GYM : Full Year Results19 Mar 2019

RNS Number : 2208T The Gym Group plc 19 March 2019

19 March 2019

The Gym Group plc ('the Company' or 'The Gym')

Full Year Results

Continued rapid growth in membership, revenue and profit

The Gym Group plc, the fast growing, nationwide operator of 1601 low cost, no contract, 24/7 gyms, announces its full year results for the year ended 31 December 2018.

Financial highlights

· · · · · ·

Revenue of £123.9 million, an increase of 35.6% (2017: £91.4 million)

Group Adjusted EBITDA2 of £36.8 million, an increase of 31.6% (2017: £28.0 million) Basic adjusted earnings per share3 increased to 8.4p (2017: 7.4p)

Adjusted profit before tax4 increased by 19.4% to £14.4 million (2017: £12.0 million) Statutory profit before tax of £10.0 million (2017: £9.2 million)

Proposed final dividend of 0.95p per share, giving a proposed full year dividend of 1.30p per share (2017: 1.20p per share)

Strategic and operational progress

·	17 new gyms opened and 13 acquired from easyGym, increasing the total estate to 158 at
December 2018
·	Total year end members at 724,000, an increase of 19.3% versus prior year (2017: 607,000);
average member numbers grew by 31.3% to 693,000 (2017: 528,000)
·	LIVE IT take-up grows to 85,000 representing 11.7% of members at 31 December 2018
·	Increase in the average revenue per member per month to £14.89 (2017: £14.41)
·	Return on capital on mature estate above 30% target at 31% (2017: 32%)
·	The new Personal Trainer model rollout across the estate to be completed by Autumn 2019
Outlook
·	The new financial year has started well and current trading is in line with the Board's expectations
with 793,000 members at the end of February, an increase of 9.5% since the year end; additionally,
over the same period, the penetration of LIVE IT has grown to 13.5%
·	Expect to achieve guidance range of 15 to 20 site openings for 2019
·	The low cost gym market is expected to double in size in the next seven years, from its current
number of sites to between 1,200 and 1,400 gyms (PwC)
·	Intend to open first small box format gym in 2019 and commence a rollout thereafter

Richard Darwin, CEO of The Gym Group, commented:

"During 2018 we accelerated our growth to reach 158 gyms, delivering rapid increases in revenue and profits as well as important projects to support a business of scale in the longer term. Our purpose is to provide affordable access to everyone who wants to improve their wellbeing and we see every day the positive impact we achieve as The Gym continues to make health and fitness available and affordable to all. Independent research confirms the low cost gym market can at least double its number of sites supporting our ambition for further organic growth alongside the maturing of our current estate.

January and February are peak months for new memberships. We have had a successful start to the year and our brand now serves over 800,000 members with 10 million visits already so far this year. We plan on opening 15-20 gyms in 2019 as we extend access to affordable fitness nationwide."

An audio webcast of the analyst presentation will be available live onhttp://view-w.tv/795-1295-21250/en at 09:30.

A copy of the Annual Report and Accounts is available via our websitewww.tggplc.com

For further information, please contact:

The Gym Group Richard Darwin, CEO Mark George, CFO

via Instinctif Partners

Numis

020 7260 1000

Luke BordewichGeorge Price

Peel Hunt Dan Webster George Sellar

020 7418 8900

Instinctif Partners Matthew Smallwood Justine Warren

0207 457 2020

1 158 sites branded The Gymand two sites currently branded easyGym. All gyms branded The Gymopen 24/7 excluding six gyms as at 19 March 2019 due to licensing restrictions.

• 2 Group Adjusted EBITDA is calculated as operating profit before depreciation, amortisation, long termemployee incentive costs and exceptional items.

• 3 Basic adjusted earnings per share is calculated as the Group's profit for the year before amortisation, exceptional items, and the related tax effect, divided by the basic w eighted average number of shares.

4 Adjusted profit before tax is calculated as profit before tax before amortisation and exceptional items.

Chairwoman's Statement

The past year has seen significant progress at The Gym Group. Our rollout of sites took the number of gyms in which we operate from 128 to 158, comprising 17 organic openings and the acquisition of 13 gyms previously branded easyGym. This positions us strongly in the low cost gym sector, growing our market share to 24%. In addition to the organic site openings and acquisition, we converted and rebranded 22 sites including 12 former Lifestyle sites, acquired in 2017, and ten of the 13 former easyGym sites, strengthening our plaftorm for growth in 2019 and beyond. The rapid development of the Company has continued, with revenue and Group Adjusted EBITDA increasing in excess of 30% whilst mature estate ROCE was maintained above our 30% target.

These are significant achievements; however, our overall financial performance was marginally below the stretching targets set for the business and the high EBITDA hurdle set for bonus purposes. Whilst we decided to convert more Lifestyle sites than originally planned, the conversions took longer than expected and membership uplift following reopening took longer than planned. In addition some of the organic openings began trading later in the year than originally anticipated, resulting in fewer trading weeks and lower revenue than expected. We have spent time reviewing performance and adapting to build further resilience. But the bigger picture is that we start 2019 as a larger business than first planned and with strong brand and operating standards across all 158 gyms in a consumer market that continues to appreciate our proposition. This signals significant room for growth in a growing market - a recent study by PwC indicates the size of the UK low cost gym market could double to 1,200 to 1,400 sites by 2026.

It was also an important year for our leadership team. John Treharne, Founder of the business in 2007, expressed his desire to step back from the CEO position having led the business through more than ten years of continued profitable growth, through our IPO in 2015 and beyond 100 gyms; achievements he could barely have dreamed of in the early days. It has been a real privilege to work with such a successful entrepreneur whose restless energy to deliver higher standards and whose personal style has created a culture of which we are all proud. I am delighted that John remains on the Board as Founder Director, focussing on continued innovation and development and providing his great experience, network and wisdom to our business and to Board deliberations.

The Nomination Committee engaged in a thorough process to determine our succession plans. Further details are provided in the Report of the Nomination Committee in the Annual Report. Having considered external candidates, we were pleased to ask Richard Darwin to step up from CFO to CEO; this continuity is welcome and Richard is ambitious and committed to grow into the CEO role. We also undertook a thorough search to find a successor CFO to Richard and were delighted to appoint Mark George to the Board. Mark brings high quality, relevant experience and a good cultural fit; he is settling well into his role.

Transitioning a business from being Founder-led requires some thought about the unique qualities that Founders bring, particularly around culture and tone from the top. We have always been proud of the enthusiasm of our colleagues and our strong culture; the Board and executive team are determined to maintain this culture and our values as we begin the next chapter. Our purpose is to break down barriers to fitness for all: Open 24/7, whenever members are ready; no contract, come and go as it suits; outstanding value; excellent quality gyms. This simple and inclusive approach has introduced hundreds of thousands of people to health and fitness for the first time and we are passionate about continuing with this mission.

In order to codify the culture that we hold dear at The Gym Group we have established our values. We are committed to lead an organisation that helps members and each other 'Take The First Step'. We are characterised by 'Realness', being fair and honest in all we do. We run gyms that accentuate 'Friendliness' being welcoming, inclusive and not intimidating. 'Challenging Your Limits' is a mindset we bring to members, to each other and to the Company as a whole. We intend to live by these values throughout the Company.

During 2018 we worked on three key initiatives to build a stronger business. We began the rollout of LIVE IT, a class of membership that offers additional benefits for a small premium. This is developing well, with members enjoying the benefits of 'multiple sites' and 'bring a friend' as well as the FitQuest monitoring machines. We also undertook the implementation of a new ERP system, Workday, which will provide a far superior platform for our financial and HR systems going forward and was an important milestone. Finally, we continued to trial and refine our innovative new ways of working with Personal Trainers. This is perhaps the most important change to our business model since inception and so getting it right was more important than going fast. Our trial phase is now complete and full rollout will run from April through to September 2019. We are confident this makes us more attractive to Personal Trainers, who in turn contribute significantly to higher member satisfaction. All of our colleagues are supportive of this important change.

My Board colleagues and I continue to visit sites regularly; I have been pleased to visit former Lifestyle and easyGym sites this year to see the high quality of our conversions with member gratitude obvious. We grow fast but I have still visited the majority of our sites! Working out alongside members is the most fun, but also the most valuable way to see the daily life of our operations.

Our sites are often in some of the more economically challenged locations or in areas that have not previously had affordable access to a gym and so we bring an important benefit to the community to engage in fitness, many for the first time. With a young membership we know that adopting a healthy lifestyle can bring long term benefits to individuals and society as a whole. We were also proud to support 'Move for Movember', contributing over £100,000 from member and staff activities and donations to this important charity, in addition to member donations to other charities collected as part of the joining process.

Of course, much is being written about the uncertain economic times and Brexit in particular. We continue to expect to performwell; our high quality, outstanding value fitness proposition will remain relevant even if the economy becomes more subdued. We do not expect Brexit to impact our trading, having taken steps to ensure we have ready access to sufficient fitness equipment and fixtures to support our growth. We will remain focussed on delivering value for all stakeholders.

Finally, let me extend thanks to my Board colleagues, particularly so in a year of executive succession. Their support and challenge are much appreciated. In turn, on behalf of the Board, thank you to all our colleagues for their hard work, good nature and commitment to delivering results for all.

Penny Hughes

Chairwoman 19 March 2019

Chief Executive's Statement

Introduction

This is my first report since becoming CEO of The Gym Group. It is a privilege to be the second CEO in the Company's 11 year history, succeeding our Founder, John Treharne. I am delighted that John remains an integral part of the business and is on the Board as Founder Director, enabling us to benefit from his experience, knowledge and contacts. As the low cost gym market continues to develop and grow, we will draw on his insight and ensure that we continue to develop the business reflecting the culture that John established.

This has been another significant year of growth for the business and The Gym Group continues to build a strong market share in the low cost gym sector through a combination of acquisition and organic openings. During the year we expanded our estate by a further 30 sites, bringing the total to 158 at year end. We have doubled the number of sites in two and a half years. 17 new sites were opened during the year as a result of our organic opening programme (within our target of 15-20 sites), and additionally we acquired 13 sites from easyGym - further strengthening our position in the South East. We financed this acquisition principally through an equity placing to maintain a relatively unleveraged balance sheet and a strong covenant for landlords; we are grateful for the support of our shareholders which enabled us to accelerate our growth in this way.

This expansion continues to grow our membership base, with total year end members up 19.3% to 724,000 (2017: 607,000) and average members up 31.3% to 693,000 (2017: 528,000). The ongoing expansion of our business has led to an increase in all our key metrics: revenue up 35.6% to £123.9 million (2017: £91.4 million) and Group Adjusted EBITDA up by 31.6% to £36.8 million (2017: £28.0 million). Adjusted Profit before Tax increased by 19.4% to £14.4 million (2017: £12.0 million) and Basic Adjusted Earnings per Share up by 13.5% to 8.4p (2017: 7.4p). Our statutory Profit before Tax has increased to £10.0 million (2017: £9.2 million).

Despite these metrics, a combination of the acceleration of the rebranding of the Lifestyle Fitness sites and some delays to the new opening schedule to be later second half weighted, caused lower revenue and fewer trading weeks. Despite rapid growth in both revenue and EBITDA, the Company delivered a less profitable result than the Board's high expectations and below the EBITDA hurdle set for bonuses. These impacts on profits are expected to have only a short term effect. We are extremely encouraged by the response of the Lifestyle sites, which have had more than 20% membership growth since acquisition; and the gyms opened in 2018 are maturing as we expect.

The low cost gym market continues to grow rapidly, and our organic and acquisition strategy has enabled us to continue to build market share. Low cost gyms remain the most attractive part of the health and fitness market. Overall, our market share increased from 22.4% in December 2017 to 24.2% in December 2018. The Gym Group achieved 40% of the net growth in the market, as we continue to expand our market share, taking members from existing operators as well as those who have never been a member of a gym before.

In a recent market report commissioned by us, PwC has evaluated the gym market in the UK and estimated the potential size of the market to be 1,200 to 1,400 low cost gyms, compared to 1,000 in previous assessments. This means that the market is forecast to double in size from where it is today (654 low cost gyms at December 2018). Penetration is estimated to increase both into new catchments that currently do not have a low cost gym, as well as other catchments that can increase their number of low cost gyms. Half of the future growth is forecast to come in the size of catchments in which we have opened to date ('standard catchments') and half in smaller catchments. The PwC assessment implies that low cost member penetration could grow to 5-7% of the population by 2026 (2018: 3.7% penetration), a penetration growth rate well below that achieved historically. With the strength of our pipeline we are extremely well placed to take advantage of the growth in standard catchments and are working on the concept that can take advantage of the smaller catchment opportunity; we intend to open our first small box format gym later this year and expect to commence a rollout thereafter.

Strategic progress

Delivering performance from gyms

Our primary financial goal is to develop sites to maturity and achieve high levels of return on capital. Overall this remains a business with significant potential, with a number of sites that have been acquired or opened in the last two years yet to reach maturity (in terms of member numbers). At the year end we had 89 sites that have been operating for more than two years (2017: 74 sites), just 56% of the total estate. Of the remaining 69 sites, 31 were acquired and 38 opened organically in 2017 and 2018. These sites continue to increase profitability and are maturing as anticipated. Mature Site EBITDA was £39.2 million, up 15.0% (2017: £34.1 million) and Mature Site EBITDA per site was £440,000 (2017: £461,000). This reduction in Mature EBITDA per site was expected and consistent with our move to smaller sites built at lower capital cost; we continue to target returns on capital of greater than 30% across our mature sites for organic openings and in 2018 we achieved that target again with a return on capital in the mature estate of 31% (2017: 32%). The return on capital for mature sites opened between 2008 and 2013 and for sites opened in 2014 to 2016 is also above 30%.

The 18 sites acquired as part of the Lifestyle transaction in September 2017 are still maturing. We took the decision during the year to accelerate rebranding of all 18 sites to The Gym brand, with 12 of these conversions taking place in 2018. This will enable these gyms to benefit from our brand, marketing, systems and operating model in 2019. Although it resulted in lower revenue and more weeks of site closures than initially expected in 2018, we were prepared to make this decision in order to maximise the best long term result for the business. The consideration for the Lifestyle business was £20.5 million, alongside total conversion costs of £9.0 million, an average of £499,000 per site. We will target a 20% plus return on capital by 2020 on this acquisition. This percentage is lower than for our organic openings, reflecting the acquisition premium incurred on such sites.

Having integrated the Lifestyle sites ahead of schedule, we successfully completed on a second significant transaction with the acquisition of 13 sites branded easyGym in July 2018. This acquisition demonstrates our focus on quality as we purchased 13 out of 16 sites, leaving behind three sites that failed to meet our location and financial criteria. The consideration for these 13 sites was £20.6 million, with contingent consideration of £4.1 million if two sites have lease extensions agreed; discussions on the £4.1 million remain ongoing. At December 2018 we had successfully converted ten of these sites to The Gym brand, enabling them to benefit from our marketing and our platform during the important January / February trading period. The total cost of conversion has been £312,000 per site. The easyGym acquisition further strengthens our network in London (eight sites) and in four other cities where we already operate (Southampton, Cardiff, Liverpool and Birmingham). In particular, we expect strong take-up of LIVE IT, our premium pricing initiative, across the easyGym sites where there has not previously been a multi-site option for members. As with the Lifestyle acquisition, we are targeting a 20% return on capital for this acquisition by 2020.

One of the most significant changes in the past year has been the overhaul of our marketing capability. This was facilitated by the appointment of new agencies in media and creative, which has enabled us to deliver fresh and innovative marketing ahead of the peak trading periods. During 2018 our marketing plans used out of home, social media, performance marketing and local awareness. The marketing plan for January / February 2019 introduced a fresh new campaign based on members' motivations for using The Gym - 'So I can' - with the launch of our first ever TV advert.

Improving operating efficiencies

Mature Site EBITDA margin in 2018 was marginally lower at 45.3% (2017: 47.0%), in line with our expectations and reflecting our continued ability to apply our operating model across a business of growing scale. The slight decrease in Mature Site EBITDA margin does not impact our ability to meet return on capital targets. We have had ongoing success in being able to secure new sites with the appropriate level of fixed cost base to operate our business efficiently, taking advantage of our ever increasing scale.

We ended 2018 with an average headline price of £17.14 per month (2017: £17.50). Our philosophy remains to be a high quality operator charging the lowest price in any given market. As in previous years, we have sought to maximise revenue on a site-by-site basis by balancing volume and price, so took the decision at the end of 2018 to reduce prices across approximately 30% of the estate. We are pleased with the response to this decision, with membership volumes growing by 1.5 times the growth rate of the rest of the estate (October 2018 to February 2019).

Some of these sites were the Lifestyle sites that had not gone through the same pricing changes that one of our organic openings experiences. In other sites we continue to endeavour to increase yield where the local market allows - pricing decisions are made through a combination of data analytics and local market intelligence. Average Revenue per Member per Month increased by 3.3% across our estate and we expect further progress in 2019 as sites become more established and LIVE IT has been in place for a whole year across the estate.

LIVE IT, our premium pricing initiative, was rolled out nationally by May 2018 and 85,000 members had taken advantage of this offer by December 2018. We continue to be encouraged by the level of take-up and expect further growth in absolute numbers as those sites that have not had LIVE IT for a whole year go through their initial months of member acquisition. As expected the most significant take-up is from new members joining. We continue to monitor the characteristics of tenure and attrition of our LIVE IT members and currently they match those of our DO IT. members. LIVE IT will be an important contributor to yield growth in 2019.

Achieving our rollout strategy

We opened 17 sites organically in 2018. Our primary focus is choosing optimal locations and we open the number of sites that is consistent with that aim. Our strong, listed company covenant is highly attractive to landlords, which results in winning the best sites that come onto the market. We continue to expect to open a geographically diverse range of sites to build on our strength in the South East, where 50% of our gyms are currently located. In 2018 we opened a number of strong London sites; today 55 of the sites are located within the M25. Our new sites continue to trade well with strong opening profiles. We are very encouraged by the performance of the gyms opened in 2017, which have delivered an EBITDA margin that is consistent with the first year performance of previous cohorts, and expect to see strong returns on capital. The 2018 cohort opened later in the year than originally planned. This meant they were earlier in their maturity profile and therefore resulted in lower revenue in 2018 than our original plans.

The flexibility of our model allows us to take advantage of trends in the property market. Increasingly we are taking space in new developments such as Tottenham White Hart Lane, Sutton and Stockport. In 2019 we anticipate opening 15 to 20 sites and the pipeline of new sites is encouraging for 2019 and into 2020. As in previous years, openings are expected to be weighted towards to the second half of 2019.

In addition to the conversions of the Lifestyle and easyGym sites, investment continued across our existing estate with a substantial refurbishment programme to ensure that all our sites benefit from modern signage along with the most up-to-date branding and product mix. Our aim was to ensure the estate matched a common standard by the end of 2018 and other than in a handful of sites this was achieved. Our rolling maintenance programme requires sites to be closed every six months for two days and ensures sites are maintained to a high standard. In the future we will focus the more substantial refurbishments on sites that need a competitive boost in their local market.

In the past year we retendered our gym equipment supply contract, splitting the contract into equipment and accessories and in the process achieving a further 10% reduction in capital costs across these areas. As part of our Brexit planning we have stockpiled the capital requirements, including gym equipment, sourced from Europe to ensure we can continue to meet our rollout target in the first six months of 2019.

Developing the member proposition

Our new system of tracking member satisfaction, which measures customer feedback, has now been deployed at site level for over a year. Detailed member satisfaction feedback is available via an app for General Managers, enabling them to focus their time on activites that improve levels of member satisfaction. This new system has enabled us to identify best practice and roll it out across the estate. The new Personal Trainer operating model is another driver behind enhanced member satisfaction and reflects the determination of our business to put member service at the heart of everything we do.

Our use of technology

Following the launch of the Member Management System in 2017, further advances have been made in developing technology infrastructure in 2018. The launch of Workday has given us a robust finance and HR system that will strengthen our capability in these areas for the future and was another significant achievement by our team. Having developed a platform for future growth, we will continue to research ways in which using technology will enhance the customer experience. Late in 2018 we launched our member app and there will be further upgrades launched over the coming months. In addition, we are investing in Artificial Intelligence to give us further insight in areas such as pricing and churn and to enable us to drive further efficiencies from our operating processes. Technology will remain fundamental to the delivery of our business model and assist in facilitating the low cost environment in which we operate.

Our people

During the year we commenced the trial of a new operating model that will enable our Personal Trainers to take up part-time employment. The majority of our Personal Trainers will be contracted for 12 hours and, outside these hours, they will continue to run their business on a self-employed basis in our gyms and will pay a monthly rent to access the gym. During the year we received HMRC clearance for the new model. We transitioned 24 new and existing sites onto the new model during the year.

The trials have shown that the new model enhances member satisfaction compared to the previous arrangements. During the trial we re-evaluated the commercial proposition to the Personal Trainers and decided to reduce the rent that is charged to those Personal Trainers who will also be part-time employees. The new model will be financially neutral for Personal Trainers. This change to the financial arrangements has been extremely well received by our Personal Trainer colleagues. The new model is probably the most significant change to the way this business has operated in its history, hence the care and attention we have taken to ensure the model is correct. We believe it will deliver tangible benefits and retain our competitive advantage by attracting and retaining the best Personal Trainers operating in our gyms.

The business has grown rapidly over the past few years and in doing so it is important that we identify the features that have made it a special place to work. As a result of the transition of John Treharne from CEO to Founder Director, we decided we needed to consult with a number of colleagues to define the values and culture associated with The Gym Group. These values will drive our colleague engagement and member interaction in future years. Our overall brand purpose is that The Gym breaks down barriers to fitness. This has been central to The Gym's purpose since it created the first low cost gym brand in the UK, and became the first to offer 24/7 operation and online-only sign-ups. As we continue to develop we will ensure we remain true to our culture. I feel proud that our business has a strong social purpose in improving the health of the nation. We believe this conviction and our core low cost ethos will allow us to continue to drive demand, even with the uncertain economic environment caused by Brexit.

We continue to build the central teams that can support the management at site level. Our intent remains to drive performance at a local level while providing high quality central support. In 2018, the focus has been to build strong teams that can support our ambition. Infrastructure developments will enable us to run a business of greater scale and substance. I was delighted to welcome Mark George to the team and the Board as CFO. Mark brings a highly relevant set of skills in digital businesses such as ASOS and Auto Trader as well as multi-site experience from a number of roles at Tesco. Ann-marie Murphy also joined as Director of People and Development during the year and already has made significant progress in supporting our front-line operations.

The commitment of all our people remains key to the success of this business, whether it be in supporting new site openings, integrating acquisitions or in day-to-day operations. Over the past year we have welcomed many employees from Lifestyle and easyGym and other new colleagues to support our growth. Additionally, during the coming year we will bring on board a further 1,500 Personal Trainers as part-time employees. I would like to welcome them all to the business and along with our existing dedicated colleagues, I thank them all for their ongoing commitment to this business.

Outlook

The new financial year has started well and current trading is in line with the Board's expectations. Membership numbers at the end of February show an increase to 793,000, another record level, with a 9.5% increase since December 2018. The significant levels of member growth are being reinforced by the performance of our acquisitions from Lifestyle and easyGym that have been fully integrated into the Group. In 2019 we anticipate opening 15 to 20 sites, with six in the first half of the year. We expect to maintain our ratio of having over 50% of our sites in the South East and expect LIVE IT to continue to increase in penetration and underpin our yield growth.

We have developed a portfolio of outstanding gyms and in 2019 we are committed to continue driving profitable progress. We remain confident in our model and its ability to drive value for colleagues and shareholders as the business continues its rapid development.

Richard Darwin

Chief Executive Officer 19 March 2019

Financial Review