Life Time Group Holdings, Inc. (NYSE:LTH) Q3 2023 Earnings Call Transcript October 25, 2023
Life Time Group Holdings, Inc. misses on earnings expectations. Reported EPS is $0.03874 EPS, expectations were $0.13.
Operator: Greetings. Welcome to the Life Time Group Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ken Cooper of Investor Relations. Thank you. You may begin.
Ken Cooper: Good morning and thank you for joining us for the Life Time Third 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. The company will discuss certain non-GAAP financial measures including adjusted net income, adjusted EBITDA, adjusted diluted EPS, net debt to adjusted EBITDA or what we refer to as our net debt leverage ratio and free cash flow.
A group of people in the fitness studio doing a yoga or pilates class. Editorial photo for a financial news article. 8k. –ar 16:9
This information along with reconciliations to the most directly comparable GAAP measures are included in the company’s earnings release issued this morning, our 8-K filed with the SEC and on the Investor Relations section of our website. I’m now pleased to turn the call over to Bob Houghton. Bob?
Robert Houghton: Thank you, Ken, and good morning, everyone. I’ll walk you through some of our third quarter key highlights and metrics. Our revenue increased 18% to $585 million. The revenue in the quarter would have been approximately $2 million higher, if not for the delay in opening our Tampa Harbour Island takeover location. Also, our third quarter results last year included approximately $3 million in revenue related to two non-profitable triathlons that we sold earlier this year. The combined impact of these two items is about $5 million of revenue. Our adjusted EBITDA increased 101% to $143 million in the quarter compared to $71 million in the prior year quarter. Adjusted EBITDA margin increased by 10.1 percentage points to 24.4% versus 14.3% in the third quarter of 2022.
Year-to-date revenue increased 23% to $1.66 billion. Year-to-date adjusted EBITDA increased 128% to $399 million compared to $175 million in the prior year-to-date period. Center memberships ended the quarter at approximately 784,000, an increase of roughly 56,000 or 8% compared to the prior year quarter. Total subscriptions ended the quarter at approximately 830,000. Average center revenue per membership increased to $722, an increase of 9% from $660 in the prior year quarter. Adjusted net income was $26.7 million compared to an $11.5 million adjusted net loss in the prior year quarter. Year-to-date adjusted net income was $91 million compared to an adjusted net loss of $67 million in the prior year period. Adjusted diluted EPS was $0.13 compared to a loss of $0.06 per share in the prior year quarter.
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Q&A Session
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Year-to-date adjusted diluted EPS was $0.45 versus a loss of $0.35 per share in the prior year period. Importantly, our net cash provided by operating activities was $115 million compared to $45 million in the prior year quarter. And year-to-date, net cash provided by operating activities was $331 million compared to $125 million in the prior year-to-date period. We are very proud that we have been able to reduce our net debt to adjusted EBITDA to 3.7x by the end of the quarter compared to 4.2x at the end of Q2 2023 and 7.6x at the end of Q3 2022. I will now turn the call over to Bahram.
Bahram Akradi: Thank you, Bob. I’m extremely proud of the entire team at Life Time for working tirelessly and passionately to achieve all the priorities that we have set for the last three years since returning from the interruption of COVID. Our first priority was to restore the number of visits and dues revenue to our clubs. We have accomplished both of these in 2023. Our second priority was rebuilding our adjusted EBITDA margin to pre-COVID levels and beyond at adjusted EBITDA margin. Margins up 23%, 24% each quarter this year, we feel excellent for having accomplished that priority. Our third priority has been to reduce net debt to adjusted EBITDA at a very rapid rate. With $506 million of trailing 12 months EBITDA at the end of 3Q, we have now reduced the net debt to adjusted EBITDA to 3.7x, and we expect to be below 3x by the end of 2024.
Another important objective was to increase our member engagement through enhanced programs and member experiences. Our visits per memberships are up approximately 24% through the first nine months of 2023 compared to the first nine months of 2019. Increased visits or engagement per membership has been a critical part of our strategy, and it is delivering the exact outcome we would expect. This creates stickier memberships, and we are now seeing lower attrition rates than we did in 2019. Clearly, our team is executing diligently to achieve all the priorities we have established sequentially to get us to this point. Now our next most important priority is to be cash flow positive after all capital expenditure without any proceeds from sale-leasebacks.
The convergence of two things that I’m excited to share with you is helping us to achieve this very important priority, approximately two years ahead of what we thought is possible just a year ago. One, our strong outlook of adjusted EBITDA performance; and two, the significant asset-light opportunities our team has been working on will allow us to deliver a cash flow positive position in the second quarter of 2024. Getting to the position of self-funding all of the capital required to deliver double-digit growth without any sale-leaseback has been a long-time goal of the company. I couldn’t be more excited to be working on delivering on this particular priority by the end of second quarter of next year. For the next quarter of this year, we expect to grow revenue between 17% to 20% compared to the same quarter in 2022 with an adjusted EBITDA margin of 23.5% to 24%, this will suggest revenue for the quarter of $555 million to $565 million and adjusted EBITDA of $131 million to $135 million.
Important to highlight, we had planned several revenue expanding initiatives to launch in early fourth quarter. And at this point, we expect to roll out in 2024. While we are not providing any official guidance for 2024 at this time, I would like to make it clear that we expect double-digit growth, both for revenue and adjusted EBITDA in line with our earlier expectations. All the while more of this growth will be coming from more asset-light opportunities. Finally, we’re expecting a couple of LOIs for additional sale-leaseback transactions. However, with the outlook of being able to deliver cash flow positive — after all, capital expenditure by the second quarter of next year, we can be very patient and diligent in negotiating the most favorable sale-leaseback terms and determining whether to execute any additional transactions at this time.
We now look forward to answering your questions.
Operator: [Operator Instructions] Our first questions come from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.
Megan Alexander: Hi, thanks for taking our question. First one, maybe can you just talk a bit about your expectations embedded in the 4Q revenue outlook? It is a bit below where you implied previously. So is that driven by something you’re seeing in membership joins or attrition or just some additional conservatism?
Bahram Akradi: No, it’s not in membership or attrition. The impact is typically when we go from $585 million of EBITDA — revenue in the 3Q to the 4Q. For our size of the company now, there is at least $30-plus million, $35 million of revenue that doesn’t exist between summer camps and other activities, summer activities. So most of the revenue drop is all from those. So we had initially intended to roll out a bunch of initiatives that are still in the process to sort of mitigate this drop. I don’t really like to have any seasonal drops. So we’re trying to find ways to add additional sales coming through programs and not services in the clubs, but like sales of apparels and nutritionals and stuff dynamic nutrition. And that rollout has been delayed now to early ’24. So we basically went back to the typical business. Business isn’t really doing anything different than we expected. The core business is in line.
Megan Alexander: Okay. Thank you. And maybe a follow-up on the sale-leasebacks and some of these asset-light opportunities. Forgive me if I missed this, but I don’t think you reiterated the $300 million proceeds expected this year, so —
Bahram Akradi: You are correct. At this point, we’re waiting for some sale-leasebacks and LOIs to come in, and they have been delayed. So the folks that have been — we’ve been in discussion to send those. They are still planning to send something, we’re still waiting to get those. However, as I mentioned to you, clearly, at this point, the number one priority of the company is not sale-leaseback, it’s not anything else, it’s to actually deliver free cash flow positive after all of the capital we need for maintenance CapEx, interest as well as all of our growth capital from internally generated cash flow and deliver double-digit growth. That’s the exact position we want to be in when the sale-leaseback market is attractive, we will do more sale leasebacks.
At this point, we don’t need them. So we will treat them exactly as they should. If they are within the — these are 20- to 25-year initial terms with 2025-year options, they are very, very long-term transactions. And so, we’re not going to do a long-term transaction because of a short-term blip on the interest rates.
Megan Alexander: Okay. That makes sense. That was kind of my question there. So it does seem it’s just more of a short-term shift given the macro and rate it’s just —
Bahram Akradi: It’s absolutely short. Yes. We have so much — we literally have 100 asset-light opportunities in the pipeline right now. So we can continue to deliver beautiful locations, great growth for the company, without having to spend substantial amount of capital. And the cash flow of the company, the EBITDA that we have this year, the EBITDA for growing double digit for next year, it generates substantial free cash flow after interest and maintenance CapEx. It’s more than enough for us to deliver double-digit top line and adjusted EBITDA growth without needing any external capital. This is exactly the ideal position for the company. Last year, I anticipated it would take about $700 million, $750 million of EBITDA to get there with the plan — and this is, again, not including sale-leasebacks.
