Life Time Group Holdings, Inc. (NYSE:LTH) Q4 2022 Earnings Call Transcript

Life Time Group Holdings, Inc. (NYSE:LTH) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Good morning, and welcome to the Lifetime Group Holdings 2022 Fourth Quarter and Full Year 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 Lifetime Group Holdings. Please go ahead.

Ken Cooper : Good morning, and thank you for joining us for the Lifetime 2022 fourth quarter and full year 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 our forward-looking statements made today. 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 comparable GAAP measures where possible without unreasonable efforts are included in the earnings release issued this morning and in the company’s 8-K filed with the SEC and on the Investor Relations section of Lifetime’s website.

I’m now pleased to turn the call over to Bob Houghton, Bob?

Bob Houghton : Thank you, Ken, and good morning, everyone. We appreciate you taking the time to join us today. I will briefly cover our fourth quarter and full year results. The full details can be found in the earnings release we issued this morning. Bahram will then outline our strategies and key initiatives followed by updated guidance for 2023. Starting with our 2022 results, fourth quarter total revenue increased 31% to $473 million, driven by a 32% increase in membership dues and enrollment fees and a 28% increase in in-center revenue. For the full year, total revenue increased 38% to $1.8 billion. Center memberships increased 12% to end the year at more than 725,000 memberships. Fourth quarter average monthly dues were $162, up 20% from $135 in the fourth quarter last year.

Fourth quarter revenue per center membership increased to $640, up 19% from $536 in the prior year period as we continue to benefit from higher dues and increased in-center activity. We generated net income for the fourth quarter of $14 million compared with a net loss of $305 million in the fourth quarter of 2021. Excluding the onetime expenses detailed in our earnings release in both periods, net income improved by $51 million. Adjusted EBITDA increased 123% to $107 million and adjusted EBITDA margin of 22.6% increased 9.3 percentage points versus 13.3% in the fourth quarter of 2021. For the full year, our net loss improved to $2 million, and our adjusted EBITDA was $282 million. We delivered another quarter of improving cash flow with net cash provided by operating activities of $76 million versus a $5 million net use of cash in the prior year period.

We reduced our net debt to adjusted EBITDA leverage in the quarter and our year-end liquidity position remains strong with cash and cash equivalents of $26 million and $423 million in total available borrowings on our revolving credit facility. As we turn to 2023, our business is in great shape, and our strategies are working. We believe we are successfully using price to optimize our club performance and enhance our member experience, driving increased club usage across our strategic investments, opening new clubs and expanding margins, helping to drive increased cash flow and reduce leverage on our balance sheet. I will now turn it over to Bahram to outline our 2023 strategic initiatives and financial guidance.

Bahram Akradi: Thanks, Bob. I am very proud of our more than 34,000 team members and our accomplishments in 2022. Our main priority in 2022 was to grow back our revenue and adjusted EBITDA margins and prove that our business model is intact and healthy. In 2022, we successfully made adjustments to our pricing strategy and executed our strategic initiatives of ARORA , which is our active aging program, DPT, our Dynamic Personal Training model, SGT, execution of our Small Group Training and, of course, the rollout of pickleball. These initiatives were critical to increasing our traffic and revenue. Additionally, we rewired our decision-making process to have significantly less layers to get things done, which helped our margin expansion effort.

We took the past three years as a great challenge and made necessary adaptations to keep Life Time in a leading position. As I have visited more than third of our clubs over the last few months, I’m happy to report that our clubs are both busy and vibrant. For our clubs that were open at the end of 2019, January of 2023, membership dues in aggregate were 103% of membership dues in January of 2020 and are still reramping. As we have explained over the past several months, it takes three to four years to ramp or re-ramp one of our large athletic clubs. While we have already surpassed January 2020 membership dues across these clubs in aggregate, we’re still in recovery period and expect to continue to improve results. In addition to the tailwinds for our reramping clubs, we feel we have significant pricing power and opportunity driven by a strong value proposition.

The average dues of our memberships sold this year through February is $208. This compares to the total average dues of all memberships of 164. Not only we’re adding new memberships at higher rates, each membership churn results in roughly $44 additional dues per month. In addition, there are over 510,000 memberships that, in aggregate, are paying roughly $17 million less in dues per month than our current rates. Furthermore, the first couple of months of the year have been very strong, and we’re looking forward to the full year 2023 and beyond. I am proud to say that our brand and business model has never been in a better shape. With all that, we are setting the expectation for adjusted EBITDA in the first quarter to $108 million to $110 million and we are raising our full year guidance to $440 million to $460 million from the $430 million to $450 million that we established on January 9 of this year.

Our focus for 2023 will remain on continuation of our recovery and margin expansion, growing our adjusted EBITDA to record levels and reduction of debt to adjusted EBITDA. We have already announced $123 million in sale-leaseback transactions so far this year, we have closed on the first $33 million of that at the end of February. We are well on track to accomplish our goal of $300 million of sale leasebacks for the year. Additionally, we’re continuing to work on more growth coming from asset-light opportunities where facilities are funded largely from landlords. Every move we make is focused on enhancing our brand, customer experience, our balance sheet and making lifetime stronger. Now we’re looking forward to answer your questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Chris Carril from RBC Capital Markets. Please go ahead.

Chris Carril : Hi, good morning. So you previously disclosed that you expect 35% to 40% of your close will reach profitability maturity this year and that’s up from about 15% in ’22. Can you update us on whether you still think that’s the case here? I presume it’s still just based on the EBITDA guidance that you provided this morning. It’s largely unchanged from what you gave us in early January, but also how you expect that may hurt to ramp over the course of the year?

Bahram Akradi : Yeah. Great question, Chris. We are seeing the clubs continuing to pick up under swipe. And that’s catching up to the swipes of the past. Obviously, they are doing that at much higher average dues. The in-center is catching up and improving in some cases, moving ahead of the past performance as well. So I don’t — I think that we still have more runway for the clubs gaining to the 2019-2020 — early 2020 prior to closure — our revenues and margins and then get beyond that as they are still, as I’ve mentioned, they’re still ramping. While our dollars have recovered, I think in terms of the opportunity to get more revenue and more memberships, more traffic and majority of the clubs is still plenty abundant. So each month, as we mentioned to you guys, you see more and more clubs, more states are getting passed their past performance and then easily go beyond.

And I don’t know how to really reconcile your question mathematically right now, but I think it’s just — there’s quite a bit — when we said these clubs — I don’t think the clubs when you call it mature, you’re talking about like they have ramped up to a level that they can’t keep going. And we have room in most of the clubs that have recovered the dollar revenue dollar margin, they still have room to gain more memberships and fill a lot more, if that helps you.

Chris Carril : Got it. Yeah. Thank you. And then just as a follow-up on pricing. Can you talk about maybe recent reception to the pricing actions you’ve taken? Thanks, again.

Bahram Akradi : Yeah. We’ve sold tens of thousands of memberships in the first couple of months of the year and not any resistance. It’s interesting, our rejoins are still at a higher rate today than they were pre-pandemic. And there is zero resistance to the price front. The customer is finding the value proposition at Lifetime. It’s not the gym. It’s not a — it’s really the variety of athletic — things they do for their family, sports. So it’s a social community. So actually, we’re getting zero price resistance. And we’re continuing to adjust the prices, and we will see if they work, they don’t. If they don’t, we can easily just go back and change the price in the club for the next week. But so far, we haven’t had to take any club backwards.

Bob Houghton : Hey, Chris, it’s Bob. Just to add a little more color to that. Not only are memberships up, membership churn or membership departures are actually down the first two months of ’23 relative to ’22, and that’s despite the fact that our average dues are up roughly $20 versus last year.

Chris Carril : Okay. Thanks so much for the detail.

Operator: Thank you. Our next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel : Hi, good morning, guys.

Bahram Akradi : Hi, Brian.

Brian Nagel : Nice quarter.

Bahram Akradi : Thank you.

Brian Nagel : So the first question I have, just with respect to your cost control and some of the repositioning of costs within the model, you clearly done a nice job over the last couple of quarters — controlling costs. I mean as we look at the business and especially in light of our improving top line, from dues perspective of membership, how should we think about the sustainability of these cost controls or another way the leverageability of them?

Bahram Akradi : Yeah. That’s a great question. I don’t expect us to continue to create more, more, more margin. I want to be clear. Now as the club’s revenue continues to go up in aggregate, many of the clubs are still going to grow those revenue, which is substantially, that’s going to add to our margins by the fact that the revenue percentage is going to grow. On the cost side, we completely rewired the company, as I mentioned, the decision-making process of lifetime instead of going through five, six, seven different people to get an approval and something, it’s now down to three. So we are basically making decisions much faster. We’ve eliminated layers those are being eliminated. So that the cost isn’t going to — and then we also have transitioned the corporate office to a structure that as we grow additional clubs, the corporate office — majority of the office does not need to grow.

So it’s — that actually allows us to benefit from the scale of the company. So it should move. We’re not intending to go back and cut more cost, I want to be clear. But what we have put in place should be here permanently.

Bob Houghton : Yeah, Brian, just to emphasize 1 point that Bahram made, most of the cost efficiency actions were taken in the fourth quarter of last year. So we’ll see the full annual benefit in 2023. There aren’t a lot of additional cost saving steps we need to take to see that full year benefit this year.

Bahram Akradi : But they’re rolling through right now every month.

Brian Nagel : That’s great. Very helpful. And then my second — my follow-up question, obviously, we’re seeing the results track well here. But how would you — if you look at these — the new center openings, how are those — generally, how are you feeling about this? How are those tracking versus your expectations versus historic levels, that sort of thing?

Bahram Akradi : They’re fantastic. I mean our new model, again, both in the way we’re modeling the operations of the clubs, the programing and the — and the pricing of this system. We’re generally opening up the clubs right now above the business plan in our dues revenue and they’re ramping beautifully. So we have no issue. Generally, we take a substantial loss the few months before the club opens and about three to four months, maybe after the club is open, that so we’ve been — as you know, we have opened significant number of clubs in December and on opening just this week, a big one in California. But — and we are covering that sort of a negative EBITDA from those. But within about four-five months from the time they open, they flip over and they start kind of giving back EBITDA. So we’re pretty excited about where everything is going. And again, as I mentioned on my remarks earlier, the business has never looked healthier, stronger than it is today.

Brian Nagel : Helpful. Congrats, again. Thank you.

Bahram Akradi : Thank you.