Q1 2024 Life Time Group Holdings Inc Earnings Call
Greetings and welcome to the Lifetime Group Holdings, Inc. First quarter 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference.
Is being recorded.
Now my pleasure to introduce your host Danny Matzke, Vice President of corporate finance. Thank.
Unknown Executive: Thank you Danny you may begin.
Unknown Executive: Good morning, and thank you for joining us for the Q1 'twenty 'twenty four lifetime Group Holdings earnings Conference call.
Unknown Executive: With me today are Brahma, Crowdie, founder, Chairman and CEO, and Eric Weaver, Senior Vice President and interim CFO and controller.
Unknown Executive: 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.
Unknown Executive: It was a comprehensive discussion of risk factors in the company's SEC filings, which you are encouraged to review.
Unknown Executive: 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 referred to as net debt leverage ratio and free cash flow.
Unknown Executive: This information along with reconciliations to the most directly comparable GAAP measures are included when applicable 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.
Unknown Executive: With that I turn the call over to Eric Weaver, Eric Thank.
Erik Weaver: Thank you Danny and good morning, everyone. We appreciate you all joining the call. This morning.
Erik Weaver: I will provide an update regarding our first quarter results. The full details of which can be found in the earnings release, we issued this morning.
Erik Weaver: We are pleased with the strong financial results. We achieved this quarter total revenue for the first quarter increased 16, 8% to $596 $7 million versus the prior year.
Erik Weaver: Driven by a 19% increase in membership dues enrollment fees and a 10, 5% increase in incentive revenue.
Erik Weaver: Access memberships increased 5% to end the quarter at more than 802000 memberships and total memberships ended the quarter at approximately 853000.
Erik Weaver: Average monthly dues for $186 up 12, 7% from the first quarter last year.
Erik Weaver: Revenue per access membership increased to $745 from $667 in the prior year period, as we continue to benefit from higher dues increased visits and increased incentive activity now.
Erik Weaver: Net income for the first quarter was $24 $9 million down nine 5% versus the first quarter of 2023.
Erik Weaver: Q1, 2023 net income was elevated as a result of one time net benefit of $8 $7 million related to the sale leaseback transactions and the sale of two trap on events.
Erik Weaver: Adjusted net income was $30 $5 million, an increase of $7.3 million versus the first quarter 2023.
Erik Weaver: Adjusted diluted earnings per share was 15 cents compared to <unk> 11 per share in the first quarter last year.
Erik Weaver: Adjusted EBITDA increased 21, 6% to $146 million and our adjusted EBITDA margin of 24.5% increased 100 basis points as compared to the first quarter 2023.
Erik Weaver: Our strong financial performance continues to drive growth in cash flow and a reduction of our net debt leverage versus the prior year.
Erik Weaver: Net cash provided by operating activities increased 21, 7% to $94 million as compared to the first quarter 2023.
Erik Weaver: We reduced our net debt to adjusted EBITDA leverage to three six times in the first quarter versus $5 two times in the prior year period.
Erik Weaver: We're excited about the continued execution and success of our business with momentum on our side. We are very optimistic about the opportunities in front of us in 2024, I will now turn the call over to Brian.
Brian: Thank you Eric.
Brian: As you would expect from what you just heard.
Brian: Addressing revenues.
Brian: We were pleased with the 597 million, we achieved for the first quarter, there nearly $2 million.
Brian: Above the top end of our guidance.
Brian: But the outperformance drives principally.
Brian: From incremental membership dues and dynamic personal training.
Brian: Adjusted EBITDA of 146 million.
Brian: It was at the top end of our guidance.
Brian: And we achieved a 24, 5% adjusted EBITDA margin for the core there.
Brian: As pleased as we are and our progress here.
Brian: We're going to reiterate our previously issued adjusted EBITDA margin expectation of 23, 5% to 24, 5% for this year.
Brian: Consistent with absolutely normal predictable seasonality a portion of their revenue gain we anticipate for the middle of every year will it be from summer activities, which generate incremental EBITDA, but at lower margins.
Brian: Even more gratifying.
Brian: Access membership at the end of Q1, 2024, where 802000, which is substantially above our expectation.
Brian: This over performance has been a direct result of the strategic initiatives. We have previously discussed with you which include Pickle ball Aurora and small group training.
Brian: And the improved member retention, we currently experiencing which is the best we have ever seen.
Brian: Additionally, we believe we have some membership pull forward into the first quarter. There from the second quarter. There are some people joined earlier in anticipation of the fall season.
Brian: Average dues were 186, a month in line with our expectations.
Brian: Based on the positive trends, we're seeing in our business, we're raising our revenue and adjusted EBITDA guidance modestly.
Brian: Our full year's revenue guidance is now 2.5 to 2.53 billion and our adjusted EBITDA guidance is 603 to 618 million.
Brian: Our priorities for this year remain.
Brian: Growing revenue and adjusted EBITDA per our guidance.
Brian: Second delivering positive free cash flow, we're on track to achieving this objective during the second quarter and we expect to remain free cash flow positive going forward.
Brian: Finally.
Brian: Reducing our net debt leverage ratio to under three times sooner than later.
Brian: And certainly before end of the year.
Speaker Change: Lastly, I want to personally thank each and every lifetime team member for your relentless commitment to delivering the ultimate experience from the member point of view, which drives the amazing financial results. We're enjoying today. Thank you.
Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a 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 for participants.
Speaker Change: And speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: Thank you. Our first question is from John Heimbach <unk> with Guggenheim Partners. Please proceed with your question.
John Edward Heinbockel: Hey, Brian I wanted to start with engagement right because I know you've given that metric and that continues to improve I think it was 135 a year last we heard so what what what has continued to happen with engagement.
John Edward Heinbockel: You mentioned the dynamic personal training, how do you guys think about wallet share.
John Edward Heinbockel: With with incentive revenue and the opportunity there because obviously your members have a pretty big wallet.
John Edward Heinbockel: Yes.
Speaker Change: Thanks, John D.
Speaker Change: From a personal training standpoint.
Speaker Change: I'm a personal training really has.
Speaker Change: In sum initiative, we launched almost two years ago I've been working on that brand and we really have amazing success with it right now.
Speaker Change: We have the most number of almost double the number of personal trainers are flying.
Speaker Change: The momentum is strong.
Speaker Change: The execution is the best I've seen the casting gives great.
Speaker Change: And we are really extremely pleased with what my team is.
Brian: Delivering right now we are seeing continued growth.
Brian: And engagements in the personal training the connectivity between the members and personal training is improving.
Brian: And so that that was the most important piece of our in center.
Brian: As we've talked about before the kids programming has been grade summer camps have been great.
Brian: Spar and.
Brian: Cafe have been the focus for this year to improve.
Brian: And we have tons of opportunity there and we're seeing.
Brian: Really the initial initial baby steps in improvement in those as well.
Brian: So at this point, John we just really have a very very optimistic view.
Brian: Of how all of these programs are coming from an engagement standpoint.
Brian: We're seeing the most.
Brian: Engaged customer.
Brian: But we have ever had in the history of the company, which directly resulting in the best retention.
Brian: We are seeing and it's continuing to trend.
Brian: Better than our own expectation, which is pretty awesome.
Brian: Great.
Speaker Change: As a follow up right.
Speaker Change: Without without stealing Thunder from your analyst day, but I know you you recently I think introduced this concept right of large format equivalent clubs and how you want to think about the pipeline. So just maybe at a high level. How do you think about that and obviously you can mix and match.
Speaker Change: All right.
Brian: Urban residential and office buildings, and you have a lot of Optionality, but how do you think that plays out over the next two or three years Wow. That's a great. Great question again, John at the end of the call today, we're going to talk about our Investor day that we're planning them give you full details of that.
Brian: For my third yes.
Brian: Our goal is to flush out the description.
Brian: In a nutshell, we as we've stated before.
Brian: Have the same expectation.
Brian: Yeah.
Brian: Levered rates of return, although any type of facility, we do which is roughly between 30% to 35% Levered return on our invested capital net invested capital, but if it's upfront invest.
Brian: Investment coming from landlords or building owners et cetera, or.
Brian: If and when they sell leaseback conversions and net invested capital that we're looking for is always between 30, and 35% and what we're going to do.
Brian: That day is demonstrate to everybody.
Brian: With a variety of examples on all of these.
Brian: Are the same so then two in to try to eliminate the confusion.
Brian: For the investors our target is between eight and 12.
Brian: A lot of fees.
Brian: In a given year.
Brian: And really averaging about 10 per year now a lot of these things as you know they have very long gestation time. So sometimes you may have a year that comes in on the lower end of the age that means a couple of those clubs that we should have opened out year.
Brian: Have some delays in it so the following good we should do 12, so for modeling purposes, what we're going to guide everybody to is to about 10 <unk> per year.
Brian: And they remain there of what it takes to deliver a double digit.
Brian: 10% plus revenue and EBITDA growth.
Brian: This is not for this year, obviously based on what we have just guided to is much higher than that now, but for 25 and beyond to get to that 10% revenue and EBIT growth. We will then need to have about 45% of that come from our same store and the rest of it needs to come from additional Oh Hello.
Brian: The expansions and other initiatives that we have in place and we felt really really great about our strategy.
Brian: Outlook and the execution of our team Yeah, Hey, John This is Eric if I could just add to that I think another another key benefit of the various formats here as our total addressable market is substantially bigger and I think that's one thing that's very important as we continue to think about our growth.
Speaker Change: Great. Thank you guys.
Speaker Change: Thanks.
Speaker Change: Yeah.
Speaker Change: Our next question is from Megan Alexander with Morgan Stanley. Please proceed with your question.
Megan Christine Alexander: Hey, good morning, Thanks, so much.
Megan Christine Alexander: I'm wondering what you thought.
Megan Christine Alexander: Thanks, just wanted to follow up Brian you alluded to it a bit in terms of the updated guide and taking it up by more than the <unk> you talked a little bit about it driven by current trends do you also talked about some pull forward of membership into one Q. So maybe can you just give us a bit more color on what's exactly changing in the outlook is it.
Megan Christine Alexander: Is it that you're getting some of these pool members that a bit earlier, which tend to have a higher a higher dues number given the pool activation fee and you're just getting more revenue out of them over the season or maybe just.
Megan Christine Alexander: To help us tie those comments together in terms of what's changing in the outlook yeah.
Speaker Change: That's great.
Speaker Change: So the most important thing Megan is retention, we keep going back we keep going back and emphasizing to everyone.
Megan Christine Alexander: High end leisure business that is based on subscription.
Megan Christine Alexander: The most important factor the most important kpis retention.
Megan Christine Alexander: And we are trending to roughly 10% better retention than we've had ever in the history of the company.
Megan Christine Alexander: And that alone allows to see that our forecast for our dues is basically significantly higher than three months ago at this point and therefore, our forecast is just purely based on facts.
Megan Christine Alexander: Our guidance is purely based on our forecast.
Megan Christine Alexander: The forecast just easily suggest.
Megan Christine Alexander: We should be able to deliver to the numbers, we just guided two bullets on topline and bottomline.
Speaker Change: Okay. That's helpful. Thank you and then again you alluded to this a bit I wanted to talk a little bit more just about the EBITDA margin center Opex was a bit higher than what the street was looking for and you didn't take the guide up as much.
Speaker Change: On the EBITDA line, so maybe not getting the leverage on sales. It seems it's driven by where that upside is coming from but I guess just bigger picture. What are you seeing in the course of the club and how are those trending and is is there some gating factor to getting EBITDA margins above 24, 5%.
Speaker Change: Is this the right level for the business, how should we think about that a bit longer term in terms of you're letting that EBITDA margin kind of drift higher over time, yeah. Let's go through this we are extremely happy with a 23.
Speaker Change: A half to 24, 5% EBITDA margin.
Speaker Change: Our focus is always to deliver the best member experience.
Speaker Change: Long long lasting enduring business.
Speaker Change: So.
Speaker Change: What I'm really proud of is the work that my team has done here.
Speaker Change: We really invented this business over the last four or five years.
Speaker Change: With a clear vision that the business is not going to be going forward. The.
Speaker Change: The same as it was before.
Speaker Change: All the.
Speaker Change: Decisions that was made during the last four or five years that we anticipated higher cost, we anticipated higher and higher.
Speaker Change: Interest rates, we anticipate that way more wages and much much higher construction cost development cost.
Speaker Change: Therefore, we made the proper adjustments, we made all the necessary adjustments.
Speaker Change: The EBITDA plus rent margin.
Speaker Change: It is now roughly 5% higher than it was at our banner year of 2019.
Speaker Change: Therefore.
Speaker Change: We have all the mark all of them latitude all this space.
Speaker Change: To pay.
Speaker Change: A little higher cap rate for ourselves these facts.
Speaker Change: And get those deals done we have the ability to cover all of the increased <unk>.
Speaker Change: Payroll. So we can continue to hire the best talent.
Speaker Change: And pay them, what we need to pay them to keep them in the clubs.
Speaker Change: And the business the new business model the whole model.
Speaker Change: Inclusive of all these increased costs.
Speaker Change: Our superior to the model, we had 2019 than before.
Speaker Change: Now all of it has been anticipated there is no surprise.
Speaker Change: And we are Super happy.
Speaker Change: Is there a chance that the EBITDA margin could be more than 24, 5%, yes do.
Speaker Change: Do we want to guide you guys to that right now absolutely not so we're just giving you the 23 and a half to 24 and a half firmly.
Speaker Change: And making sure that we can deliver our.
Speaker Change: Sure.
Speaker Change: Our objectives are promises through that through that through that range.
Speaker Change: Great. Thanks from Mhm.
Speaker Change: Yeah.
Speaker Change: Our next question is from Brian Nagel.
Brian William Nagel: Oppenheimer <unk> company. Please proceed with your question.
Brian William Nagel: Good morning.
Brian William Nagel: Good morning, Ryan.
Brian William Nagel: First and foremost.
Brian William Nagel: Congrats on another nice quarter.
Ryan: Thank you my friend.
Speaker Change: The first question I have.
Speaker Change: Talked a lot about driving the business towards free cash flow.
Speaker Change: Positive free cash flow you've read away at that debate these ratios are coming down.
Speaker Change: Maybe you could talk.
Speaker Change: Color you can give us on how you plan to your plans to address that but getting your balance sheet that comes due in early 2026.
Speaker Change: As you would anticipate.
Speaker Change: Better than anybody Brian we're always months and months and months that had we're working on those things right now.
Speaker Change: We do have some.
Speaker Change: We do have.
Speaker Change: All sorts of things planned out.
Speaker Change: Our expectation is that that will get done sooner than later with much better interest rates for our next year.
Speaker Change: And the.
Speaker Change: We have had.
Speaker Change: The much the most massive.
Speaker Change: Club opening in.
Speaker Change: In the first half of the year instead of spread out or the back half like I've seen some years this year.
Speaker Change: So.
Speaker Change: We are we just opened three or four amazing successful clubs.
Speaker Change: Beating our expectations, beating our records in every case.
Speaker Change: But we spent a lot of money to get those opened up.
Speaker Change: So, but as we go through the second quarter there.
Speaker Change: You're going to see at the end of the second quarter, the shift where we deliver free cash flow positive. This quarter. There that's after all growth capital.
Speaker Change: We start seeing the debt.
Speaker Change: Coming down that debt to EBITDA adjusted EBITDA coming down.
Speaker Change: Pretty nicely from this quarter therefore worth.
Speaker Change: And so we are absolutely thrilled we are we are exactly on our plan or better in every case.
Speaker Change: No. That's very helpful. I appreciate that and then my follow up question.
Speaker Change: Bigger picture.
Speaker Change: And we're looking at the results of your comments because it seems to be performing extraordinarily well a question I'll ask me just given market concerns.
Speaker Change: More economic et cetera.
Speaker Change: Across the business in particular on the membership side are you seeing anything at all anywhere to suggest that more cautious member.
Speaker Change: Uh huh.
Speaker Change: Within your within your model.
Speaker Change: So every month, it's a fantastic question, Brian I'm glad you're asking it.
Speaker Change: And I'm thrilled to answer it every single month, we're seeing a record month on our personal training over the month before.
Speaker Change: We're seeing record retention over it before.
Speaker Change: We are getting more clubs as I told you guys on the last call going on a waitlist if only is simply a function of.
Speaker Change: Making sure we still deliver member point of view and that sort of a highest quality leisure companies.
Speaker Change: That you can possibly expect in terms of service level that so if people want to learn about lifetime. They get the most amazing reception yet we do have to you know.
Speaker Change: Hold the memberships back in a little bit to deliver the experience. We want do you want to handle that correctly. So the only thing we're taking it's time to train our leadership in every club when they're ready to put their clubs on a wait list for putting more clubs on a wait list.
Speaker Change: So honestly, we have more demand.
Speaker Change: And then work we're concerned about.
Speaker Change: I have personally expected to see some weakness.
Speaker Change: The last 18 months and I have been wrong.
Speaker Change: Have been wrong and wrong and wrong and we kept thinking that the customer is going to get tired, they're going to get tired of it we're not seeing anything in fact, the only trend we see.
Speaker Change: I emphasize this before Brian you know at the most important key kpis is the retention and we are seeing divest retention we've ever seen.
Speaker Change: Okay.
Speaker Change: Very helpful Bryan.
Speaker Change: Best of luck with balance of year.
Speaker Change: So much.
Speaker Change: Our next question is from Alex Perry with Bank of America. Please proceed with your question.
Alexander Thomas Perry: Hi, Thanks for taking my questions here and congrats on a strong quarter I guess just first maybe following up on your last point can you give us an update on how many of your clubs or on a waitlist and are you considering raising prices where demand continues to exceed supply like what's sort of the pricing outlooks that we should be.
Speaker Change: Embedded in for this year. Thanks.
Speaker Change: Sure Great question, Alex Great to hear from you.
Speaker Change: The one thing I wanted to make sure we don't create a pattern for.
Speaker Change: It's creating a metric around how many clubs on a wait list. So theres just becomes one more thing that people get focused on it's just what we wanted to insinuate to you guys is that.
Speaker Change: We're getting more clubs getting to that point, where.
Speaker Change: To manage the experience for the customers, who are already and we have to be thoughtful about not having a free for all for people dropping in right. So the wait list is allowing us to sort of gauge the inflow of the new members in the busy clubs and all I can.
Speaker Change: I can tell you right now.
Speaker Change: Italy are giving.
Speaker Change: As many clubs on a waitlist as we can have our team and our processes properly properly in place to execute that with the with a high.
Speaker Change: Execute execution level.
Speaker Change: So I don't want to create a metric, but I can tell you by end of this month.
Speaker Change: It will be nearly.
Speaker Change: Three or four times, how many clubs are on the wait list.
Speaker Change: Just just at the end of January so, it's but it's really a function of us being able to roll it out.
Speaker Change: Without creating an.
Speaker Change: Attitude that we're too good or anything like that for the customer who loves lifetime Brad.
Speaker Change: That's really helpful. And then my follow up question was you made a comment in your prepared remarks about.
Speaker Change: Bit of a pull forward in Q1 Q on center memberships maybe.
Speaker Change: Maybe just help us think about how we should be thinking about the second quarter on any sort of key kpis I guess on center memberships, specifically and what do you think sort of driving that pull forward is it due to people being worried about.
Speaker Change: And to the club during pool season, because of the waitlist. Thanks, Yeah, Yes, I think as a function of that and the fact that we normally have.
Speaker Change: As summer pool pass so that the implementation in the busier clubs, we charge a fee to get the people into sort of discouraged people, who joined just for those three or four months.
Speaker Change: Which we have happening every year. So you guys know we have a big sign up May and June and then we have a big drop out September October, which we really don't like so we're always trying to figure out a way to discourage that behavior without.
Speaker Change: Without making the customer feeling alienated so in the past we have introduced this sort of them.
Speaker Change: Starting from April we'll layer in.
Speaker Change: Tom.
Speaker Change: Fees for the pool and then it just accelerates into May June.
Speaker Change: Those fees goes up higher and some some people who will have the pattern. They know that when I joined for the summer they're smart enough to join end of March are not.
Speaker Change: Not avoid paying any of those fees, but they are paying an extra month to deal with so at the end of the day. It all works out I just want to caution.
Speaker Change: The analyst.
Speaker Change: <unk>.
Speaker Change: And the fact that our over performance on membership.
Speaker Change: I just didn't want people to just take that and multiply as for every quarter going forward.
Speaker Change: And get ahead of our guidance.
Speaker Change: The revenue and EBITDA and then again you have a choice of doing what you wanted to do and we're just trying to make sure. We give you guys. The best information and the best guidance as possible.
Speaker Change: Perfect. That's very helpful best of luck going forward.
Speaker Change: Thank you so much Alex.
Speaker Change: Thank you. Our next question is from Simeon Siegel with BMO capital markets. Please proceed with your question.
Speaker Change: Yes.
Simeon Avram Siegel: Thanks, Hey, guys. Good morning, hope you're doing well.
Simeon Avram Siegel: Brian.
Simeon Avram Siegel: I was hoping to follow up on that a little bit actually because I mean, it's interesting. So one is it is it new this idea of people are signing up earlier to avoid these fees and maybe does that helps smooth out seasonality a little bit does it give you a little bit more predictability. If you are now, bringing those people in earlier and keeping them for longer or is it.
Simeon Siegel: Or is it normal and they were just where more people that data. So maybe any context around that any way to quantify how many pulled forward earlier and whether this is going to be just a new dynamic and smooth.
Speaker Change: Yeah, I think I think if you take the number above the number that was consensus is about 795.
Speaker Change: 7000, I would say, it's about half and half about half of it was extra pull forward.
Speaker Change: Other half was basically better retention et cetera, So where we are.
Speaker Change: We're cautious on all of this Simeon because.
Speaker Change: So really the.
Simeon Siegel: We're balancing on what the Street's may want but more so on what our customer reaction is to our company.
Simeon Siegel: Our team member and I, just can't emphasize how pleased I am with.
Simeon Siegel: With the overall field and the health of the business. The clubs are busy. The members are happy team members are in a great place, we're getting more and more amazing qualified people coming in wanting to be a part of the lifetime. So I just really don't see any negative trends at the same time, we just.
Simeon Siegel: Want to make sure we deliver a balanced tone in terms of not getting ahead of ourselves in terms of anything that's it.
Speaker Change: Okay, Yes that makes sense I guess my point of my question was have you found a way to stretch the summer members into another month or so because you're again in this avoid fees, but have them there longer.
Simeon Siegel: Exactly.
Simeon Siegel: Once again, 100% correct, that's what's happening there just basically ours our strategies.
Simeon Siegel: Our basically to have the longest term member.
Simeon Siegel: Prefer not to have people drop in drop out.
Simeon Siegel: It's more of a country club.
Simeon Siegel: And our mindset.
Speaker Change: And we Werent able to do this simeon.
Speaker Change: Prior to 2000.
Speaker Change: 2020, because we were doing so much promotions. So we almost invited people for this behavior.
Speaker Change: And now it's finally, taking hold.
Speaker Change: There are a couple of years and it really is about two years now since we were officially allowed to run our business without any restrictions across the across the northern nor than northern out very far.
Speaker Change: And.
Speaker Change: And now we're seeing things have kind of balanced out.
Speaker Change: The beauty of it is that we are delivering a much much more higher end leisure athletic country club business than we were doing in 2019 and the results are speaking for themselves.
Speaker Change: Okay. That's great. Thank you and then just last one you spoke you spoke to this.
Speaker Change: Different ways, but just maybe understanding that some of the growth in the center Opex expenses is tied to the ramping centers is there any way to just help maybe simplify what the what you think the underlying change in existing center op expenses would be fair to strip out the new <unk>.
Speaker Change: So look at all times.
Speaker Change: Anybody who tells you they are running everything perfectly.
Speaker Change: I'd have to believe.
Speaker Change: They're lying because then I would be lying if I told you everything is running perfectly.
Speaker Change: There is always opportunities to improve.
Speaker Change: We have had a bit of cost creep.
Speaker Change: It's been already corrected.
Speaker Change: Number one number two there is some that is unavoidable, but it was all planned in our strategy to change our business model.
Speaker Change: So just wages alone our four 5% higher.
Speaker Change: On the on the wage side and then we have more increased swipes and then hourly Aurora.
Speaker Change: Wages that go to service those swipes correctly are also up higher so the clubs we're spending we are spending more money.
Speaker Change: Sales and marketing.
Speaker Change: And we are spending a lot more money teaching classes that provides the best engagement in our clubs.
Speaker Change: So I don't.
Speaker Change: I don't know how else to explain to us I think the overall.
Speaker Change: We expect that the cost to go up.
Speaker Change: That's why we guided to what we guided we expected the cost to be up higher.
Speaker Change: We expect that our revenues will be higher.
Speaker Change: Spector our engagement be higher.
Speaker Change: We expect our retention to be better. So all of these things are coming right in line with our expectation slightly better.
Speaker Change: Or right in line with our expectations.
Speaker Change: Wages.
Speaker Change: Wages aren't going to go back down Simeon anybody is sitting there thinking wages are going to go down I don't know what theyre thinking the radios are going to go up they're going to keep going up.
Speaker Change: In order to employ happy happy team members.
Speaker Change: Who can afford to pay their bills.
Speaker Change: You've got to pay them enough to have the best employees in your in your in your company. So that's just that's just something everybody needs to plan for and then you need to see if you have the ability to deliver the revenues to delivery our margins and we've been able to do that.
Speaker Change: Grateful that the team has been able to execute with such a great plan.
Speaker Change: Sounds great best of luck for the rest of the year.
Speaker Change: So much.
Speaker Change: Oh.
Speaker Change: Our next question is from Chris <unk> with Deutsche Bank. Please proceed with your question.
Chris: Hey, good morning, guys and nice very nice quarter.
Chris: Thank you so much.
Chris: Sure. The first question is really about.
Chris: You've talked about outperforming all your expectations and it's kind of existing clubs new clubs.
Chris: <unk>.
Speaker Change: Change.
Speaker Change: Economics of when you look at new centers, whether it's conversion or ground up I mean is it basically enable you to.
Speaker Change: So it's kind of raised the underwriting budgets on stuff you look at maybe things fall into.
Speaker Change: A bucket of penciling out better than they did a couple of quarters ago was there any of that to think about.
Speaker Change: Yeah.
Speaker Change: Everything is in line.
Speaker Change: Let me emphasize this.
Speaker Change: Our clubs are costing significantly more.
Speaker Change: Any measure.
Speaker Change: Real estate cost more interest rates are higher.
Speaker Change: Construction is significantly higher.
Speaker Change: Payroll is higher.
Speaker Change: Our revenues are higher.
Speaker Change: So when we look at the business plan, which we approve.
Speaker Change: With those targeted net.
Speaker Change: Invested capital returns, which I told you 30% to 35%.
Speaker Change: Well, we consistently see when we come back three years four years later and look at that class of clubs.
Speaker Change: And see how did they perform their business plan.
Speaker Change: It's the same pattern.
Speaker Change: We have spent more.
Speaker Change: And we have.
Speaker Change: To elaborate more and the rate of return has remained constant.
Speaker Change: We are seeing right now is our new clubs opening in the last year year, and a half and now opening today.
Speaker Change: They will have a higher revenue per square foot.
Speaker Change: Also cost more to build but they also have revenue more revenue per square foot more margin than the old facilities because of the legacy memberships that theyre inside of those memberships in those clubs older clubs that will take time.
Speaker Change: Give it five.
Speaker Change: For 10 years.
Speaker Change: My expectation is the legacy clubs will catch up with the new clubs.
Speaker Change: Take a long time, because we've told you we're going to raise doors dues extremely methodically and slowly so the customer remains loyal to lifetime.
Speaker Change: <unk> of that.
Speaker Change: From modeling standpoint is that we again, we've been consistent about this 4% four 5% same stores.
Speaker Change: For years to come is really a function of the fact that 100 for the clubs have the ability to keep going up to catch up with the revenues and the margins of the new clubs. So.
Speaker Change: It's really all working for US we're thrilled about what this outlook looks like for 'twenty four 'twenty five 'twenty six 'twenty seven.
Speaker Change: And again I am just so thrilled with the fact that we made all the adjustments that we made because our business.
Speaker Change: Model today is enduring all of those things I mentioned to you higher interest rates more wages and more construction cost more supply costs or our business model is paying for all of those.
Speaker Change: Denver, So and I just can't be more grateful to see where we're at right now.
Speaker Change: Yes, thanks, Rob.
Rob: Thank you very helpful and great Great perspective, and just a follow up and then it kind of goes back to the to the sale leaseback outlook.
Speaker Change: Understanding that there's a general view that rates, maybe stay higher for longer but we've also heard the largest player in private credit say, hey, they're not waiting for rates come down there youre going to invest now do you guys sense any change in your potential buyers and wanting to kind of move forward on I'm looking at.
Speaker Change: So myself.
Speaker Change: Yeah. So we are in and under LOI at this point in some deals.
Speaker Change: We will announce when it's appropriate.
Speaker Change: When we have we have full commitment.
Speaker Change: On some deals.
Speaker Change: Similarly, what I have said repeatedly consistently these deals are 25 years 2025 year leases with another 30 years of.
Speaker Change: <unk> with fixed bumps in dose so the way we look at the way you look at our rent is based on GAAP rent. The number we'd give you is a GAAP rent when you look at the gap brand as a straight lining all of that when you. When you look at the difference between what the rates would have been.
Speaker Change: Couple of years, two three years ago, and what they will be now.
Speaker Change: On a GAAP basis, there may be up 50 basis points.
Speaker Change: We are generating.
Speaker Change: How much more margin at the club level that is almost non event, we can endure that extra 50 basis points extra accretive on a GAAP basis.
Speaker Change: And it won't change the outcome and the business will produce the margins that we are committing to you guys going forward. So we are in a really really good place.
Speaker Change: Looking forward to see what we can demonstrate over the next several months.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks, Bob.
Speaker Change: Hmm.
Speaker Change: Okay.
Speaker Change: Thank you our next question Ricky.
Speaker Change: Richard with Northland Securities. Please proceed with your question.
Richard: Hi, Brian Congrats on the great quarter.
Richard: Just quickly what's the current market value of your unencumbered facilities and assets and how many of these could be subject to a sale leaseback if needed or desired.
Speaker Change: Yes. This is a brilliant question.
Speaker Change: So we have.
Speaker Change: So probably $3 5 billion today market.
Speaker Change: If I took our assets.
Speaker Change: And tried to sold them for replacement cost.
Speaker Change: It would be probably $3 5 billion.
Speaker Change: To be to be realistic about $2 $5 billion from one reason or the other.
Speaker Change: It's almost.
Speaker Change: Punitive to make a sale leaseback.
Speaker Change: But roughly a billion of it.
Speaker Change: We could get into some sort of a formula that would actually work.
Speaker Change: And that would be.
Speaker Change: Some sale leasebacks of the <unk>.
Speaker Change: All their clubs, which we would have substantial tax gain.
Speaker Change: With some sale leaseback of new clubs, where we.
Speaker Change: Keep 20% to $25 million of our cost.
Speaker Change: Right.
Speaker Change: To build that facility as the net invested capital, but if we sell them early on before we have depreciated them.
Speaker Change: Then that $20 million to $25 million can show up as a loss to offset that.
Speaker Change: The tax gains on the older assets. So this is a unique opportunity over the next couple of years, where we can mix old and new throughout the year on sale leasebacks to sort of mute out the.
Speaker Change: The impact of the gains or losses from the sale leaseback.
Speaker Change: And then because I really want the market to see the natural.
Speaker Change: Potential growth of this company.
Speaker Change: And so that also we also we don't have any tax leakage. So we have some we're still enjoying some loss carryover from the Covid period.
Speaker Change: We.
Speaker Change: We forecast such a increased amount of EBITDA.
Speaker Change: And net income growth.
Speaker Change: We wanted to make sure we protect as much of it as we can so we want to use those loss carryover is not for sale of.
Speaker Change: Older assets, we want to use that to offset and maintain our cash flow to pay for our growth.
Speaker Change: So balancing all of those things.
Speaker Change: To answer your question I think.
Speaker Change: Although the $3 5 billion I think we could do in the right environment as much as 1 billion I'm not telling you we're going to do a billion I want to be clear, what you were asking and I'm, giving you pure answer we could do as much as it's been brilliant.
Speaker Change: All of it, but we have to mix and match it.
Speaker Change: Yeah.
Speaker Change: Got it got it.
Speaker Change: I emphasize emphasize emphasize.
Speaker Change: We're not saying we will do that much we won't do that much. There is no comment on that I'm just purely answering your question.
Speaker Change: That was about $2 5 billion and $3 5 billion is almost.
Speaker Change: Like punitive in the rest of it we could find a path for it.
Speaker Change: Thank you that was that was very helpful. And then secondly.
Speaker Change: Yeah. So far what we have is record breaking numbers. That's all I can tell you we we have been.
Speaker Change: Club off their club, we've seen record breaking numbers.
Speaker Change: These clubs are achieving.
Speaker Change: Contribution margin positive much faster than I've seen in the history of the company. So we're absolutely thrilled with what we're seeing in those results.
Speaker Change: Great. Thanks for taking my questions.
Speaker Change: Thank you so much.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question is from Dan Polyps or with Wells Fargo. Please proceed with your question.
Speaker Change: Hey, this is Michael Hirsh on for Dan today.
Michael Hirsh: Could you talk about Capex going forward this year and if anything has changed from last quarter's commentary and maybe how we should think about growth versus maintenance going forward.
Speaker Change: Yes. This is Eric I can take that one.
Erik Weaver: Now relative to last quarter, Nothing's really changed there capex, especially our growth Capex is coming in where we expect.
Erik Weaver: For us we're kind of looking at maintenance capex at roughly roughly $10 per square foot and so thats kind of how we're modeling out and.
Erik Weaver: And the way we are looking at that maintenance capex to be clear.
Erik Weaver: So when you look at the last years square footage at the end of the year by the billions.
Erik Weaver: 17 million square feet.
Erik Weaver: We apply it for modeling purposes, you apply $10 a foot that's about $170 million.
Erik Weaver: Now the way that 170 million is broken down to I would say, it's about half and half about half of it five bucks of it would be what would require.
Erik Weaver: Spend to maintain your current EBITDA.
Erik Weaver: Maybe plus two or 3% just to sort of cover the inflation on that EBITDA and the other half.
Erik Weaver: The other $5 we spend in the clubs is for re modernization reinvention.
Erik Weaver: And technology.
Erik Weaver: Basically investments, which we expect to get additional return from on top of that so we try to.
Erik Weaver: To make it easy for people to model you could just take the last year's deployed square footage.
Erik Weaver: Applied $10 to that so.
Erik Weaver: So this year would say, okay $170 million to $175 million and then we will take.
Erik Weaver: The remainder of it if we do equivalents of <unk> fees.
Erik Weaver: After their net net after sale leaseback, where all of that net investments I'll call. It $25 million. A piece is $2 50, you added up we're generating enough free cash flow from our business to actually execute that and Thats. The way. We are looking to go forward to be able to continue to deliver.
Erik Weaver: The 10 other fees per year.
Erik Weaver: And free cash flow positive.
Speaker Change: Thank you.
Speaker Change: Thank you so much.
Speaker Change: Oh.
Speaker Change: Thank you. Our next question is from John Baumgartner with Mizuho Securities. Please proceed with your question.
John Joseph Baumgartner: Brian I'd like to ask about the new Euro program I recognize it's early days, but I'm curious as to any initial takeaways you have at this point as the program Rolls out I think bigger picture do you see anything that would suggest an opportunity to bridge them Euro with Aurora.
John Joseph Baumgartner: And maybe enhance the offerings for active adult as an incremental source of in center revenue I think, especially when you're talking about <unk> or joint health and maybe even the opportunity to gain some traction with the Medicare plus or other insurers for preventative health, where it's a win win just curious how broad do you think about a concierge type service across your member base.
Speaker Change: So.
Speaker Change: I first.
Speaker Change: First part of your question.
Speaker Change: We.
Speaker Change: Committed.
Speaker Change: We're not going to try to.
Speaker Change: Numbers associated with <unk> to deliver.
Speaker Change: The to deliver the business model that we want and we're working on that we're very pleased.
Speaker Change: With the demand that we see for that.
Speaker Change: And we are working on.
Speaker Change: Casting more.
Speaker Change: Doctors and physician assistance to be able to handle the traffic that is coming our way.
Speaker Change: So I would consider that business.
Speaker Change: One that we will develop to a successful model.
Speaker Change: And rollout.
Speaker Change: Will you see a number that would be material impact this year the answer is no.
Speaker Change: Will it have the opportunity to start having a small impact in 'twenty five and then growing to $26 seven absolutely.
Speaker Change: Is that a crossover between the Aurora customer.
Speaker Change: The meal.
Speaker Change: Yes, but it's not the bulk of it the bulk of the mirror our customer is the person who is going to look for vanity.
Speaker Change: We're going to look.
Speaker Change: They want to look great they wanted to.
Speaker Change: Have I don't know.
Speaker Change: Vibrant.
Speaker Change: Enthusiasm towards things they want to do in life.
Speaker Change: And so theyre looking for ways to enhance.
Speaker Change: Look.
Speaker Change: Or performance right.
Speaker Change: And the science is going to allow people to do this.
Speaker Change: Our approach is to caution.
Speaker Change: People to make sure they will own the engage on those things that have been scientifically proven to be.
Speaker Change: Safe and effective.
Speaker Change: Just jump on are you sort of a snake oil sale.
Speaker Change: Sales pitch that is taking place unfortunately with these things when they get go in and there is some good there's some truth to some of these things. There is also a significant amount of.
Speaker Change: Hype.
Speaker Change: Misuse of that information and we are always going to do the right thing by the customer.
Speaker Change: And I just don't want to guide the financial community to trying to get numbers put into this it's not necessary or our growth is pretty fantastic with all of it and when we rollout mirror on a national level. So ill just add to the something we saw really good.
Speaker Change: Okay.
Speaker Change: Understood. Thanks, Rob.
Speaker Change: Yeah.
Speaker Change: Thank you there are no further questions at this time I would like to hand, the floor back over to Brian Crotty founder and CEO for any closing comments.
Brian Crotty: Well thank you.
Brian Crotty: And thanks again for joining us this morning, we're off to a great start.
Brian Crotty: To what should be a milestone year for us.
Speaker Change: And in efforts.
Brian Crotty: To share insight into our company.
Brian Crotty: Plans and our strategy, we are excited to be hosting an investor and analyst day on may 30th.
Speaker Change: Hearing twin cities.
Speaker Change: We have a comprehensive agenda that will include the key milestones in our history.
Speaker Change: Have led us to making into making us who we are today.
Speaker Change: As well as tackling many of the key investor topics that we feel are not fully understood.
Speaker Change: By the Investor community. Most importantly, we have a number of opportunities.
Speaker Change: That'd be one I'm talking about for investors to hear from and interact with our deep management bench.
Speaker Change: Institutional investors should reach out to our investor relation team for more information.
Speaker Change: The contact information is on the press release issued this morning.
Speaker Change: As well as our IR website.
Speaker Change: With that have a great rest of the day. Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.