Q3 2022 Life Time Group Holdings Inc Earnings Call
[music].
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 are 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.
Information along with reconciliations to the most directly comparable GAAP measures are included in earnings release issued this morning, and the company's 8-K filed with the S. E C and on the Investor Relations section of lifetimes website.
On the call from the management today are but crotty.
Founder Chairman and Chief Executive Officer, Tom Bergman, President and Bob Houghton.
Chief Financial Officer.
I will now turn the call over to Mr. Crowdie. Please go ahead Sir.
Good morning, and thank you for joining us.
With me this morning is Tom Bergmann, Bob Hau.
After my opening remarks, I will turn the call over to Bob.
You run through the numbers and then Tom Bob and myself.
We will be available for <unk>.
Questions and answers portion of the call.
So to start with.
We're right on track with our strategic progress and recovery from pandemic.
And poised to go beyond.
As we have discussed in the past.
Our first priority coming out of the pandemic.
As to strictly play offense and focus on rebuilding our membership dues revenue.
Now that.
We are on a path.
Two 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 their rollout of our strategic initiatives.
And improve the efficiency of our club 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 an additional sale leaseback transactions during the first quarter of 2023.
We have taken extra time to look at alternative sale leaseback structures to optimize our financing cost.
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 sale 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 under balance sheet, all utilizing only a small amount of about $475 million.
Revolving credit facility during 2023.
Before turning 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 finished 22 2022.
And look forward to 2023, it is a challenging macroeconomic environment.
I'm really excited about the progress we have made on executing our strategic priorities during 2022, and how we are positioned to try to drive substantial profitability improvement in 2023 or.
Our business model is highly resilient and we are in a great position to continue to deliver healthy way of life to more members for years to come Bob. Thank you, Brian and good morning, everyone. It.
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 analysts 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 one 4 million members across North America.
As Brian 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 incentive revenue <unk>.
Total comparable center sales increased 26% in the quarter.
Third quarter Center memberships increased 9% to nearly 729000 memberships.
Sequentially, we grew our membership base by nearly 4000 over the second quarter.
By comparison, our membership count declined approximately 3100 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're making in small group classes dynamic personal training active aging through our Aurora community and Pickle ball have all supported our continued membership recovery and driven and 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.
The 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.
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 central usage and expanded programming the opening of new centers and labor and utility coal.
Cost inflation.
Third quarter rent expense increased 20% to $63 million driven primarily by noncash rent expense, where we've taken possession of a site and started construction, but have not yet open for operation and rent expense from the sale leaseback of nine properties in 2022 Gen.
General administrative and marketing expenses were $57 million and included $5 million of noncash 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 onetime gain of $43 million related to the sale leaseback of five properties share based compensation expense and other nonrecurring items our.
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 of 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 to 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 remained strong with cash and cash 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 million to $490 million and adjusted EBITDA of $80 million to $90 million.
For full year 2022, this equates to total revenue of $1 eight 1% to $1 84 billion.
And adjusted EBITDA of 255 million 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 2000 to 5000 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 13004th quarter net memberships and last year, when we lost nearly 19004th quarter net memberships.
For the full year, we expect to add approximately 75000 net center memberships.
Preopening expenses of approximately $5 million in the fourth quarter and $14 million for the full year.
GAAP rent expense of $65 million to $70 million in the fourth quarter and $245 to $250 million for the full year.
This includes approximately $40 million of annual noncash rent expense of which approximately $10 million will be incurred in the fourth quarter. We.
We remain committed to making our enterprise more asset light.
As Brian mentioned, we are exploring alternative sale leaseback structures to optimize our financing cost 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 were 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.
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 one on your telephone keypad confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we pause for questions.
We have our first question from the line of Brian Nagel with Oppenheimer <unk> co. Please go ahead.
Hi, good morning.
Good morning, Brian Good morning, Nice quarter, Bob Welcome and look forward to working with you.
So the first question I have.
Just with regard to expense leveraging our broad you've talked about this in your opening comments, but youre clearly hear memberships tracking well, it's recovering nicely you've got new centers now coming online here.
Go through the balance of this year into next year and you talked about the kind of the target operating margin or EBIT I'm, sorry, EBITDA margin for 'twenty, three but how.
How should we think about maybe the cadence of that improvement than more of the components and where should we where should we as we.
Work through the balance of 'twenty, two and into 'twenty, three where should we see that the majority of your world and most of that expense leverage in the base with the P&L.
Thanks, Brian I think the really is important for me to reiterate that when we came out of the pandemic.
We were in a situation that is hard to sometimes explained but we basically normally pre pandemic. We had 140 clubs of <unk> hundred 40 clubs.
Third 20 to a 124 of them were in year three.
So they're pretty much at maturity they are doing full revenue full EBITDA.
Maybe a handful of the clubs are in year, two they're doing 85% of their revenue and maybe.
50% of their EBITDA and a handful of them are in year, one where they basically are doing 60% to 65% of the revenue potential of that club and Theyre doing basically on the.
Okay.
<unk> EBITDA and now they will lose money in the first six months five months four months and then they make some of 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 is a 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, which 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.
We have.
Today, we have a much larger number of clubs who have now reached that savings.
Same store similar to this year three the mature numbers we.
We still have.
Probably 50 60 clubs that they are acting more like two 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 theyre just fall either 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 'twenty 'twenty 2019 in the first couple of months or on a run rate basis that first couple of months of 2024.
[noise] shutdown and then we have of course, the additional clubs of weeds quickly switched our focus on phase two.
Sure.
But post pandemic recovery, which is now not just playing offense.
Now we have decided to start looking at okay. We are going to still grow the memberships, but we can now look truly at what the cost efficiencies are not simple.
<unk> for all of you guys understand that typically.
We do this every year every year when we do the budgets for the next year, we look for efficiencies, we'd 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 have that we started digging in we have tremendous opportunities across the board. So we have.
Eliminate the number of positions that <unk> sort of between the clubs and the corporate we have fine tuned many efficiencies in the corporate office.
And Additionally, re wiring some of our structures even in the clubs.
So.
We are very very comfortable.
<unk> you guys to the numbers that Tom and I shared with you.
The IPO, so we sort of gave you guys.
Some margins to margin range for EBITDA.
Plus adding the rent back you guys can take those and we're committed to deliver those.
Those percentages, but I'm confident that we can be.
Slightly rather than 2019 margins under the same front, so that is coming across all aspects of our business.
And there is plenty of opportunities we have implemented more than us.
<unk>.
50%, 60% of those things already.
We are taking necessary expenses, but we have to take to make those adjustments and then we should have a clean slate for the first quarter there going forward.
Got it very helpful. Thank you.
Follow up question I have you.
So I've spent a lot time lately the new clubs in on one wall Street and Dumbo, there with great for them very congratulations how should we think about <unk>.
The economic model for lifetime of clubs like theirs urban type clubs like that youre versus the more traditional centers that you're appropriate historically.
Look when we run <unk> business plan.
Doesn't matter, if it's urban or not we're looking for exactly similar to the rate of return on invested capital. So.
We have a clear advantage in our real estate.
On the sell leaseback world for the ground ups, we have partners who.
I was on the phone with two of them just as early as late last week.
There are always ready they have full trust in lifetime they know.
The legitimate.
Standup company that pays every penny of the rent so they want if they want to add anything into healthy way of life category. They want a lifetime asset don't want anything else. So we have that and then we have all other developers who are building big buildings building apartment building.
<unk> mall owners.
We are we have we're constantly the one part of our company.
Everybody is busy.
Looking at variety of different options. We're 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.
Got it. Thank you very much appreciate it thank you.
Thank you we have next question from the line of Robbie Holmes with Bank of America. Please go ahead.
Hey, good morning, Thanks for taking my question.
Can you talk about by the way great job getting the membership dues per store back to those pre pandemic levels.
Can you talk about.
What you've done in pricing.
With the legacy side as well as the new members and.
Where are you in bringing the legacy members pricing.
Up to where the new members R&D you see.
More opportunity to raise prices heading into 2023.
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 100, Twentyish, one 2020 one right before we went into it.
And I think for the full year 2019 might have been just a couple of bucks less than that.
We're going to finish the year right around 160.
<unk> per membership across the board.
This is really important while a lot of attention has been put under membership count.
Our membership count.
Isn't what pays the bills as 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.
Product services, and we sold them incredibly too cheap and it created issues and then we started to 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 are working on club by club basis to.
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.
In the past our average dues of what we're selling today, it's roughly about 191 months.
So it's about a $30 difference between the memberships, we are selling and.
And the memberships that theyre 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 a lot of those going forward in very small amounts on a monthly basis.
We will hit as people come off of hold.
After a month or so we've give them that price increase if they need to but it's not going to be a large.
But at the churn as the people drop out in those clubs get a new customer every church <unk> <unk> additional revenue.
No.
We've done a great job of achieving our target of 116.
Membership per.
Dollars per membership by end of the year and from here going forward is going to creep up and we probably won't put another major price increase passed onto legacy members.
Maybe a small group of Iran pool season, the rest of them in the September October and November of next year, just like we did this year.
Got you that's very helpful and just a quick follow up.
You guys called out the initiatives small format group training and Aurora and took a ball etcetera.
What is standing out on those initiatives and how is it impacting sort of the demographics of the membership or is it impacting the demographics of the membership. So we're selling all of those programs are already has a different group. This is the basically older people 65, and above $65 65 and above it's Scott.
The qualified memberships have come through the insurance companies.
A lot of them upgrade.
Pay an upgrade fee to our signature fee to make sure. They can get the full use of the club at all hours as well as be able to get pickle ball and other sports they want to get into.
So Aurora is on fire.
Pickle ball is growing.
50% quarter over quarter over quarter there.
Utilization is up we are.
I told you guys, we want to we want to dominate.
This category.
We have over 350 dedicated courts online right now we are gaining about five to six additional courts are weak.
And I expect us to have.
600, 700 courts by end of next year.
We just signed an agreement partnership.
With MLP.
MLP and we have ongoing relationship with the PPA.
I expect us to have 60 to 70000 memberships by end of next year that they are unique member.
Members, playing pickle ball in lifetime clubs and.
I would say half of those.
Our members of our lifetime, we're doing other things and other doing more pickle ball than anything else like myself.
And half would be all brand new customers to lifetime.
Then the other two programs our Dept.
Dynamically engaged personal training, which is a completely new innovation in personal training the way it's executed it's impossible to get that service that quality of that type of a workout online or.
With the app or with a phone or your iPad or you need to be so imagine youre chiropractic physical tariff issue or massage servicing trainer is all in one and completely interactive.
That business is growing very nicely right now quarter over quarter there.
I expect to beat.
2019 personal training numbers in 2023 I believe we got we got we are 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%.
Feel totally excited about dept.
Last but not least small group training, we have invested significant amount.
<unk> dollars in energy and time on ultra fit.
This is a sort of a sprint.
<unk> combined with the functional training intermittently changing back and forth.
Hugely popular is growing rapidly.
<unk> on our Alpha which is our version of high end version of Crossfit workout. So theyre all growing they're part of a signature memberships. So it's much easier for a customer they don't have to buy a membership and getting paid 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 are all working.
We're not doing anything other than doubling down with each and every one of them and these are the reasons. These transformations that pricing strategy. The rewiring of our structure for efficiency all of these things.
This company everybody on my side.
All of 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. Thanks, so much.
Thank you we have next question from the line of John <unk> with Guggenheim. Please go ahead.
Hi, John .
Hello, John John Your line has been on mute.
Joseph Please on mute yourself and ask your question.
Okay. We go to another question and come back to John later.
Thank you.
Move to next question from the line of Chris Carroll with RBC capital markets. Please go ahead.
Hi, good morning.
So as you noted in the prepared remarks, you saw some of our membership growth and three Q versus that kind of expected typical seasonal decline.
And that was with one less opening I think than you were anticipating for the <unk>. So can you talk about what you saw.
That was different from your expectations last quarter with respect to membership growth.
What drove that that modest increase versus the expected decline and to what degree they'd be on hold memberships contribute to that growth.
Mhm.
On hold memberships really have not much of an impact on it at all.
We are right in that 40 to $45 50000 memberships on hold I think is going to hold steady.
Our major.
Our decision was to how to run this programs I just mentioned so that the pool season would be less back there.
But people will come in if they're not going to come in for a full season, they come for pickle ball they come for Aurora there come for.
And because of those is the change in the.
Slight loss of membership to a slight gain of memberships and yes, we expect to outperform those metrics versus 2019, historically until the clubs have well surpassed the.
They're there and our 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.
Past that 2019 performance in traffic not in membership but in swipes.
In.
Revenues of course, both dues in in center.
Got it.
And then.
Just curious at a high level.
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.
But curious to hear your thoughts on just kind of a rebuilding of industry supply post pandemic.
And just generally how the competitive environment just evolving here.
I think I think there is.
As you can see there is a.
Better pressure.
On the mid mid level as always the mid level price points has always been under attack I think it's no. There's no real sign that in the mid level people can really do anything.
So it's really just also that's high end.
And on the low end, you basically have everybody from planet fitness to crunch too.
Dozens of brands.
And I think they will have a bit of a challenge.
With the price.
The supply chain cost.
Increases in construction.
So that's why I think some will you see in all other franchise model once they have a harder time to make the math work.
So in my perspective is in our space and the healthy way of life.
These elaborate athletic country clubs style.
We are sort of the league.
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're delivering to you.
It needed the exact strategy that we deployed we needed to play strictly offense for us.
18 to 24 months since they kind of get us reopened.
Reopened slowly.
And then 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 is a path that you could be growing next next several years. So we have a pipeline.
And we have additional opportunities coming in and this takes me to the next part were really looking forward.
To the the net income that 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 in the second look after mid August as I mentioned, we looked at our trajectory.
And by the $500 million of loss carryover that we have.
Significantly valuable to us.
We can chew that up in the next three years.
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 went to launch and to structure a deal that Dave 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.
And to 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.
There is the mall deals or the apartment buildings locations, we're going to or office buildings that they need us to come in and so we're in a really really great position competitively I don't I don't see anybody you 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.
Of revenue with less than.
$12 million of money is spent on direct marketing half a percent. Unlike some other so-called fitness companies they spend 30% of the revenue.
On marketing we are in an amazing position.
To make sure the.
The D.
The economics of this business model.
Shows up.
Side by side to the quality of our brand.
That is loved by the country.
That's where we're at I don't see any anybody being able to emerge to give any impact to lifetime.
Great. Thanks, so much.
Thank you we have next question from the line of John <unk> with Guggenheim. Please go ahead.
Hey, guys, sorry about the technical difficulties earlier, that's okay, well before I give you John .
Silvio Mark has on actually for John Heimbach will.
Just a quick question for you all.
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 are you safe guarding the experience for your members.
Yeah.
So.
Yeah.
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.
Sorry.
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 the ownership mindset.
Second leader structure, rather than a manager structure and all of our departments.
And.
It's Ben.
No.
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. We're more autonomy. We have eliminated significant lay are a huge layer of cost structure in the corporate office.
Was basically between the executive team and the all the department heads into clubs. The regional area leads regional leads all of that sort of that stuff and basically given the more power to the clubs and in the clubs we have new wiring so its actually across all fronts.
I think our personal training we will deliver.
Better margins.
In 2023 than historically it has.
I really would love to see our corporate overhead be.
Dan surely 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.
The cost of this passed on as a percentage for G&A to the clubs should reduce.
By at least one to one five percentage points.
Great. Thank you.
Thank you we have next question from the line of <unk> Siegel with BMO capital markets. Please go ahead.
Hi, Good morning, this gear on for Simeon Thanks for taking our question.
Just curious you know.
Just given the macro backdrop youre seeing anything in your.
Within your customer base outside of normal seasonality, along the lines of increased churn or.
No resiliency among your member base and anything interesting there maybe you can note.
Yeah, I think for the most part.
We are not seeing.
What are we focused.
Strictly.
Our strategy has been over the last half a dozen years, but then much more swift swing to sort of the top 20% of the market as you guys all well aware of the top 10%.
Spending more money is still than anybody any other category in 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 cash.
Cancel my membership because price of gas is $2 a gallon more so we are completely.
And in a right environment, However, I just wanted to be clear.
We.
Plan for the worst and we accept we expect.
The best of course, so we have.
We are having a very very cautious.
<unk> approach.
In terms of our cash flow and maintaining our liquidity and again as I mentioned and keeping our revolver as dry powder for the most part all through the next year.
But we're not seeing an impact to our customer right now we.
We still expect to have substantial growth in our revenues.
<unk>.
Through the through the 2023 is substantial.
Okay.
Great to hear.
Just as a follow up and Brian you've kind of touched on this a little bit you know.
And any further detail would be great I'm, just understanding the real estate market and how that's evolving and kind of what you mentioned on cost.
Cost and availability of your products for her new builds are you seeing any changes there that are worth calling out across.
Across the sale leaseback and just kind of the Newbuild Capex, that's that's worth noting.
So you basically have the market broken down too.
Those who do sell leaseback and they finance each unit.
<unk> put in to get the right returns figure that 10% cash on cash return.
Need to get a 65% rough and tough give or take 5% 10%.
<unk>.
Financing specific to that asset those types of investments are punitive unless we want to pay a huge cap rate, which we won't.
Is it basically doesn't allow.
The investor with the current interest environment.
To that.
That will not come back if a year from now year and a half from now the interest rates starts coming back down two years from now that portion of the market were to reopen then there are large large Reits sounds again, our partners, who have massive <unk> funds from operation and they have their cap.
<unk> is lined up completely with a <unk>.
<unk> revolver or do they have kind of a fixed.
They pay a dividend under deals that those guys also need.
They still need to grow they still need to put some of that capital to work and grow there and while the rates may move like 25, or 50 basis point, they're not going to move substantially they can do selective deals again our deals are.
20 year leases with 25 years of options.
So these are long long term investments for these companies. So they are not going to.
Shy away from great assets from great companies. So I have never had any doubt ever really it's the last thing I ever worry about us not being able to do sale leasebacks based on the credential of lifetime our status on our relationships that we have.
But.
As far as the construction cost I think you can expect.
Trends in our transitioning transition transition basis, some some commodities like steel or concrete or whatever they go up they come down did 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 cost go back.
Two.
Hmm.
What they used to be pre COVID-19, that's not going to happen. The question is are they going to be up in general.
And are they going to sell about 10, or 15% higher theyre going to settle at 25 or 30% higher.
And so we as you know 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 are we have a lot of latitude with the timing of our start so we owned 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 sale leasebacks done until we see the macroeconomic get more clear and again I want to demonstrate to the street.
Our increased cash flow.
Starting from next quarter, there moving forward.
And so we.
We are very and then we have a lot of opportunities to if we start two or three or four of those clubs six months later or nine months later, we have a lot of other opportunities that could allow us to still have that 10 ish plus.
<unk>.
New New club growth.
From 'twenty, four 'twenty five and beyond.
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.
Great. Thank you appreciate the color.
Thank you we have next question from the line of Dan <unk> with.
Wells Fargo. Please go ahead.
Hey, good morning, everyone and thanks for taking my questions.
So membership growth definitely came in better than the third quarter.
And I appreciate that there is typically negative seasonality, but fourth quarter youre guiding to down again, you have one center shifting out of the <unk> into the fourth quarter.
So just what are the kind of the moving pieces there to think about why.
Fourth quarter membership would be down and is there some conservatism built into that.
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 in mis.
The second thing is seasonally we have lost a lot more memberships in the four core there.
Significantly more than.
Then what we're guiding to guiding you too it's just seasonal it's basically we go through this shift we lose memberships in September October November .
Sort of.
It flatten out.
In December and then we grow massively in.
<unk>.
January and February March and all the way through the June July period.
Which is at a 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 would lose 3000 memberships that's nothing that's a week.
<unk> membership gain in just januarys nothing so it's actually very robust.
Number that we're showing you in.
Not going to look I want to explain to you guys.
With the with the hint with a hint of desire to do some promotional marketing.
Some price points some closeouts.
We could we could change that outcome.
It's just been the Companys 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 great and I don't want to dilute that strategy we have.
Haven't deviated from it from two years ago, when I told you guys.
And we're doing all of this with zero promotions zero closeout zero salespeople and it's working and it's going to allow us to deliver higher revenues and better margins.
Do you guys at a higher NPS than we have ever had before in 2023.
Got it thanks for all the detail.
Brian you talked a lot about the efficiencies at the centers and the focus there on margins I guess, where we sit here today were average.
Presenters.
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 FTE 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 said the higher through this year.
Yeah. So.
I have strict order to our clubs will be incredibly disappointed.
If they are cutting frontline staff if they are cutting.
Our expectations as clubs run like a four season like a Ritz Carlton.
So we're not cutting staff in the locker room, keeping the clubs and massively clean for you people. That's not that's we're 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 Thats, the only place where restructuring their business, where we have more leaders are leading the way demonstrating the work rather than sitting in the offices and having meetings and conference calls so it's across.
The board <unk> is in the Spa is in the cafes.
Again, and the biggest portion of it it's been corporate office biggest for corporate initiatives corporate office.
And everybody who was in between the corporate office and the clubs and that was substantial it was it's been 100% eliminated.
This quarter there were we're not.
Coming out and saying, we're taking one time charges were just paying for it with over performance, but it was our expectation as 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.
Understood. Thanks for the color.
Thanks.
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. <unk> for closing remarks.
I would like to take a couple of minutes here and welcome Bob.
He has an amazing partner is always on and always available to help.
Truly seven days a week.
CFO partner here, Tom has been a absolute gift for me for the last <unk>.
Six seven years, he has been an amazing partner <unk>.
He has built incredible finance.
Team here that they can they can support.
Bob in everything he needs.
As you guys know.
I'm five years older, but Tom and I share the same exact birthday.
Both are.
Jet pilots and we bought do these crazy 100 mile Mountain bike races.
Fully expect expect to be doing.
A lot what Tom on a personal level as time goes on C&I talk regularly is always available to me if I need something.
He's available to him.
Hany, it's something so I want to just truly give him my biggest.
Mark a appreciation here with all of you guys here and I'm going to have Tom say, a few things before we hang up.
Great. Thank you Brian 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 of our other executives that lifetime for all the support and most importantly, thank thank the 30000 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 is positioned going forward.
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.
And I wanted to just take one minute for Bob Bob, Let's just say Hello to everyone.
Hello, everybody, it's great to be on the call here. This morning thrilled to be here at lifetime, a huge thank you to Tom for all his support during this transition that Eni Pat and thank you to Brian for placing your trust and confidence in me as your next CFO Alright, guys. Thank you. So much we'll look forward to be on the call with you guys again beginning of <unk>.
2023, and if you have any questions feel free to reach any one of us III. Thank you so much.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.