Life Time Group Holdings, Inc.

Good morning and welcome to the Lifetime Group Holdings conference call to discuss financial results for the second fiscal quarter of 2022. At this time, all participants are in 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 most directly comparable gap measures, are included in the earnings release issued this morning and the company's 8K filed with the SEC and on the investor relations section of Lifetime's website. On the call for management today are Buram Akhradi, Founder, Chairman and Chief Executive Officer, and Tom Bergman, President and Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir.

Good morning. It is great to be on this call with you today. We're happy to report that Lifetime is growing back steadily. In the second quarter, revenue grew 42.7% to $461.3 million from $323.2 million year over year and from 392.3 million in the first quarter. Adjusted EBITDA in the second quarter grew to 63.1 million from 4.2 million year over year and from 40.6 million in the first quarter. Clubs in states that emerged from pandemic early and where we rolled out our strategic initiatives such as Texas, Colorado, North Carolina, and several others have recovered nicely and already surpassing 2019 monthly dues revenue levels. We expect to see many more of our clubs surpass 2019 monthly dues revenue levels as we complete the nationwide rollout of our strategic initiatives and continue our relentless focus on executing these programs. To refresh your memory, Our first strategic pillar is investing in our athletic country clubs, programs, and performers to drive revenue and profitability. To do that, we're driving four major initiatives, small group training, Aurora Community, dynamic personal training transformation, and Pickleball Rollout. First, small group training. We have increased from an average of 15 small group classes per club per week to approximately 40 currently. Over the next six months, we're driving participation and performer certification with the ultimate goal to get to around 100 classes per club per week in 2023. So there is still tremendous opportunity for growth in membership and revenue here. Second, Aurora. Our Aurora community did not exist a year ago. Since then, we have created the brand around dedicated active aging programs and a growing community. Since creating these systematic branded programs at the beginning of the year, our membership in the 55 plus age group have increased by approximately 12,000 and we expect to add an additional 13,000 by the end of the year. Third, dynamic personal training. Dynamically engaged personal training is a transformation in physical, in-person training, and it's designed to be an experience that cannot be replicated digitally or remotely. Since our last call, the concept, brand development, and certification of our team has been largely completed, and we have just launched DPT on August 1st. We see a tremendous opportunity to grow our personal training revenue with this transformation. We will report on our progress on DPT in the quarters to come. Finally, last but not least, pickleball. Lifetime is uniquely in a position to be the national pickleball brand leader in this incredibly fast-growing sport. We have the real estate and the space to accomplish this because of very large footprint of our athletic clubs across the country. We have already established more than 235 dedicated courts and expect to have nearly 450 by the end of the year and more than 600 by the end of 2023 with complete local, regional, and national programming using our Lifetime app Participants can easily find and book courts and get involved in mixers, leagues, and tournaments. And we have seen monthly participation grow from approximately 10,000 to more than 40,000 in just the last six months. Of these numbers, 12,000 are unique participants and growing. As we invest in our business to drive revenue and profitability, We're also actively monitoring the macroeconomic environment and managing our business to minimize the impact of the recession and high inflation environment. Inflation has had, and we expect it to continue to have, a short-term impact on our margins and construction costs until prices have settled. Tom will discuss this further. The great news is that we believe we have so much headroom and additional opportunities to gain membership and revenue as we accelerate the rollout of the four programs I just mentioned. I believe our future performance is in our control and we can continue our growth and overcome the negative impact of macroeconomic environment, albeit not as fast as we would like. On our last call, we also discussed our continued transformation to a more asset-light business. Our first priority, as I mentioned, was maximizing the revenue and return opportunities in our existing clubs by investing in the programs I highlighted. This is the most asset-light investment we can make, and we have been busy at work on implementation. We're accelerating. Our effort now that we have proved these initiatives are working. Second, we mentioned sell leaseback to make the entire enterprise more asset light. We have entered into a definitive agreement for the sale leaseback of five properties for the gross proceeds of approximately $200 million with cap rates similar to what we have achieved over the last several years. and we have some more discussions underway to complete another 300 million of cell use back by the end of the year. Third, our brand equity and reputation with developers are bringing us more asset-light growth opportunities than ever before. Finally, I'm looking forward to the Q&A and the future opportunities to demonstrate what Lifestamp can accomplish as a healthy way of life company. Now I will turn it over to Tom.

Thank you, Baram, and good morning, everyone. I'm pleased to share a few highlights from our second quarter results and then discuss our outlook for the remainder of the year before turning the call over for questions. For the quarter, total revenue increased 43% to $461 million, driven by strong increases in both center revenue and other revenue. Total center revenue increased 41% to $446 million and was driven by a 42% increase in membership dues and a 38% increase in in-center revenue. Average revenue per center membership for the quarter increased to $639 from $525 in the prior year period and $580 in the first quarter. And average monthly dues per center membership increased to approximately $157 in the second quarter compared to $132 in the same period last year and $145 in the first quarter of 2022. As we discussed on last quarter's earnings call, we expected to see average monthly dues per center membership increase to the $150 to $160 range by the end of the second quarter, and we were right in the middle to upper end of that range for the quarter. The year-over-year and sequential increase in these metrics reflect increased member spending with our in-center businesses, and the continued execution of our pricing strategy. On a same-store basis, comparable sensor sales increased 36%. Center memberships increased approximately 10% to just under $725,000 as of June 30th, compared to just under $658,000 at the end of June last year and approximately $674,000 as of March 31, 2022. We expected to add around 50,000 Net Center memberships in the second quarter and slightly beat that with close to 51,000 Net Center memberships. Total operating expenses during the second quarter were $440 million. This included non-cash share-based compensation expense of $6 million and a one-time gain of $21 million related to the sale lease back of two properties in the quarter. Excluding these items, total operating expenses increased 20.9% to $455 million. Center operations expense was $280 million and included just over $600,000 of non-cash share-based compensation expense. Excluding share-based compensation expense, Center operations expense increased 27.3% due to increased staffing required by our strategic program investment and increased usage of our centers by members during the quarter as compared to the prior year period. Our gap net loss for the second quarter was $2.3 million compared with a net loss of 76.4 million in the prior year period. Excluding share-based compensation expense and other non-recurring items, our adjusted net loss improved to $7.7 million from $73.5 million last year. Adjusted EBITDA increased to $63.1 million for the second quarter from $4.2 million in the prior year period and approximately $41 million in the first quarter of this year. showing strong year-over-year and sequential improvement. Our liquidity position at the end of the second quarter remains strong with cash and cash equivalents of $61.3 million and only $30 million in borrowings on our $475 million revolving credit facility. With the additional 500 million of sale leaseback gross proceeds that we are targeting for 2022, including $200 million in October and an additional 300 million planned before the end of the year, we expect our liquidity and financial flexibility to continue to strengthen throughout the remainder of 2022. We also showed nice improvement in cash flow during the second quarter with net cash provided by operating activities of $71.3 million compared to 25.1 million during the same period last year. Now turning to our outlook. As we highlighted last quarter and Buram mentioned again today in his remarks, we've made a number of investments in the first half of the year to drive membership and revenue growth. We remain focused on executing those investments across all our clubs while also driving center efficiencies and expense control. While the macroeconomic headwinds around inflation and consumer spending cause us to be a little more cautious in our outlook for the second half of this year, we feel very good about the overall momentum we're seeing with our business and our positioning as the definitive leader in healthy living and healthy aging. Our outlook includes the following assumptions and components. The opening of four new centers during the third quarter. and six new centers during the fourth quarter, bringing our 2022 new club opening total to 12. Given the timing of these openings and normal seasonality, we now expect center memberships to decline by a few thousand units during the third quarter and increase by a few thousand units during the fourth quarter, resulting in flattish center memberships in the second half of 2022. Please keep in mind that we normally lose memberships in the back half of the year, so this will be a significant improvement compared to the second half of 2019 when center memberships declined by more than 16,000 units. We expect average monthly dues per center membership to remain in the $150 to $160 range for the remainder of 2022. We anticipate pre-opening expenses of approximately $12 million for the full year. of which approximately $8 million will be incurred during the second half of the year, compared to just $4 million of pre-opening expenses during the first half of 2022. The additional $500 million of sale leaseback transactions we expect to close on during the fourth quarter will result in total 2022 gap rent expense of $245 to $255 million. This includes approximately $40 million of non-cash rent expense for the full year, of which approximately 23 million will be incurred during the third and fourth quarters. Assuming the completion of $675 million of sale leasebacks in 2022, we will exit 2022 with an annual run rate for rent of approximately $290 million. Given these assumptions, the continued investments and the key initiatives we discussed and expected macroeconomic headwinds, we expect total revenue to be in the range of $490 to $510 million for the third quarter and $1.8 billion to $1.85 billion for the full year 2022. Adjusted EBITDA to be in the range of $65 to $75 million for the third quarter, and continued sequential improvement in the fourth quarter, resulting in $250 to $270 million for the full year of 2022. As Buram and I have said since the start of the year, our objective has been to continue to build momentum throughout 2022 in order to exit the year on a run rate that supports a strong 2023. As with the last couple of years, 2022 has continued to throw us curve balls, but we have stayed the course in building elevated experience and executing our strategic priorities, and we are confident in the continued growth of our business. With that, we will turn the call back over to the operator for Q&A. Operator?