Life Time Group Holdings, Inc.

Good morning and welcome to the Lifetime Group Holdings conference call to discuss financial results for the third 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 conference 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 the most directly compatible comparable cap measures are included in 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 from the management today are Baram Akhradi, Founder Chairman and Chief Executive Officer, Tom Bergman, President, and Bob Houghton, Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir.

Good morning, and thank you for joining us. With me this morning is Tom Bergman and Bob Houghton. After my opening remarks, I will turn the call over to Bob to run through the numbers, and then Tom, Bob, and myself will be available for questions and answers portion of the call. So to start, We are right on track with our strategic progress on recovery from pandemic and poised to go beyond. As we have discussed in the past, our first priority coming out of the pandemic was to strictly play offense and focus on rebuilding our membership dues revenue. Now that we are on a path to exceeding pre-pandemic membership dues revenue on a same store basis in the first quarter of 2023, we have swiftly turned our focus to margin expansion. We see significant opportunities to expand margins over the next year as we expect to capture the benefit of the higher dues revenue fine tune and optimize the rollout of our strategic initiatives and improve the efficiency of our cloud operations and corporate office. We believe that even with inflation and macroeconomic headwinds, we are well positioned in 2023 to slightly exceed our 2019 adjusted EBITDA margin percentage excluding the impact of rent expense. With regards to liquidity and our balance sheet, we are working with a number of our great partners in the sale-leaseback market and are planning to close on additional sell-leaseback transactions during the first quarter of 2023. We have taken extra time to look at alternative sell-leaseback structures to optimize our financing costs and the utilization of our net operating losses reserved for the growing cash flow from our operations in 2023 and beyond. For 2023, we plan our cash flow from operations and sell leaseback proceeds to equal or exceed our 2023 capital expenditure. This will allow us to maintain a strong balance sheet during 2023 with very high levels of liquidity by maintaining cash on the balance sheet or utilizing only a small amount of our $475 million revolving credit facility during 2023. Before taking it over to Bob to run through the numbers. I want to first thank Tom for his partnership and contribution to Lifetime and wish him much happiness and success as he moves on to the next chapter of his life. And secondly, reiterate my confidence in our business as we finish 2022 and look forward to 2023. It is a challenging macroeconomic environment, but I'm really excited about the progress we have made on executing our strategic priorities during 2022 and how we are positioned to drive substantial profitability improvement in 2023. Our business model is highly resilient, and we're in a great position to continue to deliver Healthy Way of Life to more members for years to come. Bob? Thank you, Bram, and good morning, everyone.

It is a pleasure to speak with you on my first earnings call at Lifetime, and I look forward to spending more time with members of our analyst and investment community in the weeks and quarters ahead. I joined Lifetime because I believe there is no other company better positioned to lead in the healthy way of life space, particularly with our incredible beloved lifestyle brand, our unmatched ecosystem of athletic country clubs and omnichannel programming, and our amazing team of professionals who deliver the incredible experiences we provide each and every day to our nearly 1.4 million members across North America. As Brahm highlighted, we are happy with our progress to date, including continued momentum in revenue and improving profitability in the third quarter. Starting with our top-line performance, third quarter total revenue increased 29% to $496 million. Total center revenue of $480 million also increased 29% and was driven by a 29% increase in membership dues and enrollment fees and a 30% increase in in-center revenue. Total comparable center sales increased 26% in the quarter. Third quarter center memberships increased 9% to nearly 729,000 memberships. Sequentially, we grew our membership base by nearly 4,000 over the second quarter. By comparison, our membership count declined approximately 3,100 from the second to third quarters of 2019. We typically see a seasonally driven reduction in memberships between the second and third quarters, so we are pleased with the sequential increase in our membership count this quarter. The strategic programming investments we are making in small group classes, dynamic personal training, active aging through our Aurora community, and Pickleball have all supported our continued membership recovery and driven an expanded membership base and higher usage levels. This demonstrates that our strategy of elevating and broadening our unique healthy way of life offerings to attract additional members is working. Average monthly dues per center membership increased 17% to $157 from $134 in the third quarter last year, driven by both the continued successful execution of our pricing strategy and the opening of higher priced new clubs. Third quarter average center revenue per center membership increased to $660 from $555 in the prior year period, led by the increase in average dues and increased member spending within our in-center businesses. Third quarter center operations expense of $295 million increased 27% versus the prior year, primarily driven by added staffing to support increased center usage and expanded programming, the opening of new centers, and labor and utility cost inflation. Third quarter rent expense increased 20% to $63 million, driven primarily by non-cash rent expense, where we've taken possession of a site and started construction, but have not yet opened for operation, and rent expense from the sale lease back of nine properties in 2022. General administrative and marketing expenses were $57 million and included $5 million of non-cash share-based compensation expense. Excluding non-operating items in both periods, general administrative and marketing expenses increased 25% in the quarter, primarily driven by increased labor to enhance and broaden our member services, increased technology and marketing investments, and additional public company expenses. Our GAAP net income for the third quarter was $25 million, compared with a net loss of $45 million in the third quarter last year. Excluding a one-time gain of $43 million related to the sale-leaseback of five properties, share-based compensation expense, and other non-recurring items, our adjusted net loss was $12 million in the third quarter, compared to a $40 million adjusted net loss in the prior year. Adjusted EBITDA increased 51% to $71 million and grew 12% on a sequential basis, demonstrating another quarter of strong year-over-year and sequential improvement. Adjusted EBITDA margin of 14.3% increased 210 basis points from the third quarter last year and 60 basis points sequentially from the second quarter of 2022. We delivered another quarter of improving cash flow with net cash provided by operating activities of $45 million versus a $2.3 million net use of cash in the prior year period. In the third quarter, we sold and leased back five properties for aggregate proceeds of $200 million, bringing our aggregate sale leaseback proceeds through the first nine months of the year to approximately $375 million. Our liquidity position at the end of the third quarter remains strong, with cash and crash equivalents of $107 million and no borrowings on our $475 million revolving credit facility. Turning to guidance. For our fourth quarter and full year outlook, we are tightening our guidance range but leaving the guidance midpoint unchanged. For the fourth quarter, we are projecting total revenue of $460 to $490 million and adjusted EBITDA of $80 to $90 million. For full year 2022, this equates to total revenue of $1.81 to $1.84 billion and adjusted EBITDA of $255 to $265 million. This outlook includes the following assumptions. The opening of seven new centers in the fourth quarter and 12 for the full year. Average fourth quarter monthly dues per center membership between $155 and $160. A 2,000 to 5,000 net center membership decline in the fourth quarter. Please keep in mind that we do typically lose memberships in the fourth quarter. So this would be a nice improvement compared to 2019 when we lost just over 13,000 fourth quarter net memberships. and last year when we lost nearly 19,000 fourth quarter net memberships. For the full year, we expect to add approximately 75,000 net center memberships. Pre-opening expenses of approximately $5 million in the fourth quarter and $14 million for the full year. Gap rent expense of $65 to $70 million in the fourth quarter and $245 to $250 million for the full year. This includes approximately $40 million of annual non-cash rents expense, of which approximately $10 million will be incurred in the fourth quarter. We remain committed to making our enterprise more asset light. As Bra mentioned, we are exploring alternative sale-leaseback structures to optimize our financing costs and preserve the utilization of our net operating losses to offset our growing future taxable income. We plan to close on our next round of sale-leaseback activity in the first quarter of 2023. We are pleased with our progress on executing our strategic priorities this year. We've added programming, we're increasing membership and usage levels, we're opening new athletic country clubs, and we're optimizing our pricing. And our efforts to make our corporate and field operations more efficient are just getting started. We believe these initiatives leave us well-positioned to deliver continued revenue growth and a substantial improvement in profitability in 2023, creating additional value for our shareholders while continuing to ensure we provide the best possible experiences to our members. With that, we will turn the call back over to the operator for Q&A. Operator?