Greetings and welcome to the Life Time Group Holdings, Inc. First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dani Matzke, Vice President of Corporate Finance. Thank you, Dani. You may begin.

Good morning, and thank you for joining us for the Q1 2024 Lifetime Group Holdings Earnings Conference Call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Erik Weaver, Senior Vice President, Interim CFO and Controller. 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. We encourage you to review a comprehensive discussion of risk factors in the company's SEC filings. The company will discuss certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, adjusted diluted EPS, net debt to adjusted EBITDA or what we refer to as net debt leverage ratio, and free cash flow. 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. With that, I turn the call over to Erik Weaver. Erik?

Thank you, Dani, and good morning, everyone. We appreciate you all joining the call this morning. 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. 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, driven by a 19% increase in membership dues and enrollment fees, and a 10.5% increase in incentive revenue. Access memberships increased 5% to end the quarter at more than 802,000 memberships and total membership ended the quarter at approximately 853,000. Average monthly dues were $186, up 12.7% from the first quarter last year. 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. Net income for the first quarter was $24.9 million, down 9.5% versus the first quarter of 2023. Adjusted net income was $30.5 million, an increase of $7.3 million versus the first quarter 2023. Adjusted diluted earnings per share was $0.15 compared to $0.11 per share in the first quarter last year. 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 of 2023. Our strong financial performance continues to drive growth in cash flow and a reduction of our net debt leverage versus the prior year. Net cash provided by operating activities increased 21.7% to $90.4 million as compared to the first quarter 2023. We reduced our net debt to adjusted EBITDA leverage to 3.6x in the first quarter versus 5.2x in the prior year period. We are 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 Bahram.

Thank you, Erik. As you would expect from what you just heard, we're especially proud of our continued progress, and it is my pleasure to provide a little color with respect to the numbers Erik shared with you. Addressing revenues, we were pleased with the $597 million we achieved for the first quarter, nearly $2 million above the top end of our guidance with the outperformance, driven principally from incremental membership dues and dynamic personal training. Adjusted EBITDA of $146 million was at the top end of our guidance, and we achieved a 24.5% adjusted EBITDA margin for the quarter. As pleased as we are with our progress here, we're going to reiterate our previously issued adjusted EBITDA margin expectation of 23.5% to 24.5% for this year. Consistent with absolutely normal predictable seasonality, a portion of the revenue gain we anticipate for the middle of every year will be from summer activities, which generate incremental EBITDA, but at lower margins. Even more gratifying, Access membership at the end of Q1 2024 was 802,000, which is substantially above our expectation. This overperformance has been a direct result of the strategic initiatives we have previously discussed with you, which include pickleball, ARORA, and a small group training, and the improved member retention we're currently experiencing, which is the best we have ever seen. Additionally, we believe we have some membership pull forward into the first quarter from the second quarter as some people joined earlier in anticipation of the full season. Average dues were $186 a month, in line with our expectations. Based on the positive trends we're seeing in our business, we're raising our revenue and adjusted EBITDA guidance modestly. Our full year's revenue guidance is now $2.5 billion to $2.53 billion, and our adjusted EBITDA guidance is $603 million to $618 million. Our priorities for this year remain: growing revenue and adjusted EBITDA per our guidance; 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. Lastly, I want to personally thank each and every Life Time 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.

Our first question is from John Heinbockel with Guggenheim Partners.

Bahram, 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 less we heard. So what does continue to happen with engagement? You mentioned dynamic personal training. How do you guys think about wallet share within center revenue and the opportunity there? Because obviously, your members have a pretty big wallet.

From a personal training standpoint, our dynamic personal training really has been an initiative we launched almost two years ago. We have almost doubled the number of personal trainers applying each month as they did a year ago. The momentum is strong, and the execution is the best I've seen. We're seeing continued growth and engagement in personal training; the connectivity between the members and personal training is improving. That was the most important piece of our in-center experience. As we have talked about before, the kids programming has been great, summer camps have been great, spa, and cafe have been the focus for this year to improve, and we have tons of opportunity there, and we're seeing the initial baby steps in improvement in those as well. So at this point, John, we just have a very optimistic view of how all these programs are coming from an engagement standpoint. We're seeing the most engaged customers that we have ever had in the history of the company, which is directly resulting in the best retention that we are seeing, and it's continuing to trend better than our own expectations, which is pretty awesome.

Great. Maybe as a follow-up, without stealing thunder from your Analyst Day, but I know you recently introduced this concept 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 right 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?

Yes. That's a great question again, John. At the end of the call today, we're going to talk about our Investor Day that we're planning and give you full details of that for May 30. Our goal is to flush out the description. But in a nutshell, we have the same expectation on the levered rate of return out of any type of facility we do, which is roughly between 30% to 35% levered return on our invested capital, whether it's upfront investment coming from landlords or building owners, etc., or at the end with a sale-leaseback conversion. What we're going to guide everybody to is about 10 LFEs per year. Now a lot of these things, as you know, they have very long gestation times. Sometimes you may have a year that comes in on the lower end of the spectrum. But for modeling purposes, we will need about 4% to 5% of same-store growth, and the rest of it needs to come from additional LFE expansions and other initiatives that we have in place. We feel really great about our strategy, outlook, and the execution of our team.

John, I can just add to that. I think another key benefit of the various formats here is our total addressable market is substantially bigger. I think that's one thing that's very important as we continue to think about our growth.

Our next question is from Megan Alexander with Morgan Stanley.

Just wanted to follow up. Bahram, you alluded to it a bit in terms of the updated guide and taking it up by more than the 1Q beat. You talked a little bit about it being driven by current trends. You also talked about some pull forward in membership into 1Q. So maybe can you just give us a bit more color on what's exactly changing in the outlook? Is it that you're getting some of these pull members a bit earlier, which tend to have 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 help us tie those comments together in terms of what's changing in the outlook.

Yes. The most important thing, Megan, is retention. The most important KPI is retention. We are trending to roughly 10% better retention than we have had ever in the history of the company. That alone allows us to see that our forecast for our dues is significantly higher than three months ago. Therefore, our forecast is based purely on facts; our guidance is based purely on our forecast. The forecast suggests we should be able to deliver the numbers we just guided to, both on top line and bottom line.

Okay. That's helpful. 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 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 cost of the club? And how are those trending? And is there some gating factor to getting EBITDA margins above 24.5%? Is this the right level for the business? How should we think about that a bit longer term in terms of you letting that EBITDA margin drift higher over time?

Let's go through this. We are extremely happy with a 23.5% to 24.5% EBITDA margin. Our focus is always to deliver the best member experience and a long-lasting enduring business. What I'm really proud of is the work that my team has done here. We reinvented this business over the last four or five years with a clear vision that the business is not going to be going forward the same as it was before. All the decisions made over the last four or five years anticipated higher costs, higher interest rates, and much higher construction costs. We have all the latitude, all the space to pay a little higher cap rate for our sale leasebacks and get those deals done. Is there a chance that the EBITDA margin could be more than 24.5%? Yes. Do we want to guide you guys to that right now? Absolutely not. So we're just giving you the 23.5% to 24.5% firmly and making sure that we can deliver our objectives through that range.

Our next question is from Brian Nagel with Oppenheimer & Company.

First and foremost, congrats on another nice quarter. Nice one. Bahram, the first question I have, we talked a lot about driving the business towards free cash flow, positive free cash flow. You reiterated that today. The ratios are coming down. Maybe you could talk or any color you can give us on how you plan to, or your plans to address the debt on your balance sheet that comes due in early 2026?

As you would anticipate better than anybody, Brian, we're always months ahead. We're working on those things right now. Our expectation is that debt will get done sooner than later with much better interest rates for next year. We have had the most massive club opening in the first half of the year instead of spreading out like I've seen some years. We just opened three or four amazing successful clubs, beating our expectations, and we are absolutely thrilled. So as we go to the second quarter, you're going to see a shift where we delivered free cash flow positive this quarter. That's after all growth capital. We start seeing the debt-to-EBITDA coming down pretty nicely from this quarter forward, and we are better in every case.

That's very helpful. I appreciate that. And then my follow-up question bigger picture. Again, we're looking at the results, your comments, and the business is performing extraordinarily well. The question I'll ask, I mean just given market concerns of consumer and economic, etc. I mean as you look across the business, in particular on the membership side, are you seeing anything at all anywhere to suggest a more cautious member within your model?

That's a fantastic question, Brian. I have personally expected to see some weakness for the last 18 months, and I have been wrong. Every single month, we are seeing record personal training numbers. We're seeing record retention. Memberships are increasing, and we have more clubs on a waitlist. We're seeing better overall member satisfaction, and team members are in a great place. I don't see any negative trends. The most important key KPI is retention, and we are seeing the best retention we've ever seen.

Very helpful, Bahram. Congrats and best of luck for the balance of the year.

Thank you so much.

Our next question is from Alex Perry with Bank of America.

Congrats on a strong quarter. I guess just for Bahram, maybe following up on your last point, can you give us an update on how many of your clubs are on a waitlist? And are you considering raising prices where demand continues to exceed supply, like what's sort of the pricing outlook that we should be embedding for this year?

The one thing I want to make sure we don't create a pattern for is creating a metric around how many clubs are on a waitlist. It has become a function of us being able to manage the experience for our customers. We literally are getting as many clubs on a waitlist as we can have our team and processes properly in place. So at the end of this month, we will be nearly three to four times how many clubs are on the waitlist just at the end of January. But it is really a function of us being able to roll it out without creating an attitude that we're too good for the customers who love Life Time's brand.

That's really helpful. And then my follow-up question was you made a comment in your prepared remarks about a bit of a pull forward into Q1 on center memberships. Maybe just help us think about how we should view the second quarter on any sort of key KPIs on memberships specifically? And what do you think is driving that pull forward? Is it due to people being worried about getting into the club during pool season because of the waitlist?

Yes. I think it is a function of that and the fact that we normally have a summer pool pass sort of the implementation in the busier clubs. In the past, we have introduced fees for pool access, discouraging short-term memberships. We have a big sign-up in May and June, followed by a drop-off in September and October, which we really don't like. We are always trying to figure out a way to discourage that behavior without alienating the customer. Some people who know the pattern may want to join early to avoid paying any of those fees, but they're paying an extra month as a result. We just want to caution analysts and investors that our membership overperformance should not be taken as a multiplier for every quarter going forward and get ahead of our guidance on revenue and EBITDA.

Our next question is from Simeon Siegel with BMO Capital Markets.

I was hoping to follow up on that a little bit, actually because I mean it's interesting. So one, is it new this idea of people are signing up earlier to avoid these fees? And maybe does that help 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 normal and there just were more people that did it. 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 it's moved the seasonality?

Yes. I think if you take the number above the number that was consensus about 795, that's about 7,000. I would say it's about half and half. About half of it was extra pull forward, and the other half was basically better retention, etc. So we're cautious about all of this because we're balancing on what the Street may want, but more so on our customer reaction. I'm really happy with the overall health of the business. The clubs are busy, the members are happy, and we're getting more qualified people wanting to be a part of Life Time. I don't see any negative trends.

Okay. Yes, that makes sense. I guess my point or my question was, have you found a way to stretch those summer members into another month or so because again, avoid the fees, but have them there longer?

That's exactly right. Our strategy is to have the longest term members. We prefer not to have people that drop in and drop out. We weren't able to do this prior to 2020 because we were doing so many promotions. Now that we are running our business without restrictions, we're seeing a much more positive behavioral change among members. We are delivering a much higher experience than we were before, and the results are speaking for themselves. At all times, if anybody tells you they're running everything perfectly, I would believe they're lying because I would too. There's always opportunities to improve. We have had a bit of cost creep that has been already corrected as planned, and we anticipated this in our strategy to change our business model. Just wages alone are 4% to 5% higher, and we are spending more time teaching classes providing the best engagement in our clubs. Overall, we expected costs to go up, and so far, all our expectations around revenues and engagement have been met.

Our next question is from Chris Woronka with Deutsche Bank.

It was a great quarter. My first question is for you, Bahram. You've mentioned that you've exceeded all your expectations, which includes both existing clubs and new locations. Does this impact the economics when considering new centers, whether through conversion or new developments? Does it allow you to potentially increase the budgets for projects you're evaluating, making them seem more favorable than they did a few quarters ago? Is there anything to consider in that regard?

Everything is in line. Our clubs are costing significantly more on any measure: real estate costs, interest rates, and construction are all higher. Our revenues are higher, and our revenues per square foot are increasing. Where we see success is our new clubs opened in the last year and a half. They have a higher revenue per square foot, and the rate of return has remained constant. The legacy clubs will take time to reach the revenue levels of the new clubs. We’re thrilled about what this outlook looks like for 2024, 25, 26, and 27.

Yes. Very helpful perspective. And just a follow-up that kind of goes back to the sale leaseback outlook. We've heard the largest player in private credit say that they're not waiting for rates to come down. Do you guys sense any change in your potential buyers wanting to move forward on looking at some sale-leasebacks?

Yes. We are under LOIs at this point on some deals that we will announce when it's appropriate. These deals are generally 20- to 25-year leases with fixed bumps. The GAAP rent we provide is straight-lined, and any increase will not change the overall outcome. We are generating a lot of margin at the club level, and it is almost negligible—the GAAP basis and the ability we have to sustain the outcome with our revenue growth.

Our next question is from Owen Rickert with Northland Securities.

Bahram, congrats on the great quarter. 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?

We have approximately $3.5 billion in market value today. Realistically, about $2.5 billion could be punitive in nature for sale leasebacks. Roughly $1 billion of it could fit into deals that would actually work. This would involve older clubs with substantial tax gain and new clubs where we can keep our cost as net invested capital. We can mix and match older and newer clubs for sale leasebacks to manage gains and losses effectively.

That was very helpful. And then secondly, in terms of the recent April club launches, are there any early performance metrics to call out? How well have these launches gone in the first few weeks?

We have seen record-breaking numbers so far. These clubs are achieving contribution margin positive much faster than I've seen in the history of the company. We're absolutely thrilled about the results.

Our next question is from Dan Politzer with Wells Fargo.

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?

Yes, relative to last quarter, nothing's really changed there. CapEx, especially our growth CapEx is coming in at where we expect. We're looking at maintenance CapEx at roughly $10 per square foot, and that's how we're modeling out.

To clarify on maintenance CapEx, we would apply $10 per square foot based on last year's square footage. Therefore, we would expect to spend about $170 million this year; about half of it would go towards maintaining our current EBITDA. The other half will be spent on modernization, reinvention, and technology, which we expect to generate additional returns. We are generating enough free cash flow from our business to execute that effectively.

Our next question is from John Baumgartner with Mizuho Securities.

Bahram, I'd like to ask about the MIORA 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. And do you see anything that would suggest an opportunity to bridge MIORA with ARORA and enhance offerings for active adults as an incremental source of in-center revenue?

We are very pleased with the demand that we see for MIORA. We are working on testing more doctors and physician assistants to handle the traffic coming our way. I would consider that business something we will develop to a successful model for implementation but won’t have a material impact this year. The crossover between ARORA customers and MIORA is not the bulk but could add value to current offerings if executed carefully. Our approach is to ensure we are only engaging in scientifically proven and effective practices.

There are no further questions at this time. I'd like to hand the floor back over to Bahram Akradi, founder and CEO, for any closing comments.

Thank you, and thanks again for joining us this morning. We're off to a great start to what should be a milestone year for us. We are excited to be hosting an Investor and Analyst Day on May 30 here in Twin Cities. We have a comprehensive agenda that will include key milestones in our history and tackle many investor topics that we feel are not fully understood. I encourage institutional investors to reach out for more information. Have a great rest of the day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.