a year, it has no -- it's -- not only spending a lot of time, but also we lose location because nobody is willing to wait for 1 year or 2 years before we will finally build a club out there. So we have lowered that a little bit, but we could easily spend more time and have a higher number, but it will, of course, not make a difference if we are willing to open 125 clubs. So that is the reason why we scaled back on the negotiation part of the bid.

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Operator [20]

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We'll take our next question...

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [21]

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Maybe to add to that, we have no risk that the coming years, the 125 will be difficult to find because everything in the whole system is in place, we can easily up the 125 clubs the coming years.

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Operator [22]

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Our next question is from Thijs Hoste from Kemplin -- Kempen, sorry.

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Thijs Hoste, Kempen & Co. N.V., Research Division - Research Analyst [23]

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Some of have been asked, but I still have 3 remaining. So first of all would be on Spain. I think the coming half year is the first half year where we really see openings that are higher than 1 or 2 clubs. Can you please comment on how well prepared you are to handle this? For example, is the back office in place or did you already develop the real estate model and so on? That's my first question.

My second question would be related to the COO appointing that we have seen. Could you please comment on what his area of focus will be? Does he remain primarily focused on expansion or will he also support the initiatives in the development of new revenue streams and cost savings?

And then my third question is just more model-based. How should we look at international overhead going into H2 and into 2020? Do you consider that step-up of EUR 4.7 million as the new run rate or should we foresee additional step-ups? And then in terms of other CapEx, this year you guide for EUR 10 million, what would the run rate be in 2020 in the absence of already some projects?

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

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Thank you. I will answer the first 2 questions. Hans will do the last, Hans will do the easy question. If we start with Spain, we are very well prepared. What we did is the expansion team that first did the big growth in Belgium then moved to France is now focusing also in Belgium. So it's experienced people -- sorry, are moving to Spain, so experienced people who know what locations we are looking for. We think this year, the second half, will be between 5 and 10 locations. We think next year, it will be between 10 and 20 locations in Spain that we already have in our system. So the start of growing locations in Spain is happening right now.

We're very comfortable with the head office. There's a lot of people working there already for a longer time, and we really changed the system, aligned it completely with what we did in the other countries. So Spain is actually the last country that is really into the Basic-Fit system. So it's been working well, say, for the last 6 to 8 months. And -- yes, so we have no worries about the growth in Spain. So second half between 5 and 10 clubs and next year between 10 and 20. And the head office all the systems are in place to make that a success.

The second one, the COO, Rédouane. Rédouane has been working with us for over 10 years. Started with Fitness First, working on a club in sales and really worked his way up to become sales manager, country manager in Belgium and then country manager in France. He is doing now focusing on expansion. His role will stay with expansion, but also the role will also include the -- and/or responsibility for France and Spain operational-wise. So those are also the 2 countries where we will focus the growth, so it's kind of a logical step. Also the departments that are part of the expansion will report to him, so that is actually the change that we have made.

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Thijs Hoste, Kempen & Co. N.V., Research Division - Research Analyst [25]

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Okay. If I then step in quickly in Spain, those 10 to 20 clubs, does that primarily involve the Madrid area still or...

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

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Yes.

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [27]

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Well, if you look at the international overhead, the total overhead, including marketing, grew with 33%, 34% in the first half year. We expect that growth to be less in the second half of the year. We expect the total overhead to be around 30% higher than in 2018 over the whole year 2019. Meaning, of course, that in the second half year, the growth will be less. And we expect also that for the coming years for the international overhead. So not -- definitely not a step up, but we will continue to spend money in innovation. We want to be sustainable for the long-term. Therefore, we need innovation, and we need to do new things to keep our members satisfied and to increase the member retention. So that's a very important. So we will still do initiatives to make that better and to get operating leverage that will be in 2020 the case.

If you look at other CapEx, as I said, in -- the same goes for the other CapEx. Big chunk of that is, of course, the new innovation, and we'll keep on innovating. So for the coming years, as we gave guidance before, was between EUR 6 million to EUR 8 million. And I think that's a number you can count with for the coming years again.

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Operator [28]

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We will go next to Hans Pluijgers from Kepler Cheuvreux.

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Hans Pluijgers, Kepler Cheuvreux, Research Division - Head of Research of Benelux [29]

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Few questions from my side. First of all, on the impact from the Premium membership on growth in number of members, what's your idea, let's say, on the dilutive impact? Because certainly, some of the members, which initially may be planned to take 2 memberships, now take a Premium membership. What's your feeling on that? Because you see that the top line is growing and the CapEx is becoming much bigger compared to the growth in the number of members. So what's your feeling in there? Would you, let's say, see that the impact is on the top line on certain yield about 5% and the impact on the growth of the members is about 2%, 3% negative, which gives us some feeling on it and how do you see it going forward? And especially on that also what's the, let's say, churn, let's say, from existing members to the new Premium membership, could you give some feeling on that?

Secondly, also on new membership -- the new membership basic in Spain. Yes, what did you see there? Did you see also some members churn from existing EUR 19.99 to the new basic membership? So what's -- and what's your, let's say, key KPI for this, let's say, to continue to roll it out into other areas? And what you basically -- on that what you currently see and what you believe will be the impact maybe on the longer term on the yield because you are confident on that?

Then on -- you mentioned 1 club was closed in Spain, but in total you said 4, so where are the other clubs that had been closed? And could you give some feeling why they have been closed? And fourthly, going back on operational leverage, Hans already mentioned, I believe but that's for next year that should become, let's say, feasible. I understand for this year that we should not count on it. Can you give some feeling, let's say, for the coming 2 years of 2020, 2021, what do you see little bit as operational leverage potential? Because at the same time, you say you have to continue to invest in innovation, so how should we see operational leverage going forward?

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [30]

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Well, that was a lot of questions. I'll start answering first part. The impact of the Premium, it is a bit hard to say, but we know for a fact that the Premium is costing us members. The member count is lower because of the Premium for sure, and we already saw that, that some members who lived on 1 address instead of 2 membership went to the Premium membership. We think it is -- what we see so far is it's still a very small part. But what we really think and we really know is that working out together is more fun. So working out together should show us in the future a longer length of stay. So for that even though it is not maybe the 4%, say 5% increase on yield because of the Premium membership because you lose members on it as well, so we've -- but it's too early to tell, but we think it will show in the future the length of stay to be longer.

And another thing is because of the Premium membership, it is easier to bring a friend or to bring a colleague or a neighbor or a family member. The Premium membership is a system where everybody in the family can use it and everybody, who is part of that family can bring a friend. So that means the husband, the wife, the children, they can all join under Premium membership and they can all bring a friend. That is also the reason why we see that in the first 6 months, we had 250,000 nonmembers working out in our clubs. And we also think that in the future and we've seen that also already that people who went in our club as a friend also ended up joining. It is a bit too early still. It is only 6, 7 months. But we feel that we are doing the right things. So we will definitely continue with this, but we'll monitor it on a monthly and quarterly basis. But for now it works well for us.

Then the group that is a stepping over, that is a small group. It is there, but it's very small. So people who are going from the normal membership to the Premium is not a big group. And what we see in Spain also people going from say the EUR 19.99 going to the basic membership of EUR 14.99, it happens, but it's not a really big group. So it's mostly the new members that go for a different membership and not the current state. We were actually a bit surprised by that because we expect that to be higher, but that's not the case so far.

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [31]

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Then to the closure Hans. There were 4 closures as you -- as we told. So there's 1 temporary closing in France because we have an issue with the landlord about the building of the club. So we have to resolve that. And then we can open it again, that's in France. Then we have a club in Spain, Córdoba, that's a former Fitness First clubs that we closed, that was also in the schedule. And we closed 2 clubs in Belgium, which was smaller clubs. One was former ladies club, and now we opened a much better -- on a much better location another ladies club, and the same goes for a club in Antwerp, which was a small former just fit club, which we closed and opened now very well located club in Eiermarkt in Antwerp. So those were the 4 closures.

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [32]

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So the 1 temporarily will open again in 3 or 4 months, so that has to do with the building -- fit of the building.

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [33]

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Yes. Operating leverage, well, I can understand that question. If you saw the growth of our overhead in the first half year, as I said before, the growth in the second half year will be less. So at the end, total overhead will go up with around 30% in 2019. That means still no operating leverage in 2019. There will be operating leverage the year after, and there will be operating leverage in the second half year. That's why we come to a 30% growth of the whole year.

If you look at the components of those overheads, country overhead, there's operating leverage definitely in there. Marketing, we explained that we had to spend more marketing in France because of the national campaign and also with a lot of openings that we have in France, so we'll keep on spending marketing in France, but there will be operating leverage in 2020. International overhead, we will keep on innovating and doing new things. But the growth will not be that steep as we've seen in the first half year of 2019.

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Richard Piekaar, Basic-Fit N.V. - Head of IR [34]

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I'm looking at the time. We're almost done. There's still list of questions. So I would request that we go to the next person and give them also opportunity to ask a couple of questions and see if we have some time later on to answer your question, Hans, if that's okay with you?

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Operator [35]

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Moving on, we'll take a question from James Rowland Clark from Barclays.

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James Rowland Clark, Barclays Bank PLC, Research Division - Research Analyst [36]

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I will chunk in and brief because I know you're running out of time. First one for René, your comments around the new revenue streams and looking to increase the efficiency of your operations, and you also reflect that in your headquarter cost in the first half this year, I believe. Could you elaborate at all on what you are looking at? Is that related to app? Or are looking at partnerships in other respects or new geographies, can you elaborate at all there? So that's my first question.

Secondly, on club EBITDA margins, they've declined slightly in the first half of the year, and you're putting that down to Paris and some cities in the south of France that have slightly later breakeven points of EBITDA. What are those points of breaking even?

And then secondly, when you hit 24 months, are the margins out 24 months in line with a 24-month-year-old Belgium or Dutch gym? And then finally, a third question. Just on consensus for this year, is the EUR 158 million for adjusted EBITDA, that's including the Fitland acquisition. So after today's higher overheads, I know you're saying that they won't grow as much in the second half, but you are expecting openings to be Q4 weighted like they were last year. So do you feel that there's a bit of risk to that EBITDA number because of your openings being more Q4 weighted than perhaps you previously expected?

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

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Well, let me start with the first question, the revenue streams. So what we see is the more people we have on the app, the better we can communicate with them. So what we see is that, say, the secondary sales from Adidas shoes to next level products is going better because we're better connected with them. Also the TV advertisement in combination with the app is working well. We've seen increase there. Another thing, of course, with the new camera systems that we have in place, where we not have night guards anymore at night, that, of course, in time will save us if we open new clubs without night guards, but just the system in place will save us a lot of money in salary cost and give better service to the customers because we think that having more and more clubs opened 24/7 will really help us. So having that system in place will really help retention, but also cost. So it's both ways. So those are the 2 we think big drivers of revenues and saving cost.

Same with the automation of, for instance, cancellations and stuff like that, that is all in the near future will all be automated. That of course will help us now. We have, let's say, 180 people at the head office. If we double in size in the amount of clubs then we need, say, almost 400 people picking up the phone. That will be a lot less now because of the new systems that we have implemented and are testing now in the Netherlands. So we expect that to roll this out in Q4 next year in all countries. So that will really save money also in head office.

The different things we are working on, different things we are testing in both, of course, to help us improve the result of, but also help us improve the communication with the customers and improve the length of stay.

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

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And then your question about the club EBITDA margin, was the club EBITDA for the first half year '19 of -- was comparable where it was the same as in the last year, 43.1% or 43.2%, so we see that is the same margin. And reason is as I said, the opening of new clubs in the bigger cities in France and especially Paris. The breakeven level is there higher. So we need to more members to get breakeven. Depends on the rent cost, of course. Depends on where we open. It depends also on when we open. How fast that goes. But we will need around 2,500 members to get breakeven.

If you look at the mature level, the clubs are expected to be the same margin when they become mature as we have in the Benelux. Because we've seen that in all -- with all our openings, of course, they're just opened, so I can't tell you the right numbers yet. But we expect to have the same margin and the same return on invested capital as we've seen in the other openings. And that's the reason why we open those clubs.

You asked about the consensus. Well, I'm sorry to tell you that we don't give any guidance on the expected EBITDA for 2019. What I can say is that we've shown growth of 23%. And what I can also tell you is that we expect a lower growth of the overhead costs in the second half year. That's what I can tell you, and we gave guidance on what we expect as the loss that we will make in the first half year of the Fitland acquisition. So that will be around EUR 1 million or EUR 2 million. That's what we expect. I'm sorry, I can't give you guidance on the expected EBITDA -- adjusted EBITDA on the whole year.

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James Rowland Clark, Barclays Bank PLC, Research Division - Research Analyst [39]

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Just on the Q4 openings being slightly phased or weighted towards Q4. Are you expecting the same kind of drag that you saw on EBITDA last year in this year?

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [40]

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Well, if we open in the last quarter of a year, it has a negative impact on EBITDA on that year because we're not then cash flow breakeven, don't contribute positively then. So yes, it will have a negative impact on the year EBITDA, but we expect to be more evenly spread in the openings in the second half of the year.

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René M. Moos, Basic-Fit N.V. - Chairman of the Management Board & CEO [41]

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Compared to last year.

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

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Compared to last year, yes.

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Richard Piekaar, Basic-Fit N.V. - Head of IR [43]

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Okay. I propose that we go to the final question as we've run out of time. Operator, please announce the final question, please.

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Operator [44]

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Our final question today is from Robert Vos from ABN AMRO.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [45]

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I have 2 questions left. First, your yield decreased a little bit in the second quarter compared with the first quarter. What is your view on yield for the full year? And my second question comes back a little bit on EBITDA, you discussed the overhead expenses, but on club EBITDA, it was 43.1%, so that's before overhead. And you said -- you just said what you said about Fitland, that there is a dilutive impact in the second half. Is it fair to assume that the adjusted club EBITDA margin will come down in the second half compared to the first half? Those were my questions.

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

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Okay. To start with your second question, Fitland has a negative impact but that impact won't be that high. There is a huge negative impact on the club EBITDA margins. So we expect same EBITDA margin in the remaining of this year. We think that we can reset margins for the coming years. And of course, the EBITDA, if you look at the EBITDA, the adjusted EBITDA, the spread of the EBITDA in the last year we saw that 45% is normally reached in the first half year, meaning that 55% of our EBITDA target is reached in the second half year. And we expect actually the same weighing in 2019.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [47]

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Okay. And then the yield?

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Hans J. van der Aar, Basic-Fit N.V. - CFO & Member of the Management Board [48]

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Yes. We saw the yield increase in -- with 5% year-over-year, so the first half year compared to the first half year last year. Of course, what we saw last year that we introduced DUO membership in France. So there was already a improvement of the yield in second quarter of 2018 when we started with the DUO membership, let's say, as the starting of the Premium membership because you can also bring your friend then. We expect yield to improve again in the second half year, but not that much. Not again 3% or 5% above that, but we expect the yield to grow again in the second half of 2019. When we are able to maintain, we can grow the number of Premium memberships in our joiners. If we get -- now it's 25%. If you get that up a bit, it will have a positive effect on yield. And that's what we expect.

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Operator [49]

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We have reached the end of...

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Richard Piekaar, Basic-Fit N.V. - Head of IR [50]

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All right. Thank you, everyone, for -- I'm sorry, Kim. I'm just closing off now. So thank you, everyone, for dialing in today and joining us with today's half year results call. If there are any remaining questions or questions that haven't been answered, please let us know and we'll contact you directly. Okay. Thank you, and have a good day. Bye-bye.

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Operator [51]

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And that does conclude our conference today. Thank you for your participation. You may now disconnect.