Life Time Group Holdings, Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to the Life Time Group Holdings Conference Call to discuss financial results for the Fourth Quarter and Full Year Fiscal 2021. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given 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 call 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's a comprehensive list of risk factors in the company's SEC filings, which are encouraged to review. Also, the company will discuss certain non-GAAP financial measures, including adjusted EBITDA and free cash flow before growth capital expenditures. This information along with reconciliations to the most directly comparable GAAP measures are included in the earnings release issued this morning and the company's 8-K filed with the SEC and on the Investor Relations section of Life Time's website. On the call from management today are Bahram Akradi, Founder, Chairman, and Chief Executive Officer, and Tom Bergmann, President and Chief Financial Officer. I will now turn the call over to Mr. Akradi to get started. Please go ahead, sir.

Good morning, and thank you for joining our fourth quarter and year-end earnings call. I am pleased to share that we had a very good fourth quarter. Our revenue was slightly ahead of guidance and adjusted EBITDA was in line with our previous guidance despite the heavy headwinds from Delta and Omicron. The timing of these COVID variants, coupled with significant mask and vaccine mandates, was very disruptive to membership recovery trends in December, January, and early February. However, from mid-February onwards, we are seeing great momentum in club traffic and membership recovery. Our main focus for 2022 is steep revenue growth throughout the year to levels in the fourth quarter that positions the company extremely well for 2023. We made a very decisive decision to continue the offensive strategy we started in 2021 through the Delta and Omicron headwinds. We believe that these strategies have put us in a fantastic position to capture significant additional memberships at substantially higher average dues. Our center growth pipeline is the most robust I have seen in nearly 30 years. Throughout the pandemic, we established a high trust level with our real estate partners by paying 100% of the required rent, resulting in even closer relationships. In addition, our partners are experiencing the very positive impact of Life Time and the financial benefits it brings as a country club in their development. We continue to see an increasing number of urban and suburban opportunities from these relationships. For 2022, we plan to open 12 new athletic country clubs, and our pipeline for 2023 and beyond continues to become stronger than ever. We remain committed to further strengthening our balance sheet. Earlier this year, we entered into a non-binding letter of intent for the sale-leaseback of four of our properties for aggregate proceeds of $175 million. We expect to close on two of these properties by the end of this month and the other two properties by the end of September. We continue to evaluate opportunities for additional sale-leaseback transactions. As a reminder, our owned real estate has an estimated market value of more than $3 billion, which exceeds the company's current debt levels of approximately $1.8 billion. I'm looking forward to the Q&A portion of this call after Tom's remarks. Here you go, Tom.

Great. Thank you, Bahram. I'll provide some additional detail on our 2021 fourth quarter and full-year results as well as our initial outlook for the first quarter and a few comments on fiscal year 2022. In the fourth quarter, total revenue increased 57.8% to $360.5 million driven by increases in both center revenue and, to a lesser extent, other revenue. Total center revenue increased 56.8% to $352.9 million and was driven by increases in both membership dues and in-center revenue. Average center revenue per center membership increased to $536 from $414 in the prior-year period, reflecting increased spending with our in-center businesses that continue execution of our pricing strategy and the opening of new clubs in more affluent markets. On a same-store basis, comparable center sales increased 52%. Center memberships increased approximately 30% to just over 649,000 as of December 31st, 2021, compared to just over 500,000 as of December 31st, 2020. As we discussed on the last call, on a sequential basis, we typically lose members from the third quarter to the fourth quarter due to normal seasonality related to kids going back to school and our pools closing in the fall. The sequential decline of 19,000 center memberships from the end of the third quarter to the end of the fourth quarter was in line with our expectations and included the loss of approximately 9,000 center memberships related to the closure of four small atypical centers during the fourth quarter, each of which had an expiring lease and did not conform to our overall comprehensive lifestyle brand experience. Average monthly dues per membership was $135 in the fourth quarter compared to $104 in the fourth quarter of last year, an increase of approximately 30%. This increase was also in line with our expectation. With the closure of the four small off-brand lease centers that I just mentioned, combined with the expected opening of new higher-priced premium clubs throughout 2022 and the continued layering in of price increases to our existing members, we expect to continue to grow our average monthly dues per membership throughout this year. Other revenue, which includes revenue generated from businesses outside of our centers, more than doubled to approximately $7.6 million in the quarter and was primarily driven by our athletic events business. Moving on to operating expenses. In the fourth quarter, total operating expenses were $698.8 million and included non-cash share-based compensation expense and one-time items of $327.8 million. Excluding share-based compensation expense and one-time items, total operating expenses increased 21.4% to $371 million. Center operations expense was $218.8 million and included $12.9 million of non-cash share-based compensation expense. Excluding share-based compensation expense and a $1.4 million one-time cost recovery, center operations expense increased by 33.9%, or $52.5 million, due to the impact of our center closures during last year's fourth quarter. Rent expense increased 15.7% to $55.3 million, primarily driven by additional sale-leasebacks compared to the prior year and additional non-cash rent expense, where we've taken possession of a site to begin construction. General administrative and marketing expenses were $353.6 million and included $309.9 million of non-cash share-based compensation expense and $2.6 million of other one-time items. Excluding these items, general administrative and marketing expenses increased 27.4% to $41.2 million primarily due to the rectifying of our center support overhead functions as centers reopened and additional public company expenses. Depreciation and amortization decreased 1.8% to $58.1 million and other operating expenses were $13 million and included $4.6 million of non-cash share-based compensation expense and $0.8 million of gains related to sale-leasebacks. Excluding these items, other operating expenses decreased 21.1% to $9.2 million. Our GAAP reported loss from operations for the quarter was $338.3 million compared with a loss of $79.7 million in the prior-year period. Excluding the $327.8 million of share-based compensation expense and one-time items, the adjusted loss from operations was $10.5 million compared to an adjusted loss from operations of $77.3 million in last year's fourth quarter. Net interest expense was $48.4 million and included $15.9 million of costs incurred in connection with the partial pay-down of our term loan facility, including a $5.7 million pre-payment penalty. Excluding these one-time items, net interest expense decreased approximately 0.7% to $32.5 million. Our fourth quarter effective tax rate was 21.1% compared with 25.3% in the prior-year period. This lower effective tax rate is primarily a result of valuation allowances against our state net operating loss carryforwards and certain other non-deductible tax items. Our fourth-quarter GAAP net loss was $304.8 million compared with a net loss of $83.9 million in 2020. Excluding share-based compensation expense of $258.3 million and $12.9 million of one-time items, our adjusted net loss improved to $33.6 million from $82.1 million. Fourth quarter adjusted EBITDA increased to $48 million from a loss of $18 million in the prior-year period. For the full year, total revenue increased 39% to $1.3 billion driven by a 38.4% increase in center revenue and a 70.6% increase in other revenue. Comparable center sales increased to 35.3%, and average center revenue per center membership increased to approximately $2,100 versus approximately $1,300 in the prior-year period. Our GAAP net loss was $579.4 million compared with a net loss of $360.2 million in 2020. Excluding share-based compensation expense of $269.1 million and $73.4 million of one-time items, adjusted net loss improved to $236.8 million from $324.2 million. Adjusted EBITDA increased to $80.3 million from a loss of $63 million. Moving onto the balance sheet, cash and cash equivalents as of December 31st, 2021, was $31.6 million compared to $33.2 million as of December 31st, 2020. As we discussed on last quarter's call, we completed our IPO during the fourth quarter and used the proceeds to pay down $576 million of our senior secured term loan facility, including a $5.7 million pre-payment penalty, with the remaining proceeds used for general corporate purposes. We also announced during the fourth quarter that we increased the size of our revolving credit facility from approximately $357 million to $475 million and extended the maturity to December of 2026. As Bahram mentioned, just a few weeks ago, we announced that the company has entered into a non-binding letter of intent for the sale-leaseback of four properties with an estimated aggregate transaction price of $175 million. We plan to complete the sale-leaseback of two of these properties on or before March 31st, 2022, for approximately $80 million in gross proceeds. The sale-leaseback of the two additional properties is expected to be completed prior to September 30th, 2022, for approximately $95 million in gross proceeds. We will continue to consider and evaluate additional sale-leaseback transactions in the future as a tool to continue to strengthen our balance sheet and fund the attractive growth opportunities we have in front of us. As a reminder, as we continue to execute sale leaseback transactions and incur incremental rent expense, we look at adjusted EBITDA plus the impact of rent expense as reported in our financial statements to better understand our underlying operating performance and trends. Capital expenditures totaled $328.9 million during the year compared with $265.6 million in 2020. The increase was primarily related to the higher number of club openings and properties currently under construction. We opened six new clubs in 2021, and as Bahram mentioned, we plan to open 12 new clubs in 2022. Turning to our initial outlook for the first quarter of 2022. For the first quarter of 2022, we expect revenue to be in the range of $385 million to $395 million, a net loss of $64 million to $60 million, adjusted EBITDA to be in the range of $38 million to $42 million. This outlook reflects the Omicron impact we experienced in late December, January, and February, and the increased strategic investments we have made in the numerous initiatives Bahram previously mentioned to drive membership and revenue growth throughout 2022 and beyond. Let me provide some additional commentary on how we are thinking about the year from both a revenue and profitability standpoint. We are forecasting revenue to be in the range of $1.8 billion to $1.9 billion. We expect revenue to accelerate throughout the year as we move further away from the pandemic, open our pools during the second quarter, and gain momentum from our new initiatives. As you think about our revenue growth throughout the year, it's important to remember that we are different from most typical fitness companies that generate the majority of their memberships in the first couple of months of the year. For example, in 2019, we sequentially grew our net center memberships by just over 31,000 in the first quarter and 24,000 in the second quarter totaling net new center memberships of just over 55,000 in the first six months of that year. For this year, with our initiatives gaining momentum, the opening of our outdoor pools and expecting to be free of any COVID-19 mask mandates or other restrictions, we expect second quarter net new center memberships to exceed first quarter net new center memberships. A few other comments as we think about 2022. We are forecasting full-year rent expense to be in the range of $235 million to $245 million, or approximately 13% of total company revenue. This includes non-cash rent expense of $35 million to $40 million. As we build membership revenue throughout 2022, continue to gain operating leverage on our fixed cost base and achieve returns on the new initiatives we are investing in, we are targeting our adjusted EBITDA margin to steadily improve and be in the 18% to 20% range during the third and fourth quarters of 2022. We think this will position us well for additional margin expansion heading into 2023. Outside of the numbers, let me just start to wrap up by saying that while the timing of Omicron disrupted our business in late December, January, and early February, we believe this is temporary and have started to see encouraging membership and usage trends over the last few weeks with the removal of mask mandates around the country. During Omicron, we had nearly 30% of our centers under mask mandates and/or other COVID-19 restrictions. So we are very pleased that as of March 11th, we expect all of our U.S. clubs to be free of COVID-related restrictions. Our three Canadian clubs are the only locations that have remaining restrictions. There is a lot to be optimistic about as we move away from the pandemic, look forward to our summer outdoor season, and see the momentum start to build in many of the new initiatives we have been investing in. In 2022, we will continue to focus on opening premium clubs in iconic, dense urban and suburban locations, strengthening our balance sheet, making the right long-term investments to take market share, and delivering unparalleled healthy way of life experiences for our members. With that, we will turn the call back over to the operator for Q&A.

Thank you. We'll now be conducting a question-and-answer session. A confirmation tone will indicate your line is in the question queue. One moment please while we poll for questions. Our first question today is coming from Simeon Siegel from BMO Capital Markets. Your line is now live.

Thanks. Good morning, everyone. Hope you're all doing well. A quick question, Tom. How much of the digital on-hold decline came from conversions back to center memberships and B, how are you thinking about that digital on-hold rate of recapture? And then could you just speak to the average monthly price paid per membership this quarter versus prior levels? Would be great to dig into a little bit more of what you guys are seeing with the price lifts and what you'd expect going forward. Thanks.

Thanks, Simeon, and good morning. To start with, typically we get about 75% to 80% of our digital on-hold members back to access over time. That time period that people are going on hold, we continue to see shorten, so we're down to about, on average, around 4.5 to five months hold period. So we continue to do a nice job of converting on-hold members back to access members. On the pricing front, Bahram and I are very happy overall with the trends we're seeing on acquisition and the price changes we made. We continue to be pleased with it overall across the country. We didn't have as large of an increase from Q3 to Q4 as we didn't open any new higher-priced clubs during the fourth quarter, but we did see a slight increase as we started to take a little bit of legacy price member increases. And we are very well-positioned now as we think about the 12 clubs that we open here in 2022, they're opening up at over a 20% premium to where the existing price for those clubs in the market are. As we open up the new clubs here in 2022, as we continue to layer in legacy price increases, we expect to continue to see our average dues per membership grow throughout the year and in the year somewhere in that $150 to $160 range. Additionally, Simeon, we're making some additional maneuvers here with the expectation that the time people are in digital will shrink from 4.5; this is very sad right now, to about three months and that will take probably another five or six months of transformation, and then we'll be by the average of three months, so we're going to shave another month and a half off that. The average dues that we are selling memberships every day is somewhere in the $165 to $185 range, depending on the day of the week, whether it's more families joining, more singles joining. And interestingly, this is between coming and going. Compared to the first portion of this month, the membership sales are about 150% on average dues of where they were in '19. So the same number of memberships brings us actually 150% more in dues revenue, reoccurring dues revenue going forward. So the trends are really, really amazing. They're great.

That's great. And then if I can have one follow-up. I think even since the last time we spoke, there's just different conversations going along with connected fitness. Do you guys want to share any new learnings you have with your digital, but then also are you seeing people come back from connected fitness? So just any color for your perspectives there. Thank you.

I believe there is a smaller group of people, against the common belief from about a year and a half ago, who will exclusively use digital options. Every day, we see people returning, and their happiness is evident as they reconnect with the social aspect of our community and enjoy their workouts. They understand that the quality of a workout at home is not the same. However, they appreciate our company's transition to an omnichannel experience. They have access to everything they desire, including a wide variety of on-demand classes, and we are committed to expanding our high-quality streamed classes. We have developed 25 exceptional studios in our clubs, allowing us to simultaneously teach and stream these classes, all complemented by meditation, health resources, and wellness discussions.

So the app is so comprehensive in terms of a healthy way of life that we basically, like I mentioned before, we've been working on the back engine behind it, the platform. And sometimes in the third quarter, we'll be in a position to take that and invest in trying to take it to the masses through different channels. But the business in my mind, largely is Omni. It's not purely physical, if not at all, purely digital. So we're positioned amazingly well.

Great. Thanks so much, guys. Best of luck for the year ahead.

Thank you.

Thank you. Your next question today is coming from John Heinbockel from Guggenheim. Your line is now live.

Hey, I want to start with in-center revenue and your thoughts on the cadence of recovery, particularly personal training. And then sort of as part of that, you've talked about investments inside the center. Are those investments greater than you thought, maybe six months ago? And in particular, I think about getting the right roster of personal trainers ramped back up to closer to where they were in 2019.

That's a great question, John. The business has changed significantly over the past two years, especially in personal training, where we have a clear strategy. Being back in the clubs myself, I've observed that maintaining personal training in the same manner as before will likely yield only 50% to 60% of prior success. There must be a clear distinction between in-person training with a hands-on trainer and following a routine provided via an app; their execution is fundamentally different, which highlights the unmatched value of in-person training. We have adapted properly, aiming to surpass our personal training revenue per club compared to 2019. While I won’t get into specifics, we are moving quickly and expect to see substantial growth, targeting double-digit month-over-month increases in PT revenue. Achieving over 10% growth each month is feasible, but it must evolve into a new approach to training, which we have clearly mapped out. We've invested significantly in creating this differentiation and are currently executing our training strategies. I believe we can reach a point by year-end where there won't be any excuses as we head into 2023, providing investors with an excellent experience and strong financial results. Other revenue streams, like our tenants program, are already exceeding 2019 levels, and similar growth is expected from our cafe, spa, and kids programs. We’ve worked hard on defense for six months, shifting from defense to offense, reimagining and reinventing what needed to be done—not just getting back to 2019 figures, but boosting them by 10%. We have been actively investing and developing these programs over the last year, and now we’re starting to see results from our efforts, with overall growth in every aspect of the business due to our offensive strategy. We anticipate continued improvement each month moving forward.

Yeah. Just to add on a little bit. John, you're absolutely right. We've been making investments, as Bahram said, to go on the offensive in order to drive revenue growth and accelerate revenue growth. Part of that is we're at 2,700 personal trainers today; pre-pandemic, we were at 3,700, 3,800. So we're investing in rebuilding our personal training business to hit those revenue growth goals that Bahram laid out. We've also made big investments in the class schedules; they have really robust flat schedules. And as the membership volume grows, we've got that fixed cost base now established. So as we grow our dues and revenue from here, we'll start getting a lot of leverage on both our personal training base as well as our overall club operations expense.

One quick follow-up, just in terms of your capacity right on the club opening front. So I think the thought was maybe 10 or so a year after '22. What's the gaining factor I imagine? If you can do sale-leaseback, it's not capital, it may not be real estate anymore. Is that the gaining factor? And can the organization do a lot more than 10 or 11 a year, or would you like to hold it to that?

Yeah. Look, I want to balance the expectation in here, but let me just walk you through. As we mentioned to you guys, these villages that we have developed, Life Time Living, Life Time Work, Life Time Athletic Country Club, combined all in one, we are not the developer of the apartment building. However, the results that we have from that are some of the most disruptive transformations for an industry. So many conversations are going on where we basically are going to be developing these very, very large urban athletic country clubs as part of these kinds of live-work-play developments. So our expectation is we're going to get at least a dozen clubs opening per year going forward for the foreseeable future. And then there are other opportunities, John, that are going to happen in the next three, four, five, six months that I think gives us potentially a chance to pick away on some really good locations in other forms. So, my expectation of 12 clubs per year is basically unchanged; maybe it will be more based on all the opportunities we see, but it won't be less.

Thank you.

Thank you. The next question today is coming from Brian Harbour from Morgan Stanley. Your line is now live.

Good morning, guys. Maybe to follow up on that, could you remind us how some of the work, co-work locations, and living locations factor into your expectation for 12 this year?

Yes, that count of 12 refers to our Athletic Country Club Resorts. Additionally, we will be opening three new Life Time work locations this year. We are very pleased with the performance of Life Time work. We will also open our third Life Time living location this year in Henderson, Las Vegas.

And the results from the living. Again, at this point, the asset that we own, which was creating the concept, is Henderson, and it's doing amazing. We'll start moving people in sometime in June, hopefully by June 1. We're looking really forward to demonstrating one that we have designed from the ground up. But for the most part, everything we using that developers come to us, they want to have their apartment building be branded Life Time Living because of the differentiation we bring into the format, the higher rent, and the faster ramp up, which is a complete game changer for them and is providing all kinds of additional opportunities for us going forward. Mostly, in the fact that it gets us either additional income on the sites where we have additional land and they are going to buy that land from us and build apartments, from which we get the management fee and additional memberships, or it provides the opportunity to have better economics for the club that we are going to be building as part of the whole ecosystem.

Okay, thanks. And maybe just another question on kind of membership sign-up. You talked about that nice pickup since February and expectations for Q2. What have you seen that kind of reinforces confidence in that? Have there been above normal seasonality draws over the last few weeks? Do you think that the second quarter of this year could be kind of above normal seasonality? I'm just curious on some of the specifics of the things that you've seen.

I'll provide the best details I can, and the short answer is yes, definitely yes. The second quarter is looking very promising. We typically see a significant increase in net memberships every January, partly due to our consistent promotions every couple of days. Traditionally, we've been quite promotional in January prior to 2019. However, this year, we are not relying on promotions; instead, we're counting on the quality of our services, programs, and athletic clubs, and it's proving to be very effective. In December and much of January, we faced considerable challenges due to mask mandates and vaccine pressures, which lasted into early February. However, we noticed a positive change after that. In February, we actually achieved more net memberships than in January, which is unprecedented for us. March has started off better than February, which surely surpasses January as well, and the indicators are looking very encouraging. These trends give us confidence that we can meet or exceed the expectations we set for the fourth quarter when we first went public. We believe we will offset the disruptions caused by the Delta and Omicron variants, as well as government restrictions and mandates, by the fourth quarter.

Yeah. And Brian, I would just add that we had 44 or 45 clubs under mask mandate in the fourth quarter and into January and parts of February. As we saw those mandates start to lift in February, we experienced a significant increase in club usage and our swipe activity. Last week, we observed about a 4% week-over-week rise in club usage. In the latter part of February and the first two weeks of March, we're seeing great momentum in how our clubs are being used. For example, in Chicago, the mask mandates were lifted on February 28th; since then, during the first two weeks of March, Chicago is leading the way in membership recovery. We can clearly see that as all these mask mandates, vaccine passports, and restrictions ease, February outperformed January, and March is starting off stronger than February. This gives us a lot of confidence that in the second quarter of this year, we will outperform net membership gains compared to the first quarter, and I also expect the second quarter membership change to exceed what we achieved in 2019.

I want to clarify that this is not about complaining; I simply want to present the facts. I have often stated that if it were solely due to COVID, the virus's impact on us might have been around 10%. The majority, about 50% to 60%, of the revenue decline resulted from government interventions, closures, vaccines, masks, and various pressures imposed on our business. It's notable that when analyzing our daily and weekly data across the country, states that maintained their policies, like Texas during the peak of Delta and the transition to Omicron, experienced traffic drops of only around 8%, 7%, or 9% due to the virus alone. Those areas have now recovered. However, clubs facing strict government intervention and challenging municipal closures saw a potential damage of 20% to 30% in swipes and traffic. We are currently witnessing the highest swipe activity and traffic since the pandemic began, with day-by-day improvement in trends. Do we anticipate reaching 100% of traffic by the summer? Absolutely. And we expect that traffic will lead to significantly higher dues.

Great. Thank you, guys.

Thank you. Next question is coming from Brian Nagel from Oppenheimer. Your line is now live.

Hi, good morning.

Good morning, Brian.

My questions are a bit of a follow-up to some of the prior questions. Bahram, as you're merging together. As you're seeing members now return to the clubs, particularly as these COVID pressures are lifted. Is there anything different in how people are returning or how they're utilizing the club, or is it basically getting back to what it was pre-pandemic?

I see some of the happiest faces we've ever seen. People may not realize how their lives have changed, and not for the better, while becoming more isolated. As I've mentioned before, there really is no comparison. I have some of the best equipment and space at home for working out, but it's never the same. My at-home workouts can't compare to my workouts at the club. The reason I go to the club is the experience we've been focused on creating. We have worked hard to develop this athletic country club experience. When you visit the club, you can see the unique social environment we've cultivated. Life Time has nearly 30 to 35 million square feet dedicated to indoor and outdoor tennis, pickleball, and pools. You can't replicate the Life Time experience through any other means. We offer members the chance to travel and enjoy different locations across the country, like the beach club. Recently, I was in Coral Gables, where members from Syosset and the East Coast gathered for Havana Nights. Our overall experience is so robust that with COVID making people feel anxious, they stayed home and changed their routines. When they return, they're excited. We didn't let this crisis go to waste; I want to be clear about that. COVID, along with various government decisions, was the first time in our company's history that we saw a decline in revenue and EBITDA. During times of crisis, it's important to seek opportunities. We have the chance to rethink our clubs from expansive 100,000 square feet facilities filled with multi-purpose gyms to creating a truly national athletic country club that offers unique advantages. You can find pickleball, tennis, and beach clubs all over the country. Right now, our members are telling us how amazing the experience is. They're traveling and planning their routes, ensuring they pass by Life Time locations, often staying at nearby hotels. We used this opportunity to refine and elevate every aspect of our athletic country clubs. Our execution is more dynamic than ever. We have improved member services and our sales approach, and the feedback from members has been overwhelmingly positive. We've continued to invest in our clubs physically and in terms of programming. We now offer various programs and options, and the response has been incredible. Members have expressed their gratitude and amazement at how we've navigated these challenges. I can confidently say there are no negative trends; everything I see is positive.

I appreciate the color. Congrats. Thank you.

Thank you.

Our next question today is coming from Robby Ohmes from Bank of America. Your line is now live.

Good morning, guys. Thanks so much for all the colors; it's been really helpful. I have just a few follow-ups. One of them maybe, Brian, would just be as you are recovering people, how much of that is totally new members to Life Time? When you see these new members coming in, where are they coming from? And then also just one other follow-up related to this. So it sounds incredible that you are seeing the seasonality kind of shift after you had missed the window normally because of Omicron. As you move through the year, are you thinking of some new marketing initiatives that offset the fact that Omicron ruined the normal window in January?

Both are good questions. Prior to COVID, about 21% to 25% of our membership consisted of people who had dropped out and later returned as past members. Currently, that figure is around 35%. This is expected as some members have taken a break for a while and eventually return. Regarding marketing, if we feel the need for it, we will implement it because we want to achieve our objectives and goals for the year. Right now, our focus has been on creating compelling reasons for people to come to Life Time. We have launched several specific initiatives in the past months and are concentrating on programs, classes, and routines that enhance the experience and promote social interaction. Instead of spending heavily on advertising, we are actually investing less in marketing while seeing greater results in membership and average dues. We have received no complaints regarding price changes; members are transitioning from clubs that charged $89 to ones now priced at $119 or $129 without any questions about the increase. The churn we are experiencing will benefit Life Time because our pricing was significantly lower than it should have been, and we still have considerable pricing power going forward. When customers are drawn in by the experience, the price becomes less relevant. Our current strategies are not just effective; they are performing exceptionally well.

That sounds great. Thank you.

Next question today is coming from Dan Politzer from Wells Fargo. Your line is now live.

Hey, good morning, Bahram and Tom. Thanks for taking my questions. I just want to hit on some of your recently opened centers. If you could talk about the ramp there, maybe any data points or color you can provide, especially the ones in the higher cost of living areas, such as Coral Gables? And also similarly, do you still expect kind of a four-year ramp there to reach a normalized revenue, or do you think that there could be maybe some upside? Thanks.

No, I think they'll ramp up in three years or less. We used to estimate that clubs would reach 90% of their membership capacity within four years. Right now, I believe we can reach that 90% membership capacity in definitely less than 36 months. Our systems have improved significantly in creating waitlists for clubs; for example, we had 9,000 people on the waitlist for our newly opened Frisco Club. That club is expected to reach a million dollars in dues faster than ever before. We're seeing excellent results in our other new club in River North, Chicago as well. If you ever have the opportunity to visit any of these clubs, I highly recommend it. You'll witness the high-end athletic country club experience, the social atmosphere, and the remarkable programs that come to life seamlessly. They sell themselves without the need for marketing; people are just drawn to them. I believe the ramp-up to 90% capacity will occur in less than three years.

Thanks for the helpful information. For my follow-up, regarding your guidance, it seems we're looking at an EBITDA in the mid-500 range based on your comments. This appears to be influenced somewhat by a softer first quarter. Could you explain the factors impacting this compared to your previous guidance and what you experienced during the process of going public? Thank you.

Yeah, I'll start. It's really just a temporary delay due to Delta and Omicron pushing the recovery back one to two quarters. So from a strategy standpoint and execution standpoint, everything we're trying to do, Dan, we're still working extremely hard. As Bahram said, our goal is to drive this to get the revenue levels back in the second half of the year so we can get back on track of where we thought we would be pre-pandemic. So to me, it's really just a Delta-Omicron impact, no change in strategy, no change in execution, and all the new initiatives that we've been investing in will start to take hold here in the second quarter as we really see an acceleration of memberships and then hold on to them throughout the rest of the year.

The key focus for me is the transition from 2022 to 2023. I won't stop until I'm confident we will exceed our December 2022 projections. We are determined to execute our plans effectively to surpass those numbers. This is vital because approximately two-thirds of our revenue comes from subscriptions. If our subscriptions are significantly better than we anticipated, this will positively impact our revenue in the coming year, month after month. Our strategy aims to increase the company’s revenue to 100%, then 110%, and ultimately 120% of the 2019 levels. Given the higher costs we face, including utilities and payroll, we need to achieve greater revenue to offset these expenses, and we have a solid plan to do so. Additionally, with more clubs set to open, reaching 2019 revenue is just the starting point; we aim to exceed that. However, it’s crucial for everyone to concentrate on the fourth quarter. Tom and I, along with the management team, are committed to ensuring we recover fully from the impacts experienced in the first two or three months of the year, particularly in December and January.

And Dan, just to close it out. What gives us a lot of confidence is those parts of the country where we've seen less restrictions and mask mandates, such as Texas, the Heartland, Mountain Regions, have recovered in the 90% to 100% in February type of ranges. So that gives us the confidence as the New York and Chicago, and other parts of the coast have eased up now here in February, that we're going to recover those clubs to that same percentage as rapidly as we can.

We expect to have at least a dozen clubs surpassing 2019 dues numbers by the end of March. And those are just like Tom said; those are the markets that were the least restrictive for us. So as you go back, the markets have been more restrictive. It doesn't mean they don't come back; it's just going to take longer. But hopefully now through this summer, we're seeing a steeper recovery in those markets, and we're seeing some of that trend as well, by the way.

Understood, thanks so much. Appreciate it.

Thank you. Next question is coming from John Baumgartner from Mizuho Securities. Your line is now live.

Good morning. Thanks for the question. I guess let me first off, I'm curious just to be more specific about how inflation is impacting business at the margin. What are you seeing in terms of the labor availability and wage pressures? How is that tracking relative to your views maybe back in October? And then second, just given the acceleration of broader inflation here around the economy. How is it, or is it, I guess, evolving your views on pricing power relative to what you were thinking last summer? I mean, it sounds like, Bahram, it sounds as though right now you're not seeing much elasticity, but how are you thinking about an incrementally stronger pricing power sustaining at this point?

I am not concerned about our pricing power. We have historically underpriced many offerings, including memberships and in-center services. Now that we are focused entirely on high-end delivery, we regularly conduct tests; decisions in this area are not overly risky. If we set a price $2 higher than necessary and it doesn't work, we can easily adjust it back down. We employ a dynamic pricing strategy where we continuously test and analyze results. Our aim is to avoid making customers feel nickeled-and-dimed or taken advantage of. Customers understand the rising costs of food and payroll, and as long as we provide the right products and services, they accept it. Our brand is highly valued by both our employees and our members, leading to fewer staffing issues compared to other businesses. People prefer to work for Life Time over competitors even for slightly lower wages. While we do encounter some challenges, they are manageable due to the strength of our brand. We anticipate an additional monthly revenue of $10,000 to $15,000 per club to offset increased payroll costs. Our recent transformations in membership sales and services are helping clubs get back to pre-lease dues levels. Once we balance our personal training revenue and margins, we expect to maintain similar profit margins despite rising labor costs and other challenges. Overall, we feel very optimistic.

Well, thanks for that. Just along those lines in terms of meeting consumer's needs, I'm curious in light of your announcement regarding the Aurora program for active adults. Your prior demographic efforts have been concentrated on programs for your cohorts, kids and teens. But can you discuss this program a little bit more? What are you seeing from that demographic that drives the initiative? To what extent do you think it can enhance membership growth relative to being an attack on offering at the margin for existing members? And when you think about your programming across generations, where do you see the largest opportunities for growth in the largest paybacks moving forward? Thank you.

That's a great question. This activity was previously happening sporadically in our clubs. We have established relationships with several companies targeting the age group of 55 and older. These programs, financed by insurance companies for individuals aged 65 and up, include offerings like Silver&Fit and SilverSneakers. We had been implementing these but lacked a comprehensive approach with branded programming. The ARORA Club presents an opportunity to significantly increase this demographic by offering tailored programming during the least busy hours of the club. We are planning two to five hours of activities that range from pickleball and swimming to social coffee gatherings, all under a cohesive brand. For the past six months, we've been developing this brand through market research, engaging with potential participants to understand their preferences, and refining our offerings. This initiative will not disturb existing programs but rather leverage our resources to boost traffic and revenue, focusing on membership swipes and subscriptions. Overall, this is a structured program aimed at meeting our objectives, and so far, the feedback has been very positive.

Great. Thanks, Bahram. Thanks, Tom. Thanks for your time.

Thank you, we've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

We're grateful to all of you guys for the attention and the focus. We're excited to take the remainder of this year, and as I mentioned, the focus is not on revenue recovery. The focus is on steep revenue growth, both to recover and then get way past that. We appreciate the support we're looking forward to seeing you guys on the next call, which I think the results will be significantly in line with the kind of growth expectations we have. So thank you, Tom.

Thanks, everybody. Have a great day. Talk to you soon. Bye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.