Life Time Group Holdings, Inc. (NYSE:LTH) Q1 2023 Earnings Call Transcript

Life Time Group Holdings, Inc. (NYSE:LTH) Q1 2023 Earnings Call Transcript April 25, 2023

Life Time Group Holdings, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.06.

Operator: Good morning. Welcome to the Life Time Group Holdings First Quarter 2023 Earnings Conference Call. 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. I will now turn the call over to Ken Cooper with Investor Relations for Life Time.

Ken Cooper: Good morning, and thank you for joining us for the Life Time first quarter of 2023 earnings conference call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Bob Houghton, CFO. 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 those forward-looking statements made today. There is a comprehensive discussion 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, net debt, free cash flow before growth capital expenditures and free cash flow. For purposes of this call, free cash flow is defined as net cash provided by operating activities after total capital expenditures.

This information, along with the reconciliations to the most directly comparable GAAP measures where possible and without unreasonable efforts are included in the company’s earnings release issued this morning, our 8-K filed with the SEC and within the Investor Relations section of our website. Our website also includes a supplemental presentation pertaining to the delevering of our business, a topic that Bahram and Bob will address this morning. I’m now pleased to turn the call over to Bob Houghton. Bob?

Robert Houghton: Thank you, Ken, and good morning to all our stakeholders on today’s call. We appreciate you joining us this morning. I will briefly cover our first quarter 2023 results, the full details of which can be found in the earnings release we issued this morning. Bahram will then provide a bit more color on the quarter and how we will continue to grow our business, improve our profitability and reduce our leverage through the remainder of the year. We are off to a strong start this year. First quarter revenue increased 30% to $511 million, driven by a 31% increase in membership dues and enrollment fees and a 28% increase in in-center revenue. Center memberships increased 13% as we ended the quarter at approximately 764,000 memberships.

We added 39,000 center memberships during the quarter, including one of the strongest January enrollments in our more than 30-year history. Including digital on-hold memberships, total memberships increased 9% to approximately 814,000 memberships. First quarter average center revenue per membership increased to $667, up from $640 in the fourth quarter and up 15% from $580 in the prior year quarter as we continue to benefit from higher membership dues and increased in-center activity. We generated net income for the first quarter of $27 million compared with a net loss of $38 million in the first quarter of 2022. Adjusted EBITDA increased 196% to $120 million and our adjusted EBITDA margin increased 13.1 percentage points to 23.5% versus 10.4% in the first quarter of 2022.

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We delivered another quarter of improving cash flow with net cash provided by operating activities of $74 million versus $9 million in the prior year quarter. As I move to an update on our adjusted EBITDA and leverage ratio, I will make reference to the new supplemental slides, which are posted to our IR website. As detailed on slide three, we reduced our net debt to adjusted EBITDA leverage in the quarter and expect further improvement in this key metric as we continue to grow our adjusted EBITDA and reduce our net debt. We are very pleased with our start to 2023. We are successfully executing our strategies to deliver significant revenue growth and improve profitability through growing memberships, increasing club usage through our expanded programming and opening new clubs that are ramping faster in great locations across the country.

We are also clearly seeing the benefits from the re-wiring of the business and the strategic initiatives that we put in place last year. And we remain confident in our ability to increase cash flow and improve our balance sheet. I will now turn the call over to Bahram.

Bahram Akradi: Thank you, Bob. I am very pleased with our first quarter results. Our team has been executing on our strategy with a great deal of passion and care. With our newly re-wired structure, we delivered Q1 records of revenue and adjusted EBITDA for Life Time. We have great confidence that we can continue to elevate our programming and experiences for our dedicated member base, while also growing our revenue and adjusted EBITDA. As Bob mentioned, memberships grew very nicely, up nearly 40,000 in the quarter. Our attrition has been coming down steadily each quarter and we project June will be the first month with attrition rates below 2019 levels. Not only our membership is growing, our in-center businesses are also improving on both top and the bottom lines.

These improvements are driving better margins and are reflected in our better than expected first quarter performance, our Q2 guidance and our updated outlook for 2023. First, we are reiterating our full year revenue guidance of $2.2 billion to $2.3 billion. At the midpoint of that range, revenue increases approximately $430 million or 23.5% from last year. This guidance includes a revenue expectation of $560 million to $570 million for the second quarter, which is 21% to 24% growth over last year’s second quarter. Second, we’re increasing our full year adjusted EBITDA guidance to $470 million to $490 million from $440 million to $460 million. This includes an adjusted EBITDA expectation of $124 million to $126 million in the second quarter.

We continue to be very conservative in our assumptions and are focused on deleveraging our balance sheet. As I mentioned previously, our number one focus has been to lower our net debt to adjusted EBITDA by first and most importantly growing our adjusted EBITDA. We have made good progress in this effort, as Bob mentioned. Page three of our supplemental presentation shows the improvement trend for our leverages over the last four quarters and our projection for ’23 year-end, which is around 3.5 times. It’s important to mention, we have approximately $400 million of our debt associated with assets under development. These assets are not yet deployed nor are they generating any revenue or adjusted EBITDA. Once these assets are brought online and mature a bit, debt to adjusted EBITDA will reduce by nearly a full turn and that’s before any sale leasebacks.

As I’ve mentioned on prior calls, earnings calls, our future development strategy will include building more clubs that are financed by landlords, which typically require less than $10 million of capital on average per location for Life Time. Further emphasizing this strategy would allow Life Time to generate as much as additional $300 million of free cash flow each year that could be utilized to reduce debt. In closing, I’m very happy with the position we’re in today and we’re very excited for the future. With that, we will answer your questions now.

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Q&A Session

Operator: Thank you. Our first question is from John Heinbockel with Guggenheim Securities. Please proceed.

John Heinbockel: Hey, Bahram. Can you hear me?

Bahram Akradi: Sure, can, John. How are you?

John Heinbockel: I’m good. I want to start with in-center revenue seasonally for the two summer quarters. How do you think about members spend, willingness to spend? And then the sort of things that you’re going to do, Bahram, when you think about specifically for those quarters in terms of getting more involvement in the kids’ camp, some of the events that you run and trying to get more engagement than you’ve ever gotten before?

Bahram Akradi: I love it. John, we have been improving our processes and our technology where the members are — they have started buying summer camp because the supply on that is basically limited in every club and it can only take so many summer camp kids from our memberships that we started this year by taking those reservations a few months back. And I am absolutely certain that we will outperform anything we’ve done in the past because already we have the kind of a view of how pack those programs will be. We are not seeing any resistance from the customer to spend at this time, even though we’re extremely conservative and are baking in a pretty healthy macroeconomic headwind coming up some time in the next six to 12 months.

That’s we’re baking that into our assumptions, but we are not seeing change. People love the programs, love the service, love all the additional changes we have made to make transactions for them easier and more robust. And all of those programs are working and personal training is setting records in EBITDA on a monthly basis. Everything is working. I mean, I wish we — there was something that I could tell you. But right now, all things are working.

John Heinbockel: Great. And maybe as a follow-up, the transaction you just announced, Atlanta and Tampa, taking over existing facilities. Is there much of an additional opportunity to do that given the condition some facilities or owners may be in coming out of COVID? I guess, obviously, that’s attractive in terms of capital cost and member ramp as long as the facilities are good. Is there an opportunity there?

Bahram Akradi: Absolutely. When we see these things, in order for them to become a Life Time execution, they require significant overhaul. And landlords who basically haven’t been getting paid by some of these tenants, when they have the opportunity to take those assets back, they look around and they look what tenants paid rent throughout COVID without mocking around, they call us and they ask us if we want it. And they’re willing to make bigger concessions to have Life Time be the one going in there. So, yes, we have significant discussions on these types of facilities. And they will become a bigger percentage of our growth as in the future years because we are in discussions, we’re talking to them, we’ll take them many times, we shut them down to completely overhaul them and get them back where the landlords are providing TI dollars for us to do so.

They are extremely attractive from the economic standpoint. They’re sometimes two, three times better on the return on invested capital than we would do it the otherwise.

John Heinbockel: Okay. Thank you.

Bahram Akradi: Thanks a lot.

Operator: Our next question is from Brian Nagel with Oppenheimer. Please proceed.

Brian Nagel: Hey, guys, good morning.

Bahram Akradi: Good morning, Brian.

Brian Nagel: Congratulations on another nice quarter.

Bahram Akradi: Thank you.

Brian Nagel: So my question, as you look at the results, a nice beat on EBITDA on a modest upside in your revenue. So as you look at that kind of how the model is flexing here, we talked a lot about the re-wiring of the model and the cost controls and such. But is there a particular area as you’re really getting ramping or you’re seeing better than expected efficiencies that are allowing you to drive these EBITDA beats?

Bahram Akradi: Yes. So I want to be clear, we’re spending roughly $40 million, $45 million more than three, four years back on an annual basis in additional programming. So we have focused on increasing, not cost cutting, improving the quality, improving the programming that we offer the members as part of the signature membership. So but we did go back and we really looked at our infrastructure and the way the company was making decisions. We re-wired that so that the decisions we’re going through two to three stop at max rather than six or seven. We dramatically reduced the red tape in the company, very little change in — actually there was no cuts in the number of people delivering services, I want to be clear. That is completely contrary to my direction to the team that I want the highest NPS, I want the highest quality ever.

We basically re-wired the business. And the improvement in the percentages of the margins you guys are seeing are here and they’re permanent. They are not for a quarter or two quarters. You can expect roughly between 20% and 23% EBITDA margin, which is a good couple of percent better than what we have done pre-COVID, right, before COVID. Once you add the rents back to our EBITDA, that number is about 2%, 3% better than the best numbers we had before on a steady basis. So as far as the revenue, the revenue was actually a little better than it reflects the way you guys are seeing it. We have been — we’ve taken our foot off the gas on pushing the timing of the club openings. So if it takes a little more time to negotiate the bids a little more, allow the quality come together, not spend money on overtime for delivery of the clubs.

So we have had delays in opening, so therefore, delays in revenue coming online, but the outperformance of the total clubs, opened clubs are making up for the delays and we’re still kind of giving those revenues. So the revenues are strong as well as the EBITDA. It’s not just the EBITDA, membership sales, we gained 39,000 to 40,000 additional members — net memberships in the first quarter, amazing results. So everything is working, Brian.

Robert Houghton: Yeah, Brian, it’s Bob. Just to add, the PT business, as Bahram talked about in his comments, I mean, we’re delivering record levels of EBITDA dollars, record levels of EBITDA margin. We’re growing that business sequentially in the top-line month-over-month. So that’s another business that’s really working well for us.

Brian Nagel: That’s great. I appreciate all the color there. And then one quick follow-up, if I could. So Bob, you mentioned in your comments, maybe just talk about here too just the strength of that membership growth, particularly in January, which I guess is the typical New Year’s resolution type season. So as we head now into the cool season, we have the guidance you gave, how should we be thinking about the membership here or the trajectory of membership? And given that this will be the first, I guess, un-COVID affected cool season for Life Time?

Bahram Akradi: Yeah, membership will be very strong here in May, June, July. We expect no — at this point, we’re not expecting any negative sort of a factor coming into play. We are so ready, the clubs have been upgraded, the beach clubs are looking amazing and I think there will be significant pent-up demand for that. So we are also working on figuring out ways so we can make it easier for people to order food on the pool deck and that will allow to kind of improve the opportunity on revenue side on that. So we’re pretty stoked about what’s about to come here the next quarter as well.

Brian Nagel: Congratulations again. Thanks for all the color. Appreciate it. Thank you.