This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: 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.
spk02: 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.
spk06: 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?
spk09: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We have a first question from the line of Brian Nagel with Oppenheimer & Co. Please go ahead.
spk04: Good morning.
spk09: Good morning, Brian.
spk04: Good morning. Nice quarter. Bob, welcome. Look forward to working with you. So the first question I have, just with regard to expense leverage. Now, Bram, you talked about this in your opening comments, but you'll clearly hear memberships tracking well. It's recovering nicely. You've got new centers now coming online here through the balance of this year and next year. And you talked about the target operating margin, I'm sorry, EBITDA margin for 23, but How should we think about maybe the cadence of that improvement, then more the components? And where should we, as we work through the balance of 22 and into 23, where should we really see the majority, if you will, the most of that expense leverage through the P&L?
spk02: Thanks, Brian. I think the really is important for me to reiterate that when we came out of pandemic, We were in a situation that's hard to sometimes explain, but we basically normally pre-pandemic, we had 140 clubs. Of those 140 clubs, 122 of them, 124 of them were in year three. So they're pretty much at maturity. They're doing full revenue, full EBITDA. Maybe a handful of the clubs are in year two. They're doing 85% of their revenue and maybe, you know, 50% of their EBITDA, and a handful of them are in year one where they basically are doing 60, 65% of their revenue, the potential of that club, and they're doing basically only flat EBITDA. They lose money in the first six months, five months, four months, and then they make some in the last four or five months of the year, but it's pretty much flat. So when we came out of the pandemic, What's really not understood in this business, the subscription business, we pretty much started every club in year one. So all of our portfolio was in year one. Depending on the rate of opening, some markets were much more robust. They opened sooner, like Texas, and they didn't really bring any additional restrictions in as time went on. those clubs are all acting beyond year three. They are ahead of what we were ever doing in the past in revenue and in margins. Today, we have a much larger number of clubs who have now reached that same store, similar to this year three, the mature numbers. We still have probably 50, 60 clubs that they're acting more like year two rather than year one because they were held back by the particular states much longer into the closure and then with a lot more restrictions even when they open. So they're just tracking behind. But we got to August. We could take a look ahead and our analytics basically mapped out that by the beginning of the 2023, it looks like we should be able to have the same store clubs for sure on the dues revenue caught up with the 2019 and the first couple of months of, or on a run rate basis, the first couple of months of 2020 before we shut down. And then we have, of course, the additional clubs. So we quickly switched our focus on phase two of our kind of a post-pandemic recovery, which is now not just playing offense. Now we've decided to start looking at, okay, we're going to still grow the memberships, but we can now look truly at what the cost efficiencies are. It's important for all of you guys to understand that typically we do this every year. Every year when we do the budget for the next year, we look for efficiencies, we look for how we can improve. But we didn't do that for three full years. We were just strictly trying to get these clubs on a trajectory so we could see that we're going to win on the revenue side first. Once we had that, we started digging and we have tremendous opportunities across the board. So we have eliminated a number of positions that they were sort of between the club's and the corporate. We have fine-tuned many efficiencies in the corporate office and additionally rewiring some of our structures even in the clubs. So we are very, very comfortable guiding you guys to the numbers that Tom and I shared with you during the IPO. So we sort of gave you guys some margins to the margin range EBITDA plus adding the rent back, you guys can take those and we're committed to deliver those percentages. But I'm confident that we can be slightly better than 2019 margins on the same front. It's coming across all aspects of our business and there's plenty of opportunities. We have implemented more than 50%, 60% of those things already. We're taking necessary expenses that we have to take to make those adjustments, and then we should have a clean slate for the first quarter going forward.
spk04: Got it. Very helpful, Bram. Thank you. Then the follow-up question I have, So I've spent a lot of time lately at the new clubs on 1 Wall Street in Dumbo. They look great. Very congratulations. How should we think about the economic model for a lifetime of clubs? There's urban-type clubs like that versus the more traditional centers that you've opened historically.
spk02: Look, when we run any business plan, it doesn't matter if it's urban or not. We're looking for exactly similar rate of return. uninvested capital. So we have a clear advantage in our real estate and the sell these back world for the ground ups. We have partners who, you know, I was on the phone with two of them just as early as late last week. They're always ready. They have full trust in lifetime. They know we are the legitimate stand-up company that pays every penny of the rent. So if they want to add anything in the healthy way of life category, they want a lifetime asset. They don't want anything else. So we have that. And then we have all other developers who are building big buildings. They're building apartment buildings, mall owners. We're constantly – the one part of our company – everybody is busy is in our sort of looking at a variety of different options. We also have been able to take over some other assets where they were meant to go somewhere else, but they didn't perform. Folks didn't perform, so the landlords called us, and we were able to negotiate amazing, amazing deal structures for us. So our expectation is the return on these, on invested capital, will be no different than our prototype models.
spk04: Got it. Well, thank you very much. Appreciate it. Thank you.
spk09: Thank you. We have next question from the line of Robbie Ohms with Bank of America. Please go ahead.
spk05: Hey, good morning. Thanks for taking my question. Um, Bram, can you talk about, you know, by the way, great job getting the membership dues per store back to those pre pandemic levels. Um, can you talk about, um, you know, what you've done in pricing, you know, with the legacy side, as well as the new members and, and, um, where, where are you in, in, you know, bringing the legacy members. Pricing, uh, you know, up to where the new members are and do you see, you know, more opportunity to raise prices heading into 2023?
spk02: That's a brilliant question. So let me take the time to explain. So when we went to pandemic, our average price was around for membership was about 120-ish, 120, 21, right before we went into it. And I think for the full year, 2019 might have been just a couple bucks less than that. We're going to finish the year right around $160 per membership across the board. This is really important. While, you know, a lot of attention has been put on the membership count, a membership count isn't what pays the bills, it's the dollars. And I've gone through this for, I think, 10 to 12 years, even before I was public. For our business, when we started this company, we built the most amazing business. product, services, and we sold them incredibly too cheap and it created issues. And then we started kind of trying to correct that, correct that, correct that. But during the shutdown and reopening, we basically took an approach. And as of right now, over the next 45 days, myself and my team, Bob, Tom, and Jay-Z, and the rest of the group, we're working on a club-by-club basis to sort of point out what should be the optimal membership in that club. And those optimal memberships are going to be less than what we had put in as membership counts in the past. Our average dues of what we are selling today is roughly about 190 a month. So it's about a $30 difference between the memberships we are selling and the memberships that they're dropping off. So we have put in quite a few legacy price increases. We are in a really, really good place right now. We don't expect that we do a lot of those. Going forward, very small amounts on a monthly basis will hit as people come off of hold. After a month or so, we give them the price increase if they need to, but it's not going to be a large increase. But the churn, as the people drop out and those clubs get a new customer, every churn is $30 additional revenue. So we've done a great job of achieving our target of $160 per membership by end of the year. And from here going forward, it's going to creep up, and we probably won't put another major – price increase, you know, passed on to legacy members, you know, maybe a small group around, you know, pool season, the rest of them in September, October, November of next year, just like we did this year.
spk05: Gotcha. That's very helpful. And just a quick follow-up, the, you know, the, you guys call that the initiative small format group training and Aurora and Pickleball, et cetera. What, you know, what is standing out on those initiatives and how is it impacting the sort of the demographics of the membership or is it impacting the demographics of the membership?
spk02: So we're selling all of those programs. Aurora is a different group. You know, this is a, you know, basically older people, 55 and above and 65 and 65 and above is got the qualified memberships that come through the insurance companies. Uh, a lot of them upgrade with a pay an upgrade fee to a signature fee. to make sure they can get the full use of the club at all hours as well as be able to get pickleball and other sports they want to get into. So, Aurora is on fire. Pickleball is growing like 50% quarter over quarter. Utilization is up. We are, you know, I told you guys we want to dominate this category. We have over 350 dedicated courts online right now. We are gaining about five to six additional courts a week, and I expect us to have 600, 700 courts by end of next year. We just signed an agreements partnership with MLP, and we have ongoing relationship with PPA. I expect us to have 60,000 to 70,000 memberships by end of next year that they are unique members playing pickleball in lifetime clubs. And I would say half of those Our members of our lifetime who are doing other things and how they're doing more pickleball than anything else like myself And half would be all brand new customers to lifetime then the other two programs are DPT are dynamically engaged personal training, which is a completely new innovation in personal training the way it's executed and It's impossible to get that service, that quality, that type of a workout online or with an app or with a phone or your iPad. Imagine your chiropractor, your physical therapist, your massage therapist and trainer. It's all in one and completely interactive. That business is growing very nice right now, quarter over quarter. I expect to beat the 2019 personal training numbers in 2023. We have everything lined up. We have the pricing, we have the strategy, the structure of the workers, how they do it. Everything has been reprogrammed 100%. I feel totally excited about DPT. Last but not least, small group training. We have invested significant amount of dollars and energy and time on UltraFit, which is a sort of a sprint workout combined with a functional training intermittently changing back and forth. Hugely popular is growing rapidly GTX and our Alpha, which is our version, a high-end version of a CrossFit workout. So they're all growing. They're part of a signature membership, so it's much easier for customers. They don't have to buy a membership and then pay differently. They just buy the signature price point, monthly dues, and they can take as many classes as they want. So when I look ahead, our expectation is that all of these programs I just mentioned to you, they're all working. We are not doing anything other than doubling down with each and every one of them. And these are the reasons, these transformations, the pricing strategy, the rewiring of a structure for efficiency, all these things. You know, this company, everybody on my side, all the leadership, everybody is working seven days a week. We have the best alignment we have ever had. Everybody is fired up for a record year for 2023. That sounds great.
spk05: Thanks so much.
spk09: Thank you. We have next question from the line of John Heinbockel with Guggenheim. Please go ahead.
spk02: Hi, John. Hello, John.
spk09: John, your line has been unmuted. If you have muted yourself, please unmute yourself and ask your question.
spk02: Okay. Why don't we go to another question and come back to John later.
spk09: Thank you. We move to the next question from the line of Chris Carroll with RBC Capital Markets. Please go ahead.
spk07: Hi. Good morning. So, as you noted in the prepared remarks, you saw center membership growth in 3Q versus that kind of expected typical seasonal decline. And that was with one less opening, I think, than you were anticipating for the 3Q. So, Can you talk about what you saw that was different from your expectations last quarter with respect to membership growth and what drove that modest increase versus the expected decline? And to what degree did the on-hold memberships contribute to that growth?
spk02: The on-hold memberships really have not much of an impact on it at all. You know, we are right in that 40, 45, 50,000 memberships on hold, I think it's going to hold steady. Our major decision was how to run these programs I just mentioned so that the pool season would be less factor. The people come in, if they're not going to come in for pool season, they come for Pickleball, they come for Aurora, they come for... And because of those, is the change in the slight loss of membership to slight gain of memberships. And yes, we expect to outperform those metrics versus 2019 historically until the clubs have well surpassed their potential. And there's still quite a bit of potential. I still believe the other markets that they were behind, again, because of what I explained earlier, I expect by mid-summer next year, pretty much all of our clubs surpassed the 2019 performance in traffic, not in membership, but in swipes, and in revenues, of course, both dues and in-center.
spk07: Got it. And then, Bram, just curious at a high level, you know, curious to hear your latest thoughts on just kind of competition in the health and wellness space. I mean, I know you offer a very unique product and experience, and that's been a big focus for the company historically here. But curious to hear your thoughts on just kind of the rebuilding of industry supply post-pandemic and just generally how the competitive environment's just evolving here.
spk02: Yeah, I think there is, as you can see, there is a bit of pressure on the mid-level, as always. The mid-level price point has always been under attack. I think there's no real sign that in the mid-level people can really do anything. So it's really just us at its high end And on the low end, you basically have everybody from Planet Fitness to Crunch to dozens of brands. And I think they will have a bit of a challenge with the supply chain cost increases in construction. So that's why I think some of you see in all of the franchise model ones, they have a harder time to make the math work. So my perspective is in our space, in the healthy way of life, these elaborate athletic country club style, we are sort of a league of our own. I don't see anybody being able to emerge. Our business model needed 100% reengineering and retooling over the last 12 months to deliver the results that we are delivering you. And it needed the exact strategy that we deployed. We needed to play strictly offense for, you know, last 18 to 24 months since they kind of let us reopen slowly. And then once we had the clarity of revenue recovery, then switch to the margin expansion. If you have done it any other way, I don't see how there's a path that you could be growing next several years. So we have a pipeline, and we have additional opportunities coming in. And this takes me to the next part. We're really looking forward to the net income, the pre-tax income we're going to generate the next three years. I expect it to be substantial. And as a result of that, when we took a second look after mid-August, as I mentioned, we looked at our trajectory here. About the $500 million of loss carryover that we have is significantly valuable to us. We can chew that up in the next three years with pre-tax income that we can be offset. So then we changed our strategy rather than selling old building and taking the gain and washing out our net loss carryover, which I think is incredibly valuable when we know we're going to be so profitable. we basically started talking to our partners, landlords, and say, hey, why don't we just take the new clubs that we want to launch and structure a deal that they fund those new constructions. Rates will be similar. They have corporate guarantees, so it doesn't change for them, and they trust us. And that will allow us to kind of get the new club openings pre-funded for the ground up, a lot of our real estate, a lot of our growth now was already funded by our partners, you know, whether it's the mall deals or the apartment buildings, the locations we're going to, or office buildings that they need us to come in. And so, you know, we're in a really, really great position competitively. I don't see anybody can. And then This year, we are on track to do about 100 billion impressions naturally. It allows us to do well in excess of $2 billion of revenue with less than $12 million of money spent on direct marketing. Half a percent, unlike some other so-called fitness companies, they spend 30% of their revenue on on marketing, we are in an amazing position to make sure that the economics of this business model shows up side by side to the quality of our brand that is loved by the country. So that's where we're at. I don't see anybody being able to emerge to give any impact to Lifetime. Great. Thanks so much.
spk09: Thank you. We have next question from the lineup. John Heinbockel with Guggenheim. Please go ahead.
spk01: Hey, guys. Sorry about the technical difficulties earlier. That's okay. We forgive you, John. This is Julio Marquez on, actually, for John Heinbockel. Just a quick question for you all. You mentioned broad-based efficiency opportunities, but I guess what are the one or two biggest buckets that you guys have identified and If that happens to be in the clubs, how are you safeguarding the experience for your members? Thank you.
spk02: Yeah. So over the years, our business model sort of had slowly creeped into more of a management style. And, of course, there is benefits to that. But we basically – went sort of deeper into that management style during the last three years because we were focused on all other priorities. And then when we look back, we can snap it back into more of an ownership mindset. It's like a leader structure rather than a manager structure in all of our departments. And it's been adopted lovingly by our general managers. They are super excited about the ability for them to be the lead general of their clubs. And then we have created all brand new dashboards for them. And they can see and operate their business with more autonomy. we have eliminated significant layer, a huge layer of cost structure in the corporate office that was basically between the executive team and all the department heads in the clubs, the regional area leads, regional leads, all that sort of stuff, and basically given more power to the clubs, and in the clubs we have new wiring. So it's actually across all fronts, I think our personal training will deliver better margins in 2023 than historically it has. And I really would love to see our corporate overhead be substantially less of a burden to the clubs than they have been in the past. And we've taken an aggressive approach to actually make sure the corporate office expense will shrink versus grow, while our revenues will grow substantially in the next year. Therefore, the cost that is passed on as a percentage for G&A to the clubs should reduce by at least one to one and a half percentage points.
spk00: Great. Thank you. Mm-hmm.
spk09: Thank you. We have next question from the line of Simeon Siegel with BMO Capital Markets. Please go ahead.
spk00: Hi, good morning. This is Garrett on for Simeon. Thanks for taking our question. I'm just curious, you know, just given the macro backdrop, you're seeing anything within your customer base outside of normal seasonality along the lines of, you know, increased churn or, you know, resiliency among your member base. And anything interesting there maybe you can note?
spk02: Yeah, I think for the most part, we are not seeing... We focused strictly on our strategy. It's been over the last half a dozen years, but then much more swift swing to sort of top 20% of the market. As you guys all well aware of, the top 10% is spending more money still than any other category. The next 10% is still not affected. So that top 20% is the least. We're not hearing anybody coming in and saying, oh, God, I'm going to cancel my membership because price of gas is $2 a gallon more. So we are completely in a right environment. However, I just want to be clear that We plan for the worst and we expect the best, of course. We are having a very, very cautious approach in terms of our cash flow and maintaining our liquidity. Again, as I mentioned, keeping our revolver as dry powder for the most part all through the next year. We're not seeing an impact to our customer right now we still expect to have substantial growth in our revenues through the 2023, substantial.
spk00: Okay. That's great to hear. And I guess just as a follow-up, and Brahm, you kind of touched on this a little bit, but any further detail would be great. Just understanding the real estate market and how that's devolving and kind of what you mentioned on cost of cost and availability of products for new builds, are you seeing any changes there that are, you know, worth calling out across the sell-lease-back and just kind of the new build CapEx that's worth noting?
spk02: Yeah, so you basically have the market broken down to those who do sell-lease-back and they finance each unit and by putting, to get the right returns, to get a 10% cash on cash return. They need to get a 65% rough and tough, give or take, 5%, 10% financing specific to that asset. Those types of investments are punitive unless we want to pay a huge cap rate, which we won't. It basically doesn't allow the investor with the current interest environment, that will not come back. If a year from now, a year and a half from now, the interest rate starts coming back down, two years from now, that portion of the market will reopen. Then there are large REITs. Again, our partners who have massive FFO, funds from operation, and their capital is lined up completely online. you know, with a big, huge revolver. They have kind of a fixed, you know, they're paying a dividend on their deal. So those guys also need, you know, they still need to grow. They still need to put some of that capital to work and grow their... And while the rates may move like 25 or 50 basis points, they're not going to move substantially. They can do selective deals. Again, our deals are, you know, 20-year leases with 25 years of options. So these are long, long-term investments for these companies, so they're not going to shy away from great assets from great companies. So I have never had any doubt ever. It's the last thing I ever worry about is not being able to sell these racks based on the credential of lifetime, our status, and our relationships that we have. But as far as the construction cost, I think you can expect – in a transition basis, some commodities like steel or concrete or whatever, they go up, they come down, they go up. Labor has gone up. Labor isn't going to come back down, which is probably a third to half of the construction cost. So we're not going to see construction costs go back to... what they used to be pre-COVID. That's not going to happen. The question is, are they going to be up in general? And are they going to settle at 10 or 15% higher? Are they going to settle at 25 or 30% higher? And so, as you guys know, we have our own internal construction GC at Lifetime, which has kept our costs down. So we're well aware of it. We have a lot of latitude with the timing of our start. So we own right now five large club parcels. We have the entitlements. And while we could have started some of those right now, we deliberately have those on pause until we have some of these forward sell these backs done, until we see the macroeconomic get more clear. And again, I want to demonstrate to the streets our increased cash flow starting from next quarter, moving forward. And then we have a lot of opportunities to, if we start two or three or four of those clubs, six months later, nine months later, we have a lot of other opportunities that could allow us to still have that 10-ish plus new club growth opportunity. from 24, 25, and beyond. So we are just totally not comfortable with our growth prospect and our ability to handle any sort of obstacle that gets our way. We've done it for 30 years. We find a way to overcome any sort of obstacle, and we're expecting to see some more challenges with the macroeconomic, and we're completely prepared for it.
spk00: Great. Thank you. Appreciate the call.
spk09: Thank you. We have next question from the line of Dan Pollager with Wells Fargo. Please go ahead.
spk08: Hey, good morning, everyone. Thanks for taking my questions. So membership growth definitely came in better in the third quarter. And I appreciate that there's typically negative seasonality. But fourth quarter, you're guiding to down again. You have one center shifting out of the 3Q into the fourth quarter. So just, you know, what are the kind of the moving pieces there to think about why, you know, fourth quarter memberships would be down? And, you know, is there some conservatism built into that? Thanks.
spk02: Well, we would be foolish if we don't have conservatism built into what we tell you. So I don't know what else to tell you on that. So, yes, they are conservative. We don't want to tell you something and miss. The second thing is seasonally. we have lost a lot more memberships in the fourth quarter, significantly more than what we're guiding you to. It's just seasonal. It's basically we go through this shift. We lose memberships in September, October, November. We sort of flatten out in December, and then we grow massively in January and February, March, and all the way through the June, July period, which is our really robust season. So not giving up as many points as we have given up in the past years, we are absolutely a great position. We lose 3,000 memberships. That's nothing. That's a weak additional membership gain in just January. It's nothing. So it's actually a very robust position. you know, number that we are showing you. And, you know, we're not going to – and look, I want to explain to you guys with a hint, with a hint of desire to do some promotional marketing, some price points, some closeouts, we could change that outcome. It's just been the company's strategy, and we're going to stick to it, to have zero sales and zero promotions and let the customer come to us naturally because the product, the services, the experience is that great. And I don't want to dilute that strategy. We haven't deviated from it from two years ago when I told you guys that we are doing all this with zero promotions, zero closeouts, zero salespeople. And it's working. And it's going to allow us to deliver higher revenues and better margins to you guys and a higher NPS than we have ever had before in 2023.
spk08: Got it. Thanks for all the detail. And then, you know, Karam, you talked a lot about the efficiencies at the centers and the focus there on margins. I guess where we sit here today where average members per center is 20-plus percent below 2019, and I think we've talked about that in the past, how are you thinking about staffing per center, the number of FTEs per center? Are you where you need to be? Is there room to cut there, or are you still kind of ramping with some of the personal trainers that you set to hire through this year?
spk02: Yeah, so... I have strict order to our clubs, and I'll be incredibly disappointed if they are cutting frontline staff. Our expectation is these clubs run like a four-season, like a Rich Carlton. So we're not cutting staff in the locker room, keeping the clubs immaculately clean for you people. That's where not the saving is. We have had too many dollars go to... middle-level management, all the way through from the corporate office all the way to the club model. And that's the only place we're restructuring the business where we have more leaders leading the way, demonstrating the work, rather than sitting in the offices and having meetings and conference calls. So it's across the board. It's in PT, it's in the spa, it's in the cafes, Again, the biggest portion of it has been corporate office, biggest for corporate initiatives, corporate office, and everybody who was in between the corporate office and the clubs. That was substantial. It's been 100% eliminated. This quarter, we're not coming out and saying we're taking one-time charges. We're just paying for it with overperformance, but our expectation is we have everything on a clean slate for January forward. So we can have, like I told you guys, we want to have a record year of revenue and margins, and obviously that will translate to EBITDA and such, and you guys can do your own work on that.
spk08: Understood. Thanks for the call.
spk02: Thanks.
spk09: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to Mr. Akradi for closing remarks.
spk02: I'd like to take a couple minutes in here and welcome Bob. He's an amazing partner. He's always on and always available to help. Truly a seven days a week CFO partner here. Tom has been a absolute gift for me for the last six, seven years. He's been an amazing partner. He's built a incredible finance, uh, team here that they can, they can support, uh, Bob in everything he needs. Um, as you guys know, I'm five years older, but Tom and I share the same exact birthday. We both are, um, jet pilots, and we both do these crazy 100-mile mountain bike races. I fully expect to be doing a lot with Tom on a personal level as time goes on. He and I talk regularly. He's always available to me if I need something. I'm always available to him if he needs something. So I want to just truly give him my biggest... marks of appreciation here with all of you guys here, and I want to have Tom say a few things before we hang up.
spk03: Great. Thank you, Baram. I really appreciate it. It's a great friendship and partnership we've had for almost seven years now, and I want to thank you for that. I want to thank all the other executives at Lifetime for all the support, and most importantly, thank the 30,000 plus team members out there. You guys are incredible. The energy you bring and the happiness you bring to our members every day is so impressive. And I've been grateful to serve this company for seven years and super happy with how it's positioned going forward. It's in really good hands and really well positioned to drive profitability and growth for years to come. So thank you, everybody. It's been great working with you.
spk02: And I want to just take one minute for Bob. Bob, why don't you say hello to everyone and
spk06: Yeah, hello, everybody. It's great to be on the call with you this morning. Thrilled to be here at Lifetime. A huge thank you to Tom for all his support during this transition that he and I've had. And thank you to Bram for placing your trust and confidence in me as your next CFO.
spk02: All right, guys. Thank you so much. We look forward to be on the call with you guys again beginning of 2023. And if you have any questions, feel free to reach any one of us three. Thank you so much.
spk09: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer