Sats ASA (SATS) Earnings Call Transcript

Hi, everyone, and welcome to this Q&A following SATS' Q3 reporting this morning. I'm Stine Klund, Investor Relations in SATS, and I am joined by CEO, Sondre Gravir; and CFO, Cecilie Elde. Sondre will introduce the session with a short summary of the Q3 highlights before we open up for questions.

Yes. Good morning, everyone, and welcome. As Stine said, welcome to this Q&A session. We will spend most of the time on answering your questions; hopefully, you have a lot. But first, I thought I could just summarize the third quarter from our side. We are delivering another strong quarter reported from SATS progressing in line with the communicated midterm ambition of reaching an EBITDA of NOK 1.1 billion. If we look at the quarter, we see that member engagement continues to rise. We see that number of workouts is increasing with 7% and also member satisfaction is delivering strong. And we also have a 4% member growth and then also higher workouts per member. And these are very important operational KPIs to indicate the direction we are heading towards and the growth in the activity is fueled especially by the growth in attendance to our GX or to our classes, group training, where we see that visits are up 10%. And we also, in the presentation earlier today, went through more in detail how granular we work on our group training offering and are able to scale this really depending on fitness trends and demand in the market. Then we delivered 8% revenue growth, and we see EBITDA growth of 13% reaching NOK 192 million. We also have, Cecilie commented on in the presentation, a strong operational cash flow with a cash conversion of 74%, maintaining then our leverage ratio stable at 1.3 net debt to EBITDA despite both dividend payment of NOK 127 million in the quarter and NOK 40 million in share buybacks in the quarter. We also see a positive development in our Swedish operations where we see an increase in the country EBITDA in Sweden of 19% compared to Q3 2024. So despite that we, of course, have observed that the consensus was slightly above our delivery on EBITDA. We believe this -- and we see this as a strong quarter and fully in line in -- towards the direction we communicated on the Capital Markets Day and well aligned with our internal planning. So we are happy with the current development and are positive to the momentum going forward. So that's what we plan to just summarize in the introduction to this call. The presentation we have already gone through earlier today. So with that, I open up for questions.

Tomas Helgo, please go ahead.

I can actually take in English. So can you explain in detail how the earlier marketing campaign this quarter worked? Has it been 2 months of free training until you lock in 12 months or has this changed? And also why have you been more aggressive on the marketing push this year compared to earlier years?

Yes, I can comment on that. If you compare to earlier years, we have different marketing mechanisms from the different campaigns. And if you just compare to earlier years and especially last year, we did a bigger marketing push and the campaign push that landed in Q4 last year, primarily in October. This year, we did a stronger push earlier in the fall, starting in mid-August, second half of August and coming into September. We had the same campaign mechanism as we used earlier in Q1 in that campaign. So in average, it was giving away 1.5 months -- between 1 and 1.5 months in the beginning of the membership and then you enter into, so to say, full prices. So that's why if we compare to last year, we see that marketing cost is elevated in this quarter compared to Q3 last year. So that's primarily what we talk about when we talk about the timing effects and when we also see that this has resulted in a stronger net growth on the membership side this year compared to last year. We see positive development on churn, meaning that we have a somewhat lower churn compared to previous periods. But then the sales in this quarter has been strong due to this campaign effect. And we also, as we indicated in the presentation today, guiding that we don't expect net growth for the second half in total to exceed last year second half. So this is just, so to say, the timing of where we place the campaigns, and it's nothing, so to say, extraordinary. And then we're also commenting on the yield side that, of course, the yield is then affected by this campaigning and also the fact that we have seen a somewhat higher student and senior and corporate share in the sales that we have done this quarter, which is then somewhat affecting yield. But again, the yield development long term is still expected to be positive.

And can I just elaborate before jumping on? The churn that's a bit lower, you said, in this period compared to earlier periods. Is this a reason why kind of you are a bit more aggressive on the marketing campaigns as it makes more sense to have more members come in at a higher cost than earlier because they stay for longer or is it something else?

Partly. So we don't report specifically on churn from quarter-to-quarter. We gave some more insights around our churn development on the Capital Markets Day in spring. But the leading indicator for churn is the activity level. And the more active members are, the lower the passive share of member is in the base and then the lower the churn levels are. And of course, what we see is we do mostly digital marketing. We do mostly digital performance marketing. And then, of course, the lifetime value of a new member is affecting our willingness to invest in marketing and our acquisition cost per member is in, of course, in relationship to the lifetime value of a membership. When we then see that they activate more GX members? The answer is yes. Then you see a longer member duration, you see a higher lifetime value and you would be willing to pay somewhat more in the acquisition cost of new members. It's not solely driving the marketing spend decisions because we also do brand marketing. But in selected performance campaigns, it might trigger increased investments.

[indiscernible]

Yes. Well, it's actually quite a bit of a follow-up from Tomas' question. Because as you said, the membership growth in the quarter was very strong and that partly affected the average revenue per month you achieved in this quarter. And if we compare this quarter to Q3 and also to some extent to Q4 last year, should we sort of expect the average revenue per month to accelerate more going into Q4 this year than last year as you sort of time your marketing campaign where you gave away 1 to 1.5 months of training for free at an earlier stage this year compared to last year?

First of all, the yield is normally lower in the third quarter due to just the activity level and the first half of the quarter being summer months. And as we've said before, we actively sort of manage the trade-off between price and volume, and that's what Sondre talked about, but we want to maximize revenue, so we will increase campaigning when that makes sense. But if you followed us and looked at the campaigning we have done throughout the year, we have had a very strong growth this year, and it is partly driven by the campaigning that we do. So the impact that you see now and will probably see in the next quarter is because we defer the campaign cost throughout the binding period of the membership. You will get a delayed hit on the yield from earlier campaigns and that will sort of continue into the fourth quarter before you sort of have turned the effect from previous campaign out of the numbers. So we expect to see that the yield will continue to increase going forward. But since we had more campaigning this year, it will affect this year's yield somewhat.

This is the CFO favorite topic. This is the duty between the reported yield where you, from an accounting point of view, have to defer the campaign effects versus the underlying contractual price that the members actually pay.

I think the most important thing is, we are not very worried about the yield development going forward if you look at the longer picture. We will continue to optimize for revenues and follow the yield closely and expect the yield to increase also going forward.

Yes. So just to understand this a bit better, when you have marketing campaigns and you get customers with a 12 months lock-in, you essentially distribute the marketing cost over those 12 months. So if you give away 1 or 1.5 months of free training, you sort of just distribute that over the next, well, 10.5 to 11 months.

Yes, that's correct.

So from a cash flow point of view, basically, if you give away 2 months and then you get full price, the members will not pay the membership fee in the first 2 months and then they pay full price from month #3. But from an accounting and reporting point of view, those 2 months of free membership, so to say, is distributed over the whole membership binding period, bringing down the monthly reported yield somewhat every month, but the underlying payment, the underlying contractual price that they actually pay is then somewhat higher in the last 10 months.

[indiscernible]

Yes. Just a short question. I've just seen more comments recently that people argue that the performance of the Swedish center should be in line with the Norwegians and that's sort of a driver to create value. To me, that sounds a bit strange given the difference of competitive situation in Stockholm, especially compared to Norway. Do you have any comments on those comments?