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Edited Transcript of GYM.L earnings conference call or presentation 29-Aug-19 8:30am GMT

Half Year 2019 GYM Group PLC Earnings Call

Surrey Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of GYM Group PLC earnings conference call or presentation Thursday, August 29, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark George

The Gym Group plc - CFO, Company Secretary & Director

* Richard Darwin

The Gym Group plc - CEO & Executive Director

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Conference Call Participants

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* Anna Elizabeth Barnfather

Liberum Capital Limited, Research Division - Research Analyst

* Christine Zhou

RBC Capital Markets, LLC, Research Division - Senior Associate

* Douglas Jack

Peel Hunt LLP, Research Division - Analyst

* Kathryn Helena Louise Leonard

Numis Securities Limited, Research Division - Analyst

* Owen Shirley

Joh. Berenberg, Gossler & Co. KG, Research Division - UK Mid-Cap Analyst

* Sahill Javed Shan

Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Consumer

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Presentation

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

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Good morning, everyone, and welcome to The Gym Group H1 Interim Results.

What we're going to set out this morning is an H1 based on the release that we put out this morning, which showed another period of significant progress in growing sites, members and yield. But probably as importantly, we've also developed our capability in the half in the areas of technology and marketing.

So in terms of sites and members, those numbers have been fairly well flagged. We opened 8 in the first half, 796,000 members at the half year, up 10.6%. And the yield growth also, which we announced back in July, of 5.6%, with half of that coming from LIVE IT. But the improvement in tech capability and marketing capability is particularly important as we grow this business. Our app, which we launched at the end of last year, had 700,000 sessions in June alone, more than 1/4 of our membership have downloaded the app. And our marketing campaign that we did in January and February, really quite innovative. And our first steps campaign, which was offering free off-peak membership to 16- to 18-year-olds over the summer, was also a big success for us.

Probably most importantly associated with this business is the culture, and we identify as one of the highlights in the first half, the strong culture which was demonstrated by us retaining our Gold IIP Award. So this is a scale business now with enhanced capabilities to really drive performance.

In terms of the operational KPIs, we always like to put this chart up. And whilst our release is quite extensive this morning because IFRS has muddied the water, what IFRS can't hide is the fact that we are showing very strong growth in a number of these metrics. EBITDA growth over the last 5 years of 23% is clearly a very good level of growth. But the same occurs whether you look at gyms' revenue or members. And of course, there's further growth to come. The maturation of the estate over the next couple of years. By the end of this year, we'll still only have 109 sites out of our current estate that will be mature. That will grow to 155 at the end of 2020. And clearly, growth to come from the rollout of our standard catchment gyms and also, what I'll talk a little bit later, the small box opportunity.

So with that, I'd just like to hand over to Mark, he's going to take you through the financial update.

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

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Thank you, Richard. Good morning, everyone. So first of all, just to highlight some of the key headlines from a finance point of view. It's been a very good first half for us, absolutely in line with our expectations. As Richard said, we've grown to 165 sites now. And these new sites, plus the maturity of our existing sites, have helped the number of members grow by 10.6% in terms of the closing member -- number in June versus the previous June. But over the half as a whole, it's a 20% growth in average members. Now that's the important figure, of course, in terms of generating the revenue growth that we've seen.

Our revenue per member is up, and that means revenue is growing faster than the number of members. And the revenue growth at 26.9%, very healthy. This has led to growth in EBITDA, the group adjusted EBITDA of 28%. Our net debt at the end of the half was GBP 47.2 million, GBP 1.2 million more than the net debt of GBP 46 million that we ended 2018. More on that later.

And we've declared a dividend of 0.45p for the first half, a 29% increase from the same period last year. So a good start to the year, very much in line with our expectations.

So before we dive into the numbers, just a note about IFRS 16. So from January 1 this year, we are reporting under the new accounting standards. For the -- these results and for our full year results that we'll do in March, we will show the numbers -- the key metrics under the old methodology as well. And you can see in the table here, the comparison between the pre-IFRS 16 version and the post-IFRS 16. As you know, revenue is not affected by the accounting change, and the change comes in costs around property costs where instead of these payments being treated as rent, it's now a combination of depreciation and interest on the property lease liability.

Our key group adjusted EBITDA metric now adds back cash rent as a cost rather than the IAS 17 accounting charge that we had previously, so you'll see a slight difference in that between the 2 metrics.

The cash flow metrics, of course, remain completely unchanged, and that's absolutely critical, as does nonproperty net debt of GBP 47.2 million in both cases.

So in addition to the changes that come from IFRS 16, there are 2 other accounting changes that I just wanted to make you aware of that are all put into the presentation that we did for analysts a couple of months ago. That's available on our website. The first is that the amortization relating to IT and software investment is no longer an adjustment out of our PBT and earnings numbers. And the second is that we have changed the accounting assumption on the useful economic life of our gym equipment, so it would depreciate over a slightly longer period now based on the evidence that we have of our older gyms. And the net effect of these 2 is a small negative impact on earnings in this year.

We'll talk in more detail about the numbers in the coming slides. But just one other thing to say on this is that you'll notice that the growth rates in -- the year-on-year growth rate in PBT and earnings are much higher under IFRS 16. So the reason for this is that the lease liability and interest costs are much higher than they are in the IAS 17 accounting charge, which gives us a lower profit number in terms of absolute profit versus the previous accounting methodology. But actually, the quantum year-on-year growth in profit is quite similar under both, so you end up with a similar quantum growth over a lower base, much higher percentage growth.

So on IFRS 16, the rest of this presentation will be on IFRS 16 unless stated otherwise. Moving into the numbers themselves and the income statement. So as you can see here, good growth across all of our key measures. Site EBITDA grew broadly in line with revenue. A few dynamics here. The first is that our organic maturation of the estate does help, over time, gradually improve profitability at the site level. We've also had some improvement in the fact that our Lifestyle sites have moved on from where they were in the first half of 2018. But offsetting this in terms of our percentage margin at the site level is that we've now got easyGym sites in for the first time, whereas, in H1 last year, we didn't have those in. And they're currently a lower level of profitability than our organic estate, which we've explained before, and obviously, we're looking to improve that level of profitability. But all of those factors taken into account, it's broadly flat in terms of site EBITDA margin.

Our central costs are growing, but they're growing slower than sales, as you would expect, which means our group adjusted EBITDA has grown 28% to GBP 24 million, and EBITDA margin has increased slightly to 32.5%.

Now one of the strong drivers behind our growth in revenue is average revenue for member per month, which has grown 5.6% versus the same period last year. So just to take you through some of the key drivers there. So the biggest contributor to that growth was our increased penetration of our LIVE IT. premium-priced product, which, as Richard explained, is now -- or at the end of June was 16.9%. And as you can see, that's contributed approximately half of the growth between the 2 periods. Another factor that was a contributor to the average revenue per member was easyGym. So as you know, easyGym has a weighting towards London and has a higher average price point than most of our estate. And by including that in these numbers and then not in the comparative from the first half last year, that also contributes to the average revenue per member growth.

And the third large contributor was the new operating model that we have for Personal Trainers, New Gym Team. So the PT rental income that we have is added to our average revenue per member. But of course, there's an offsetting cost in our P&L from paying the salaries to those PTs under the new model. So if you like, that's not the net profit increase.

In terms of the impact from pricing overall, it's actually relatively small. But within that, there are a few things going on worth talking about. The first is we're taking a little bit less in joining fees than we have in the previous year, and that's an ongoing trend in the industry. The second is that we had, as you know, a number of sites, about 50 sites in Q4 2018, where we reduced the price. And we have been increasing the price of those sites throughout the first half of this year. But net-net, that was a slight negative on average revenue per member per month. But offsetting these factors is the fact that we've been increasing prices in a number of other areas of our estate, easing our dynamic pricing modeling, identifying opportunities where we know we can increase price because we've got a strong site with high-capacity utilization.

So the overall there what we're demonstrating is that through dynamic pricing and really identifying where it makes sense to lower prices to drive volume to optimize revenue. And in other cases, we'll go for yield. We're able to successfully manage that and have some quite significant price reductions in certain sites and still, overall, have additional price growth in terms of yield. So a pleasing outcome in terms of yield growth.

Moving to group EBITDA and the contributing factors of that in the first half. We had a small contribution from our mature sites as usual and then a good contribution from our newer sites. So we're pleased with the -- how the sites in 2018 and the first signs of 2019 are coming through, and they've made a good contribution despite the 2018 cohort being relatively back-end weighted as we know. Most of the growth in the first half of the year in terms of EBITDA growth has come from the inclusion of our acquired sites, both Lifestyle improving versus H1 last year; and easyGym being included but not included in last year's number. So you can see that a strong contribution in terms of EBITDA. Central costs have gone up, but as we mentioned earlier, they're decreasing as a percentage of revenue.

So in terms of CapEx, our capital expenditure in the first half is very much focused on organic growth. We've got 8 gyms in the half and fit-out costs for those 8 gyms was within our guidance of GBP 1.3 million to GBP 1.4 million per site. We've paid GBP 2.1 million in deferred consideration for the easyGym transaction and spent a further GBP 0.4 million converting the remaining easyGym sites. You compare that to last year, where we had quite a big expenditure on the conversions of Lifestyle in a similar period.

We spent GBP 1.3 million in the first half in IT CapEx, but this is ramping up through the year, so we'll spend more in the second half. And we expect the overall year spend on IT CapEx to be between GBP 3.5 million and GBP 4 million.

In maintenance CapEx, we continue to reinvest in our gyms to ensure we maintain a very high standard of product for our members, although it will be back-end weighted this year, and so we'll spend a little bit more in the second half. But for us, this is really important and a driver of competitive advantage to maintain our estate at the absolute highest possible level. So we'll continue to spend between 6% and 7% of revenue on maintenance CapEx going forward. So this is a business that's continuing to invest in long-term growth, both in expansion of our estate, but also in maintaining the existing estate.

Turning to cash flow. As you can see, this is a business that generates very healthy operational and free cash flow. In the first half, the working capital movement was negative, which is unusual for our business. So just to explain what caused this. There are 2 factors that were unusual that together accounted for a GBP 3 million movement. The first is that the introduction of our new Personal Trainer model, where we now have many personal trainers paying us rent each month, is that we have a receivable at the end of each month that we didn't have previously, and that will be maintained in our business going forward. The second is that from our revenue collection provider, we always have a day's payment at the end of each month that's due to us, but because the period end fell on a weekend, we actually had more days, and that just gave us a slightly bigger receivable. Now that reverses out at the full year where we don't end the period on a weekend. So there's a small adjustment there, which is a bit unusual for us. We would expect to return to a very small positive working capital effect with the growing business going forward.

So as a result, our operating cash flow at GBP 18.7 million, very healthy. 77.8% cash flow conversion, slightly lower than last year because of this working capital factor. Free cash flow of GBP 16 million, again, a very good number, approximately the same as the amount that we have spent on expansionary CapEx and paying out dividend. So we have a small GBP 1.2 million expansion of our net debt versus the GBP 46 million where we ended 2018.

So 2019 is an important year for us in terms of the inflection point on our cash because we expect, for the year as a whole, to be able to fund our expansionary growth and our dividends out of our internally generated cash flows, and from 2020, to be starting to pay down net debt.

So I'll finish now just to talk a little bit about our guidance for the rest of the year. So we've had a solid first half behind us now. So we're able to reiterate the guidance that we gave at the beginning of the year. We expect to open 15 to 20 new gyms in terms of our standard catchment gyms, and of course, the additional new box -- sorry, small box gyms that Richard talked about. Worth noting that in the second half, it'll be quite back-end weighted again towards November, December in terms of the openings. We expect the capital cost of those sites to be very much in line with what we've had historically, between GBP 1.3 million and GBP 1.4 million. And we also retain the guidance that we set at the beginning of the year on IT investment and maintenance CapEx.

The one number that has changed slightly because of our movement in accounting is that depreciation on an IFRS 16 -- sorry, on a pre-IFRS 16 basis, where we previously guided we'd come out at about 16% of revenue, because we've changed the UELs on our gym equipment, that will now be near at 15%. But that's the only reason why that's changed. And then our guidance on central costs, employee incentives and tax remain the same as we had in March.

So in summary, we've had a very good start to the year, in line with our expectations and it sets us up well to deliver our plan for the rest of the year.

With that, I'll hand back to Richard.

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

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Thank you, Mark. The update I'd like to give on the strategic and operational progress in the business is set against 4 key areas. And these are the areas that we think are important in running a successful, high-quality, low-cost gym business. So we'll show how we're taking advantage of the market opportunity; how we're building a high-quality estate that's both from our standard catchment rollout, but also the opportunity around small box, which we identified on the back of the PwC research that we commissioned earlier in the year; the infrastructure development that we're doing around tech and marketing in particular; and also the developments of the business model, in particularly looking at LIVE IT. and also the new PT model.

So if we start with the market. It's clear from these charts that the health and fitness market is in long-term structural growth and that, that is being led by low cost. But I think it's telling that even in the last recession and the global financial crisis, if you look at that between 2008 and 2012, what you didn't see was a reduction in penetration. So the percentage of people that in the U.K. that were a member of a health and fitness club flat lined, it didn't decline. So since 2012, you've seen growth in that measure, up to 15.6% of the population based on the last LDC data are now a member of a health and fitness club. And as I say, it flatlined around 12% between 2007 and 2012.

Within that, the private sector itself has grown, as you can see, it's at 10.5% by 2019. And what we'll see in a moment is that all that growth is really being driven by the low-cost market. And because the low cost by its nature is also lower priced, our average price is under GBP 18 per member per month that is having an impact on the overall pricing in the private sector since 2012 -- since 2007. So you can see GBP 42.07 in 2007, now on average for all private sector clubs, GBP 41.14. So our expectation is that this market continues to show long-term structural growth, particularly as we go into untapped areas of the U.K., particularly with our small box format.

You've seen this chart before. It shows that low cost is the driver of overall market growth. This has been updated to the latest LDC data that came out in March of this year. There are now 2.8 million of the 10.4 million members of our health and fitness club who are low-cost members. All the growth is coming from low cost. So 21% CAGR since 2015 from low cost, really no growth coming from the other private sector clubs or from the public sector overall. So there's now 683 low-cost sites as at March 2019, as I said, the PwC report suggests that, that could grow to 1,200 to 1,400.

I think when we've looked at the chart we've put on the top right-hand corner in previous years, what we've seen is some marginal growth in the private independent and also the private multi-club. That was actually, we explained at the time, just down to classification by LDC. And I think if you look at the chart on the bottom right-hand corner, what you can see is all the net growth, which is openings less closings, is actually coming from low cost and the public sector and the private sector. Again, it's fundamentally flat in terms of our net openings.

So we're now in a position where 4.2% of the U.K. population is a member of a low-cost gym. PwC said that could grow up to 7% by 2026, consistent with a doubling in the opportunity and the size of the market up to 1,200 to 1,400 sites in the U.K. Clearly, some very strong tailwinds for this market.

And when we look specifically at the low-cost market, what you again see is 2 players, ourselves and Pure Gym, gathering the majority of the growth. Between us, we have 58% market share, The Gym itself has 24% market share. There's really limited growth coming elsewhere. Energie and Xercise4Less appear to have stopped growing, JD Gyms has shown some limited growth, but the majority of the growth is really coming from the top 2 players.

And we continue to want to position ourselves as, within any given market, the highest-quality, lowest-price operator. And I think the chart that we show on the right-hand side with our average price of GBP 17.94 compared to the rest of the market shows that we're being successful in doing that. But it doesn't mean that, that number of GBP 17.94 can't increase. And in fact, you'll recall, at March, it was GBP 17.37. So we have been successful with our approach to dynamic pricing to drive yield and price up, and that has been assisted by a much greater use of data analytics in our business overall.

So we continue to have a very strong position in a growing market, enhanced by the 2 acquisitions that we've done in the last couple of years, and also the infrastructure developments that enable us to run a business of scale.

So moving on to how we're growing our estate overall. In the half year that's just gone, we've had the highest number of openings in the year since the IPO. And we continue to expect the second half to meet our guidance levels, but to be back-ended weighting in terms of when those openings will come. So 8 organic openings in the first half as, say, it was 6 in the previous 3 years.

And in terms of where we're opening, we continue to take advantage of the fact that this business is very flexible in terms of the way it can use space in terms of where it can locate. So we take advantage of trends that happened in the property market. The biggest trend right now, clearly, is what's happening in the retail market and the significant number of spaces coming up with CBAs. And in fact, 5 out of 8 of the sites that we've located in the first half have been on retail parks. These are very strong sites for us. They come with parking, good ceiling height, great signage, and we're very pleased with the openings that we've seen in the first half. And we continue to target with these openings 30% return on capital. But it's not just about retail parks, it is a flexible use of space. So even in that first half, we've also gone into redevelopments of particular buildings by landlords or onto, in one instance, a leisure park. And we continue to open at a similar sort of size to what we've seen previously. So the average for the year, in our expectation, will be about 15,500 square feet. And in addition to our 15 to 20 standard catchment rollout, we're also opening our first small box site in Newark and Nottinghamshire later in the year. So the pipeline for 2019 is very strong. We've got good visibility and growing our pipeline for 2020.

On now to the acquisitions. So easyGym and Lifestyle are now fully integrated into our brand and onto our platform. We have taken the opportunity in H1 to do a very limited amount of estate management. So Lifestyle first, we completed that integration, as you know, by August 2019. And we're pleased with the level of revenue growth that we've seen from the Lifestyle estate, so 23% up year-on-year in the first half, and that's despite having a lower price of GBP 16.32 than the rest of the estate, which is just under GBP 18.

On easyGym, we completed the integration in H1. So there were 2 further sites that we hadn't converted as we went into H1, that's Kings Heath in Birmingham and Oxford Street. They also happen to be the sites that would be subject to the deferred consideration if we were able to do the lease extension. And we continue to discuss with the landlords, and we're making some progress in terms of those lease extension discussions, but they're quite complex, so they may take a little bit of additional time. What we're really pleased about by easyGym is the level of take-up of LIVE IT. Now we expected a good take-up of LIVE IT. just in terms of where those sites were located. But even though many of the conversions were only done at the end of last year, we've already seen 16% take-up of LIVE IT. in the easyGym estate overall.

And then in terms of the estate management that I referred to, we mentioned at the time of the July update that we had mothballed Birmingham Corporation Street, which was an easyGym site. We did that because we wanted to concentrate our capital spend on a site that we had only 300 yards away that was -- is very large. And so we've moved the members from Corporation Street across to our Birmingham City Center site.

Stoke is a Lifestyle site. We paid nothing for that site because it wasn't profitable and it was on a short lease. So we had a free run at seeing whether we could make it successful. We've decided that it won't meet our long-term requirements, and therefore, we've decided to close that site.

And in addition to those 2 acquisition sites, there's 1 further site in our estate that had a 5-year break, and we've decided to exercise that break and we'll close in H2. Importantly, we don't see, for the foreseeable futures, any additional closures. So this is, as I say, just a bit of estate management that we've done because of the size of business that we've got to. Overall, both acquisitions are on track with our plans that we set out at the time, where we're targeting a 20% return on capital overall.

And finally, in terms of how we're growing our estate, the small box opportunity. We announced this back in March that we would do one in 2019. We've now said that, that will be in Newark and Nottinghamshire. And we're really making significant progress in designing what is the optimal use of space and also identifying further sites that we can roll out in 2020.

So the size for us is between 5,000 and 9,000 square feet. That's lower than what we have elsewhere in any of our standard catchment sites. And one of the key things here is that we make more of the space usable. So in our small box format, 80% of the first site will be usable gym space. That compares for some of our smaller standard catchment sites of around 60%. And it's really that, that enables us to have a great amount of space that can be used by members overall.

So you'll recall, PwC talked about the fact that there could be an additional 300 low-cost gyms coming from small catchments. That's catchments between 25,000 and 60,000 overall. And we're actively looking to fill that pipeline for 2020, and we do expect to commence the rollout in 2020 of our small box format. This is an additional leg of growth on top of the 15 to 20 standard catchment rollout that we typically guide to.

So on now to how we are developing the infrastructure of this business. And our focus in 2019 has been very much about enhancing our capabilities, particularly in the areas of technology and marketing. So marketing to begin with, we did a new campaign in January and February, which is based about members' motivations for joining The Gym. And that was an enhanced campaign across all media channels, and we did go on TV for the first time, but we also did other channels such as digital, SEO, PPC and social. We're building on that campaign in terms of what we do in September and October. So it will be the same campaign across many of the same media channels.

Probably the most innovative and significant thing we did in the first half from a marketing standpoint was our First Steps campaign, which was about offering for 16- to 18-year-olds free 6-week off-peak membership. So as they go through the stress of exams, as they get themselves ready for summer, we want The Gym to be their first experience of going to a gym. And we've been successful and happy with the take-up that we've seen from that particular campaign. Clearly, we're doing it because we want to then sign them up for the full memberships, and we'll see the success of that in September and October as we do our normal student campaign.

Lots of developments on tech. Our app, as I mentioned, has 700,000 session usages per month. We're taking the functionality that we've done on the app and putting it so that it can be used on Apple Watches. That will launch in the second half. But also the tech team is really key to our approach to dynamic pricing. So the use of data and the insight that we get from our business to really be able to identify where the opportunities are to drive yield is fundamental.

And of course, it's the tech platforms that really support some of our other rollouts. So YANGA, which is a subscription drinks product, we're rolling out across the estate. And digital screens, which enable us to both communicate with members but also do some third-party messaging, again, we're rolling out across the estate overall.

So these are important developments because we really believe that capability in tech and marketing will be a key differentiator in the low-cost market going forward.

And then finally, in terms of development of the business model, Mark spoke in terms of the financial impact of LIVE IT. LIVE IT. has performed very strongly in H1 and it has continued to grow in the first 2 months of H2. So it was at 16.9% of members at the half year. The greatest take-up we see is from the city center clusters, and that's because multi-use -- multi-site use is the most popular benefit of the 3, so multi-site use, bring a friend, FitQuest overall. And it's been a significant contributor to yield growth overall. And then one additional trial that we're doing in this area is a third tiered price product called FLEX IT. FLEX IT is a price point that you can take up without paying a joining fee, and so therefore, it's priced slightly higher than our core membership overall. We're 3 months into a trial. We're going to do quite an extensive trial associated with FLEX IT. It'll probably takes us about 6 months, and then we'll assess whether we roll out into the rest of the business. We do believe that our approach to dynamic pricing means that we're likely to have a 3-tier pricing structure, and that's why we're trialing FLEX IT going forward. But it's also clear to us that dynamic pricing is really what will underpin some of our yield growth as we go forward.

And [personally] significant. I've said this internally to the business, but I'm happy to say externally as well. Perhaps the most significant change that we've made to our business model since this business was founded was the New Gym Team model, which was the new Personal Trainer model that we've introduced. And the transition has gone extremely well. And we're now pleased that we have in place what we think is a market-leading proposition that will enable us to attract the best personal trainers.

So just a quick reminder of the model. We now have, at the end of the transition, 1,500 part-time employees doing 12 hours per week. Outside of that time, they run their own self-employed personal training business. We also incidentally have 300 who aren't giving us any hours and are just paying a rent overall. So additional 300 full rental PTs. And the benefit of the model is that it gives us greater influence over what those personal trainers are doing in the 12 hours that they're working for us. But it also means that we have a single, engaged team, which is really important in terms of driving the business forward. And the cost, we've spoken about, about GBP 1 million this year, and we're on track with that guidance. So a very smooth transition, and we're now focused, as we go forward, on obtaining the benefits of the new model.

So just to summarize and briefly talk about the outlook. This has been a strong H1. We've built on the strategic investments we've made in 2017 and '18. And we're on track overall with our plans for the year: strong growth in membership and yield that we've seen; the organic openings, 8 in the year; the acquisition integration is complete; the first 2 months of 2000 -- of H2 2019 really trading as we would expect.

And as we look forward, we'll do the 15 to 20 openings, we'll open our first small box, and we would expect LIVE IT. to continue to grow as it has done in the first 2 months of this year.

So we have created in this business what we think is a really strong proposition for members. As I've said in my quote, in doing so, we're really driving access to affordable fitness across the U.K. That's a great business and a great purpose for a business that as a team we can all get behind. And what we're demonstrating on the financial front is that we can convert the strong member growth into strong financial returns, and we'd look for that to continue in the second half.

So that's all I wanted to say. We shall now open the floor to questions.

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Questions and Answers

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

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Doug?

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Douglas Jack, Peel Hunt LLP, Research Division - Analyst [2]

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Douglas Jack at Peel Hunt. Two or 3 quick questions, if that's okay. The LIVE IT. take-up is orientated towards new joiners. Has there been much change in the churn rate within the membership base, which, obviously, facilitates that take-up?

In terms of the small box rollout in 2020. If you start rolling out in 2020, what kind of pace do you think you'd be looking at over the next 2 to 3 years?

And in terms of the personal trainers moving to part-time, can you just remind us of the exact numbers of how many are part-time and how many are just rent-only? And are you surprised in any way by the take-up of that switch over to part-time?

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

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So in terms of LIVE IT., we don't see any difference in the churn associated with those that take LIVE IT. versus those that don't take LIVE IT. So the take-up or the increase in the percentage of the take-up LIVE IT. is purely because people are seeing this as an attractive proposition. I think it's also helped by the increased scale. So increasingly, we get sites close to where people live as well as close to where they work. And so the multi-site access is really an attractive element overall.

We haven't, and we're not, at this point, don't give any guidance as to the scale of the small box rollout. What we are saying is we do expect to do a rollout. So we're not saying that this is a trial because what we're doing in our small box is really taking many of the features that we have in our standard live box and shrinking them down. What we have been successful in doing, which is kind of not always that easy, is bringing the capital cost down proportionately. So we can open these at GBP 700,000 to GBP 750,000 and that will still expect to get the same sort of return requirement.

And then just on the PT. So I think I'd just mentioned some numbers there. We have 1,500 part-time employees that are doing the 12 hours who then PT outside of that. And in addition, there are 300 that are full-rental PTs. And that's pretty much in line with our expectations. We obviously look at that on a site-by-site basis to make sure that we've got the right mix because we don't want too many full-rental PTs in a given site because obviously that reduces the opportunity for some of the other PTs.

Yes, Owen?

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Owen Shirley, Joh. Berenberg, Gossler & Co. KG, Research Division - UK Mid-Cap Analyst [4]

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Owen Shirley at Berenberg. Just on the small box to follow up, when do you think you'll know with certainty the pace of the rollout?

And the second question was, sorry to be the one to ask this, but on Brexit, with supply of kind of capital equipment, I think it mostly comes from Europe. Just what's your planning around that?

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

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So on small box, I think by the time we get to our January update, we'll be giving some guidance as to how many we expect to open in 2020. So we're not looking for sites. We are very actively filling the pipeline for small box and that's because we really do believe in the opportunity overall.

In terms of Brexit, we -- as you quite rightly say, we import quite a lot of equipment from -- actually, really from Asia, bits of the fit-out come from Europe. We have a warehouse in one of our sites, actually one of the ones that we opened this year in Northampton, where we've stockpiled some of the equipment from Europe that we need. And then also, we've made sure with our equipment supplier, which is Matrix, that they've got enough stock within the U.K. to be able to fulfill our immediate aims and needs in Q4. So we are as prepared as we can be for Brexit overall.

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Christine Zhou, RBC Capital Markets, LLC, Research Division - Senior Associate [6]

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This is Christine Zhoe from RBC. A couple of quick questions. Firstly, on the average revenue per member per month, going forward, do you expect a sort of similar level of 5%, 5.5% growth? And I guess, within that, is the LIVE IT. contribution going to be -- going to slow down slightly going forward?

And secondly, on the easyGym and Lifestyle site profitability, do you expect those to converge over time to the profitability you see on the organically growing sites? Or will it be sort of a -- remain at a lower level?

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

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Yes. So first of all, on the average revenue per member per month, if you look at the contributing factors behind that 5.6%, some of those are things that are not going to continue. So the easyGym component, of course, once that's in the basin and we're lapping that, that goes away as a year-on-year change. The second is also on the PT rental component that there will be some continued growth in the second half because we're in a rollout phase through 2019. But once that's part of the model, that's not -- no longer going to be sort of contributing to year-on-year growth. We would expect that LIVE IT. would continue to make a contribution because it is still growing. But -- and obviously, we don't quite know where that's going to end, and we haven't given guidance on that. But certainly, over the next few months, we would expect that to continue to drive up our yield.

In terms of Lifestyle and easyGym, as you say, they do have -- those sites do have a lower level of profitability now, but we are improving that. And we would expect it to converge towards our current level that we achieve in organic. It's not clear whether we'll get to exactly the same levels because they're a slightly different business and a different starting point. But we wouldn't need them to get to the levels that we have in our organic estate to achieve the target we have with 20% return on capital, which is really the key next year that we'll -- in 2020, we'll report on delivering that.

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Anna Elizabeth Barnfather, Liberum Capital Limited, Research Division - Research Analyst [8]

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It's Anna Barnfather from Liberum. Just a couple of questions on FLEX IT and also the joining fees. You mentioned that there's a trend for people not to want to pay joining fees as well as this is a marketing tool that you use certain points in the year. Could you tell me how much of your revenues is joining fees? Or how -- what proportion of new members haven't paid a joining a fee? Or just some light on that, please?

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

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So joining fees are relatively low there in the first half, probably in the order of about 1.5% of total revenues. So it's really reduced, it's come down probably from when the business first started 10 years ago quite significantly. I think one of the attractions of FLEX IT is that it enables us to have a price point that has a joining fee and have a price point that doesn't have a joining fee because a lot of our research -- and one of the reasons we use promotional activity on joining fee is that some of our research suggests that actually, when you take a joining fee off, that helps conversion overall. And so what we want to be able to have is a very attractive entry price that potentially does have a joining fee and then a slightly higher price that doesn't have a joining fee, and so people really have that trade off. And that's the nature of the trial that we're doing right now. The reason we need an extensive trial period for it is that we need to go through a number of cycles. September and October would be one important cycle so that we can see how it trades through a particularly important period overall. And then we'll make the decision as to whether we roll it out across the rest of the estate.

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Anna Elizabeth Barnfather, Liberum Capital Limited, Research Division - Research Analyst [10]

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Just another as a follow-up on -- in terms of the new members, how many are rejoiners and how many are first-time joiners? And what the average length of membership now is?

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

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Yes. So no real change in terms of average length of membership. And we haven't given out data on the proportion of members that are rejoiners, but that is improving. We've got a very good track record. It's one of our 8 KPIs by which we run the business, the percentage of our members that join who are rejoiners. And so we're absolutely keen on both ends of that. The first is to give them a fantastic experience while they are a member. So if their circumstances change, if they move house or they are a student going away for the holidays or their job changes or they just fall out of love of fitness for a while, when they do want to come back, they come back to us because they've had a good experience. So that's key to it. But then the other part of it is to make sure we've got the right marketing tools to be able to approach them and market in an effective way so that they feel like they want to come back to us as well when the time is right. So we don't give numbers out on it, but it's an improving part of our business.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [12]

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It's Kathryn Leonard from Numis. I just have 2, if that's okay, please. Just in terms of the digital expenditure, capital expenditure that you're seeking to make over the next couple of years. I just wonder whether you might be able to give us your wish list perhaps or some of the key kind of longer-term targets as the sector becomes more digitized, and you've talked about that in the statement. And secondly, just on the PTs, new PT model. Just wondering if you could give us a little bit of a feel perhaps on what you're seeing on PT joining uptake on a per-site basis and the impact you're seeing on members and class participation and things, which I think -- yes, that's the target.

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

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So in terms of the digital spend, so Kathryn, you rightly identified that we said in the statement today that in futures, we would expect that spend to be around 3% to 3.5% of revenues. It's been around 2.5% for this year overall. Where we'll spend the money, we will undoubtedly invest into an enhanced consumer-facing website, and that would be the significant project for 2020. That's not to say that our website isn't good at the moment, but we think that there is further opportunity to really create a strong e-commerce website. And then we'll also look at things that enhance the digital experience of members, that can be member self-serve. So for instance, if they want to change details about their membership and they can just do it online or even investing into customer service. And we'll continue to do something that we've done this year, which is invest into data models that will really help us drive our analytical capability and improve our analytical decision-making. So that will really be the focus for 2020 and partly into 2021.

In terms of PT uptake. So if I understand your question correctly, I think you're asking how many of our members actually take up PT overall. Is that right?

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [14]

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No, it wasn't very clear. Just in terms of class participate -- obviously, in one of the assets you were looking at was your ability to train the PTs better, have more input on the breadth of classes and the quality of the classes and just thinking about kind of membership satisfaction and tenure and things. And one of the aspects in the sector has been class participation and the want for breadth and then what they -- in the fitness that they do and obviously, part of that is classes. So it's more about...

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

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No. Absolutely. So that is absolutely one of the benefits is that the PTs in their 12 hours, one of the key things that they'll do and do, do is run the classes by having a little bit more influence over them, then we can train them to be able to deliver. And make sure we get consistency in terms of that delivery of classes across the whole business. I think classes, overall, it's a relatively low number of our members that actually do classes, but it's an increasingly important part of our business. And I think you can expect us, as we get into 2020, to invest more time and resource in terms of improving our capability in this area. And there may well actually be a technology component to that as well because the ability to do digital classes has -- is enhancing, and we'll begin to tap into that as well.

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Sahill Javed Shan, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Consumer [16]

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Sahill here from N+1 Singer. Three questions for me. Firstly, Slide 9, you've -- so on the bar charts there, there's about GBP 0.5 million improvement on the EBITDA for the '08 and 2017 openings. Could you just slightly help us in terms of understanding what that is in terms of percentage increase, if you've got that figure to hand?

And the second question is around the acquisitions of both Lifestyle and easyGym. I think what I really want to understand is -- clearly, they're performing well. Have they performed in line or ahead of the guidance you gave us at the time of the acquisitions?

And the final question is around -- going back to Q4 '18, the 50-odd sites where you clearly had to adjust pricing for various reasons, where we are in terms of how many sites are back to the prices before you made the adjustment? And what's the outlook going forward for those remaining sites, please?

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Mark George, The Gym Group plc - CFO, Company Secretary & Director [17]

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Yes. So perhaps, we'll just sort of do that in reverse order. The 50 sites -- the 51 sites that were reduced in Q4, 49 of those have had some form of price increase. And some of them we're going to keep at a lower level. So some of them have just gone up GBP 1, and we'll keep them at that level because we think that's the right place for them to be for that market. And then the balance of the sort of 40 or so left, about half are back at where they were before and about half are on their way back to where they are. So there's a real mixture. And as we've talked about recently, everything is done on a site-by-site basis now. So we will be looking at those sites individually and adjusting them up and down as we do with other sites that are outside of that particular group that you mentioned.

On Lifestyle and easyGym, very much in line, I think in terms of our target for being 20% return on capital for next year. And so we'll talk more about that next year in terms of the performance against that target. We -- in terms of what the GBP 0.5 million represents as a percentage, we haven't kind of given that out in the past. You could probably make a stab at it in terms of looking at the number of sites that we have that are -- would be in the mature cohort as total. We typically don't get a lot of growth. It's -- if you look back at previous versions of this chart, it would always be a very small contribution because typically, once they reach maturity at our site, they tend to be steady performers rather than sort of rapid increase in EBITDA. So the expectation would be flat to small positive from that going forward.

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Richard Darwin, The Gym Group plc - CEO & Executive Director [18]

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Okay. Any further questions?

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Unidentified Analyst, [19]

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(inaudible)

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Richard Darwin, The Gym Group plc - CEO & Executive Director [20]

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The number of our members that have personal trainers...

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Unidentified Analyst, [21]

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Yes. In terms of what percent? Is that (inaudible) in (inaudible) now...

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Richard Darwin, The Gym Group plc - CEO & Executive Director [22]

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Yes. It's not a stat that we actually monitor or have monitored in the past. Whether we do going forward is a good question and probably something that we could do. The reason we haven't done it in the past is that they're self-employed. That's their business. It's up to them. All of the things that around being self-employed, including kind of setting prices, are down to the PTs. We believe it's under 10% of our membership base, but that's a bit of a stab in the dark to be honest.

Okay. Any further questions? Okay. So that, I think, is it. Thank you very much for joining us today, and we look forward to seeing you at the full year results next year. Thank you.