Life Time Group Holdings, Inc.

Good afternoon and welcome to Lifetime Group Holdings conference call to discuss financial results for the third quarter fiscal 2021. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. During this call, the company will make forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. There is a comprehensive list of risk factors in the company's SEC filings, which you are encouraged to review. Also, the company will discuss certain non-GAAP financial measures, including adjusted EBITDA and free cash flow before growth capital expenditures. This information, along with reconciliations to their most directly comparable GAAP measures, are included in the earnings release issued this afternoon. in the company's 8K filed with the SEC and on the investor relations section of Lifetime website. On the call for management today are Buram Akhrati, founder, chairman, and chief executive officer, and Tom Bergman, chief financial officer. I will now turn the call over to Mr. Akhrati to get started. Please go ahead, sir.

Thank you, Jessie. Good afternoon, and thank you for joining us on our first earnings call following the close of our IPO in early October. It's great to speak with all of you as a public company once again. I especially want to thank and congratulate all Lifetime team members for achieving this incredible milestone for a second time. First, I want to take the opportunity to reinforce the significant distinction that defines our business, so hopefully we don't have to address them again and again in the future. Then I will share a few highlights from the third quarter before turning it over to Tom to provide additional details on our results. Lifetime is a comprehensive, highly differentiated, high-end, aspirational, healthy lifestyle brand. We have been consistently delivering the best places, programs, experiences, performers, and now the best digital platform as well. Our comprehensive athletic resort destinations are not gyms or fitness studios. We provide all aspects of a healthy way of life, including entertainment, nutrition, weight loss, athletic training, and sports for all ages from 90 days old to 90 years old, both physically and digitally when possible. Ultimately, we aim to create a healthier, happier lifestyle for our communities and members. We're also committed to delivering long-term shareholder value through the significant growth opportunities presented by all aspects of our healthy way of life ecosystem. Lifetime is in a very unique position with an incredibly trusted brand millions of customers, difficult to replicate athletic resource across the country, an amazing team and culture, all of which we are leveraging to continue our growth, particularly with the opportunities that have emerged in the last 20 months. Turning now to our financial results, we had a fantastic third quarter. total revenue grew 66.7% from 231 million in the second quarter to 385 million in the third quarter this year. The total revenue also grew 19.2% from 323 million in the second quarter of 2021 to 385 million in the third quarter. Adjusted EBITDA grew from 4.2 million in the second quarter 2021 to 47 million in the third quarter. Center membership grew from 658,000 in the second quarter to 2021 to just over 668,000 in the third quarter. As we And we achieved this despite nearly 20% of our large clubs still being impacted by additional COVID-19 masking and other related restriction during the quarter. Regardless of any additional turbulence from COVID and its variation, we are in a great position to continue capturing market share. We expect to have a very robust recovery over standard memberships, membership dues, and adjusted EBITDA in the first half of 2022, resulting in monthly adjusted EBITDA catching up to the 19 in the summer and then exceeding 2019 monthly adjusted EBITDA by the end of 2022. Our new center development pipeline continues to be very robust with significant opportunities to expand. During the third quarter, we opened two new centers in Peabody, Massachusetts at North Shore Mall and Coral Gables, Florida. As of September 30th, 2021, we have 12 new centers under construction and we have 10 or more planned new centers annually for the foreseeable future in an increasingly affluent market. Lifetime Digital is also in a great position for rapid growth in 2022 and beyond, resulting from our continued enhancement of this platform. We remain very focused on our core strategic goal of providing our growing community of members with the best, most comprehensive, omnichannel health and wellness experiences, and programming via our physical spaces and the digital platform. And as I now turn it over to Tom, I want to emphasize that I have never been more excited about the future of Lifetime. Tom?

Great. Thanks, Param, and hello, everybody. I'll provide some additional detail on our third quarter and year-to-date results. as well as our outlook for the remainder of the year. In the third quarter, total revenue increased 67% to $385 million, driven by increases in both center and other revenue. Total center revenue increased 63% to $372 million and was driven by increases in both membership dues and in-center revenue. Average center revenue per center membership also rebounded nicely to $555 from $349 in the same prior year period, reflecting increased spending with our in-center businesses, the continued execution of our pricing strategy, and the opening of new centers and more affluent markets. On a same-store basis, comparable center sales increased 59%. Center memberships increased approximately 17% to just over 668,000 as of September 30th, 2021, compared to approximately 573,000 as of September 30th, 2020. Our third quarter ending center membership balance also reflects a sequential increase of just over 10,000 memberships compared to the end of the second quarter of 2021. During the third quarter, as Baram stated, nearly 20% of our clubs in various jurisdictions across the country, including some of our large markets such as Chicago and North Carolina, had mask mandates and other COVID-19-related restrictions imposed on them during the quarter. In light of these restrictions and the typical seasonality in our business during this quarter, we are particularly pleased with the sequential quarterly growth in memberships. As Baram shared, we have continued our relentless focus on delivering the very best premium experiences to our members. As we have delivered these premium experiences, we have strategically increased our new joint membership prices across most of our centers in early 2021. We believe we can continually refine our pricing as we deliver exceptional experiences and find the optimal balance among the number of memberships per center, the member experience, and maximizing our return for each center. Third quarter average monthly dues per membership of $134 was approximately 10% higher than the average monthly dues per membership of $122 in the third quarter of 2019 and approximately 20% higher than the average monthly dues per membership of $112 in the third quarter of 2020. Important to highlight is that this increase in average monthly dues per membership shows our strategy is working by being able to charge higher new joint membership rates and opening new centers in more fluent markets. We believe we also have the opportunity over time to increase legacy member pricing. We are using our experience and data analytics to look at member data and pricing across the portfolio of our clubs, and we expect to continue to raise prices thoughtfully and analytically while minimizing any member attrition. We expect average revenue per membership and average monthly dues per membership to continue to increase as we acquire more new members increased legacy member pricing, and opened new centers in increasingly affluent markets. Other revenue, which includes revenue generated from businesses outside of our centers, increased more than fourfold to $13 million in the quarter and was primarily driven by our athletics event business as we were able to produce several of our iconic events during the third quarter of 2021 compared to the third quarter of 2020 when COVID-19 restrictions forced the cancellation of most of our events. Moving on to operating expenses. In the third quarter, total operating expenses increased 25.1% to $402.6 million versus the prior year period and included $4.1 million of share-based compensation expense and $2.5 million of non-recurring items. Center operations expense increased 40% to $232 million and was primarily driven by the reopening of our existing centers and the addition of seven new centers, partially offset by staffing productivity and other cost efficiency initiatives at our centers. Rent increased 10.5% to $52.5 million, driven primarily by the sale-leaseback of five centers occurring since Q3 of 2020. and are taking possession of six sites for future centers where we started incurring gap rent expense, most of which is non-cash. General administrative and marketing expenses increased 40.7% to 45.3 million, which included 4.1 million of share-based compensation expense and 0.6 million of non-recurring expenses. This increase is primarily due to the return of corporate team members who remained furloughed during the third quarter of 2020 and an increase in marketing spend with more clubs open during the third quarter of 2021 compared to the third quarter of 2020. Depreciation and amortization decreased 5.5% to $58 million, and other operating expenses decreased 2.3% to $14.8 million. As a result of our continuing recovery, our operating loss improved 81% to 17.5 million from 90.8 million in the prior year period. Net interest expense increased to 39.8 million from 31 million in the third quarter last year. This is due to a higher average net debt balance during this year's third quarter. Our third quarter effective tax rate was 20.8% compared with 22.8% in the prior year period. This lower effective tax rate is primarily a result of valuation allowances against our state net operating loss carry forwards. Net loss was $45.4 million this quarter compared with a net loss of $93.6 million last year, which included tax-affected expenses of $3.2 million related to share-based compensation and $2 million primarily related to a non-recurring loss on a sale-leaseback of one of our properties. Finally, as Bram mentioned, adjusted EBITDA improved significantly to $47 million from a loss of $12.4 million in the third quarter of last year. Moving on to the balance sheet. Cash and cash equivalents as of September 30th, 2021. was $44.8 million compared to 33.2 million as of December 31st, 2020. As you all know, we completed our IPO earlier this month, which generated proceeds of approximately $670 million after offering related underwriting discounts and other costs. We used the proceeds to repay $576 million of our senior secured term loan facility which included a $5.7 million prepayment penalty and added cash to the balance sheet for general corporate purposes. Additionally, the underwriters in the IPO notified the company yesterday that they were exercising their option to purchase nearly 1.6 million additional shares of common stock at the $18 per share IPO price, which will result in additional net proceeds to the company of approximately $27.2 million after deducting underwriting discounts and commissions. We intend to use the net proceeds for general corporate purposes. Net capital expenditures totaled $79.8 million during the third quarter compared with $45.6 million in the prior year. The increase is primarily due to a higher number of active new club construction projects and an increase in maintenance capital expenditures compared to last year's third quarter when many of our clubs were just reopened or partially opened during the quarter. Turning now to our outlook for Q4 2021. Revenue is expected to be in the range of $350 million to $360 million, and adjusted EBITDA is expected to be in the range of $48 million to $52 million. Included in this guidance is the closure of four smaller non-premium, non-brand-right centers where the company has elected to allow the leases to expire. Also underlying this guidance is the assumption that current COVID-19 mask mandates and other related restrictions remain in place for the clubs that are currently under restrictions and do not impact more clubs than are affected today. With this guidance, We expect our fourth quarter adjusted EBITDA margin to improve compared to the third quarter of 2021 as we continue to see the benefit of staffing and other cost efficiency initiatives, lower insurance and team member benefit costs, and lower real estate tax expense. So before closing, I want to join Buram in sharing How pleased I am with how well positioned the company is to continue to gain market share as demand for experiences and healthy living continues to grow. With the Lifetime brand, our attractive member demographics, and our asset-light real estate development model, I believe we are poised for rapid expansion for the foreseeable future and the opportunity to serve and bring healthy living, healthy aging to more and more consumers across North America. To wrap it up, I want to reiterate Brahm's comments on how proud we are of the Extraordinary Lifetime team members who continue to deliver an unparalleled healthy way of life experience for our members and advance our strategic priorities. And with that, I'll turn it back to you, Jesse, to open the call up for questions.