Earnings Call Transcript - LTH Q3 2022

Operator, Operator

Good morning, and welcome to the Life Time Group Holdings Conference Call to Discuss Financial Results for the Third Fiscal Quarter of 2022. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this conference is being recorded. During this call, the company will make forward-looking statements which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. There is a comprehensive list of risk factors in the company's SEC filings, which you are encouraged to review. Also, the company will discuss certain non-GAAP financial measures, including adjusted EBITDA and free cash flow before growth capital expenditures. This information, along with reconciliations to the most directly comparable GAAP measures, 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; Tom Bergmann, President; and Bob Houghton, Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir.

Bahram Akradi, CEO

Good morning and thank you for joining us. With me this morning are Tom Bergmann and Bob Houghton. After my opening remarks, I will turn the call over to Bob to run through the numbers. Then Tom, Bob, and I will be available for the questions and answers portion of the call. So to start, we are right on track with our strategic progress on recovery from the pandemic and poised to go beyond. As we have discussed in the past, our first priority coming out of the pandemic was to strictly play offense and focus on rebuilding our membership dues revenue. Now that we are on a path to exceed pre-pandemic membership dues revenue on a same-store basis in the first quarter of 2023, we have swiftly turned our focus to margin expansion. We see significant opportunities to expand margins over the next year as we expect to capture the benefit of the higher dues revenue, fine-tune and optimize the rollout of our strategic initiatives and improve the efficiency of our club operations and corporate office. We believe that even with inflation and macroeconomic headwinds, we are well positioned in 2023 to slightly exceed our 2019 adjusted EBITDA margin percentage, excluding the impact of rent expense. Regarding liquidity and our balance sheet, we are working with a number of our great partners in the sale leaseback market and are planning to close on additional sale leaseback transactions during the first quarter of 2023. We have taken extra time to look at alternative sale leaseback structures to optimize our financing costs and the utilization of our net operating losses reserved for the growing cash flow from our operations in 2023 and beyond. For 2023, we plan our cash flow from operations and sale leaseback proceeds to equal or exceed our 2023 capital expenditure. This will allow us to maintain a strong balance sheet during 2023 with very high levels of liquidity by maintaining cash on the balance sheet or utilizing only a small amount, about $475 million revolving credit facility during 2023. Before turning it over to Bob to run through the numbers, I want to first thank Tom for his partnership and contribution to Life Time and wish him much happiness and success as he moves on to the next chapter of his life. And secondly, reiterate my confidence in our business as we finish 2022 and look forward to 2023. It is a challenging macroeconomic environment, but I'm really excited about the progress we have made on executing our strategic priorities during 2022 and how we are positioned to drive substantial profitability improvement in 2023. Our business model is highly resilient, and we are in a great position to continue to deliver a healthy way of life to more members for years to come. Bob?

Robert Houghton, CFO

Thank you, Bahram, and good morning, everyone. It is a pleasure to speak with you on my first earnings call at Life Time, and I look forward to spending more time with members of our analysts and investment community in the weeks and quarters ahead. I joined Life Time because I believe there is no other company better positioned to lead in the healthy way of life space, particularly with our incredible beloved lifestyle brand, our unmatched ecosystem of athletic country clubs and omni-channel programming, and our amazing team of professionals who deliver the incredible experiences we provide to our nearly 1.4 million members across North America. As Bahram highlighted, we are happy with our progress to date, including continued momentum in revenue and improving profitability in the third quarter. Starting with our top-line performance, third quarter total revenue increased 29% to $496 million. Total center revenue of $480 million also increased 29% and was driven by a 29% increase in membership dues and enrollment fees and a 30% increase in incentive revenue. Total comparable center sales increased 26% in the quarter. Third quarter center memberships increased 9% to nearly 729,000 memberships. Sequentially, we grew our membership base by nearly 4,000 over the second quarter. By comparison, our membership count declined approximately 3,100 from the second to third quarters of 2019. We typically see a seasonally driven reduction in memberships between the second and third quarters, so we are pleased with the sequential increase in our membership count this quarter. The strategic programming investments we are making in small group classes, dynamic personal training, active aging through our ARORA community, and pickleball have all supported our continued membership recovery and driven an expanded membership base and higher usage levels. This demonstrates that our strategy of elevating and broadening our unique healthy way of life offerings to attract additional members is working. Average monthly dues per center membership increased 17% to $157 from $134 in the third quarter last year, driven by both the continued successful execution of our pricing strategy and the opening of higher priced new clubs. Third quarter average center revenue per center membership increased to $660 from $555 in the prior year period, led by the increase in average dues and increased member spending within our in-center businesses. Third quarter center operations expenses of $295 million increased 27% versus the prior year, primarily driven by added staffing to support increased center usage and expanded programming, the opening of new centers and labor and utility cost inflation. Third quarter rent expense increased 20% to $63 million, driven primarily by non-cash rent expense where we've taken possession of a site and started construction but have not yet opened for operation, as well as rent expense from the sale leaseback of nine properties in 2022. General, administrative, and marketing expenses were $57 million and included $5 million of non-cash share-based compensation expense. Excluding non-operating items in both periods, general, administrative, and marketing expenses increased 25% in the quarter, primarily driven by increased labor to enhance and broaden our member services, increased technology and marketing investments, and additional public company expenses. Our GAAP net income for the third quarter was $25 million compared with a net loss of $45 million in the third quarter last year. Excluding a one-time gain of $43 million related to the sale leaseback of five properties, share-based compensation expenses, and other non-recurring items, our adjusted net loss was $12 million in the third quarter compared to a $40 million adjusted net loss in the prior year. Adjusted EBITDA increased 51% to $71 million and grew 12% on a sequential basis, demonstrating another quarter of strong year-over-year and sequential improvement. Adjusted EBITDA margin of 14.3% increased 210 basis points from the third quarter last year and 60 basis points sequentially from the second quarter of 2022. We delivered another quarter of improving cash flow with net cash provided by operating activities of $45 million versus a $2.3 million net use of cash in the prior year period. In the third quarter, we sold and leased back five properties for aggregate proceeds of $200 million, bringing our aggregate sale leaseback proceeds through the first nine months of the year to approximately $375 million. Our liquidity position at the end of the third quarter remains strong with cash and cash equivalents of $107 million and no borrowings on our $475 million revolving credit facility. Turning to guidance. For our fourth quarter and full year outlook, we are tightening our guidance range but leaving the guidance midpoint unchanged. For the fourth quarter, we are projecting total revenue of $460 million to $490 million and adjusted EBITDA of $80 million to $90 million. For full year 2022, this equates to total revenue of $1.81 billion to $1.84 billion and adjusted EBITDA of $255 million to $265 million. This outlook includes the following assumptions: the opening of seven new centers in the fourth quarter and 12 for the full year, average fourth quarter monthly dues per center membership between $155 and $160, and a 2,000 to 5,000 net center membership decline in the fourth quarter. Please keep in mind that we typically lose memberships in the fourth quarter, so this would be a nice improvement compared to 2019, when we lost just over 13,000 fourth quarter net memberships, and last year when we lost nearly 19,000 fourth quarter net memberships. For the full year, we expect to add approximately 75,000 net center memberships. Preopening expenses of approximately $5 million in the fourth quarter and $14 million for the full year, GAAP rent expense of $65 million to $70 million in the fourth quarter and $245 million to $250 million for the full year. This includes approximately $40 million of annual non-cash rent expense, of which approximately $10 million will be incurred in the fourth quarter. We remain committed to making our enterprise more asset-light. As Bahram mentioned, we are exploring alternative sale leaseback structures to optimize our financing costs and preserve the utilization of our net operating losses to offset our growing future taxable income. We plan to close on our next round of sale leaseback activity in the first quarter of 2023. We are pleased with our progress on executing our strategic priorities this year. We've added programming, we're increasing membership and usage levels, we're opening new athletic country clubs, and we're optimizing our pricing, and our efforts to make our corporate and field operations more efficient are just getting started. We believe these initiatives leave us well-positioned to deliver continued revenue growth and a substantial improvement in profitability in 2023, creating additional value for our shareholders while continuing to ensure we provide the best possible experiences to our members. With that, we will turn the call back over to the operator for Q&A.

Operator, Operator

Thank you. We will now start a question-and-answer session. Our first question is from Brian Nagel with Oppenheimer & Co. Please go ahead.

Brian Nagel, Analyst

Hi. Good morning.

Bahram Akradi, CEO

Good morning, Brian.

Robert Houghton, CFO

Good morning.

Brian Nagel, Analyst

Nice quarter. Bob, welcome. Look forward to working with you.

Robert Houghton, CFO

Thank you.

Brian Nagel, Analyst

So the first question I have is regarding expense leverage. Bahram, you mentioned this in your opening comments, but clearly your membership is improving significantly. It's recovering well. You have new centers set to open throughout the rest of this year and into next year. You also mentioned the target EBITDA margin for 2023. How should we think about the timing of that improvement and the different contributing factors? As we progress through the end of 2022 and into 2023, where should we expect to see most of that expense leverage reflected in the P&L?

Bahram Akradi, CEO

Thanks, Brian. It’s important for me to reiterate that when we emerged from the pandemic, we found ourselves in a challenging situation, difficult to explain. Pre-pandemic, we had 140 clubs, with 122 of them in year three, which means they were essentially mature, generating full revenue and EBITDA. A few clubs were in year two, achieving about 85% of revenue and around 50% of EBITDA. Some were in year one, reaching approximately 60% to 65% of their revenue potential and showing flat EBITDA. They initially lost money during the first few months and then broke even in the latter months of the year. When we came out of the pandemic, it’s perhaps not fully appreciated that we effectively restarted every club as if they were in year one. Our entire portfolio was treated as year one clubs. Depending on the market's opening rates, like in Texas, some opened sooner without added restrictions. Those clubs have exceeded past performance in both revenue and margins. Currently, a larger number of clubs have reached maturity similar to this year. However, around 50 to 60 clubs are still performing like year two due to prolonged closures and more restrictions imposed by certain states, which has set them back. Looking ahead to August, our analytics indicated that by early 2023, the same-store clubs should align with the dues revenue levels of 2019 and early 2020. With additional costs factored in, we quickly shifted our focus to phase two of our post-pandemic recovery. We decided to continue growing memberships while also assessing cost efficiencies. It’s important to note that we conduct this efficiency review every year as part of our budgeting process. However, we hadn't done that for three years because our main goal was to get the clubs back on track to boost revenue. Now that we have achieved that, we see significant opportunities for improvement. We have streamlined operations by eliminating several positions between the clubs and corporate. We've refined efficiencies in the corporate office and adjusted some structures within the clubs. We are confident guiding you toward the numbers that Tom and I shared during the IPO, including the margin range for EBITDA plus rent recovery. We are committed to achieving those percentages and are confident we can exceed 2019 margins. This improvement is reflected across all areas of our business, and we’ve already implemented over 50% to 60% of these changes. We are managing necessary expenses to make these adjustments and aim to start the first quarter with a clean slate moving forward.

Brian Nagel, Analyst

Got it. Very helpful, Bahram. Thank you. I have a follow-up question. I've spent a lot of time lately at the new clubs on One Wall Street and Dumbo. They look great, Bahram. Congratulations. How should we think about the economic model for Life Time of clubs, specifically the urban-type clubs like those compared to the more traditional centers that you've historically opened?

Bahram Akradi, CEO

When we execute any business plan, it doesn't matter if it's urban or not, we aim for similar rates of return on invested capital. We have a distinct advantage in the real estate sector, especially in the sale leaseback area for new developments. I recently spoke with two partners who are always ready to collaborate. They have complete confidence in Life Time and recognize us as a reliable company that pays its rent consistently. When they consider adding assets in the healthy lifestyle space, they prefer Life Time over others. Additionally, we are in contact with developers constructing large buildings, including apartment complexes and mall owners, with whom we have ongoing partnerships. Everyone at our company is exploring various options actively. We've also managed to acquire some assets that were initially intended for different purposes but underperformed, leading the landlords to reach out to us. We were able to negotiate favorable deal structures. We expect that our return on invested capital will align with our prototype models.

Brian Nagel, Analyst

Got it. Thank you very much. Appreciate it.

Operator, Operator

Thank you. We have the next question from the line of Robby Ohmes with Bank of America. Please go ahead.

Robert Ohmes, Analyst

Hi, good morning. Thank you for answering my questions. Bahram, great job getting the membership dues per store back to pre-pandemic levels. Could you explain what you've done with pricing for both legacy and new members? Also, how close are you to aligning the pricing for legacy members with that of new members? Do you see additional opportunities to raise prices as we approach 2023?

Bahram Akradi, CEO

That’s a great question. Let me explain. Before the pandemic, our average membership price was around $120. For the full year 2019, it might have been just a couple of dollars less than that. We're planning to finish the year with an average of about $160 per membership. This is significant because while membership counts are often highlighted, what truly matters is the revenue they generate. I've been observing this for the last 10 to 12 years, even before we became publicly traded. When we started this company, we created outstanding products and services but charged too little, which led to challenges. We attempted to rectify this over time. During the shutdown and reopening phases, we adopted a careful approach. Over the next 45 days, my team and I will be assessing each club individually to determine the optimal membership level for that location, which will likely be lower than our past membership counts. Currently, our average monthly dues are approximately $190, indicating a $30 difference between our current memberships and the ones that are leaving. We have implemented several legacy price increases and are in a very strong position now. We don’t foresee frequent increases moving forward; any that occur will be minimal as membership holds are lifted. Each time we replace a dropped membership, it means an additional $30 in revenue. We have successfully reached our target of $160 per membership by year-end, and moving forward, we anticipate a gradual increase. We might consider a small price increase for legacy members during the pool season and others around September, October, and November of next year, similar to this year.

Robert Ohmes, Analyst

Got you. That's very helpful. And just a quick follow up. You guys called out the initiative small format group training in ARORA and pickleball, et cetera. What is standing out on those initiatives? And how is it impacting sort of the demographics of the membership, or is it impacting the demographics of the membership?

Bahram Akradi, CEO

We are selling all of those programs. ARORA targets older individuals, specifically those aged 55 and above, with many qualifying for memberships through insurance companies. A significant number choose to pay an upgrade fee to access the club at all hours and take part in pickleball and other sports. ARORA is thriving, with pickleball participation increasing by 50% each quarter. Utilization rates are rising, and we aim to dominate this segment. Currently, we have over 350 dedicated courts available and are adding five to six new courts each week, anticipating 600 to 700 courts by the end of next year. We have recently formed a partnership with MLP and maintain ongoing relationships with PPA. By the end of next year, I expect to have 60,000 to 70,000 unique pickleball members at Life Time clubs, with about half of them being existing Life Time members. The rest will be new customers. We also have our dynamically engaged personal training, or DPT, which is a groundbreaking approach to personal training. The quality of service and the type of workout cannot be replicated online or with an app; it requires in-person interaction with professionals like chiropractors, physical therapists, massage therapists, and trainers all in one setting. This aspect of the business is growing nicely month-over-month, and I anticipate surpassing our 2019 personal training numbers this year, as we have everything in place, from pricing to strategy and structure. In addition, we've invested heavily in small group training with Ultra Fit, a program combining sprint workouts and functional training, which has gained immense popularity and is growing rapidly. Our GTX and Alpha programs—which represent our high-end CrossFit offerings—are also expanding. These programs are included in the signature membership, simplifying the process for customers as they only need to pay a single monthly fee for unlimited access to classes. Looking ahead, I expect all the programs I mentioned to continue thriving, and we are intensifying our efforts on each of them. The transformation, pricing adjustments, and restructuring for greater efficiency are all part of our focus. Our leadership team and I are dedicated and working tirelessly to ensure 2023 is a record year.

Robert Ohmes, Analyst

That sounds great. Thanks so much.

Operator, Operator

Thank you. We have the next question from the line of John Heinbockel with Guggenheim Securities. Please go ahead.

Bahram Akradi, CEO

Hi, John. Hello, John. Okay. Why don't we go to another question and come back to John later.

Operator, Operator

Thank you. We move to the next question from the line of Chris Carril with RBC Capital Markets. Please go ahead.

Christopher Carril, Analyst

Hi, guys. Good morning. So as you noted in the prepared remarks, you saw center membership growth in 3Q versus that kind of expected typical seasonal decline. And that was with one less opening, I think, than you were anticipating for the 3Q. So can you talk about what you saw that was different from your expectations last quarter with respect to membership growth? And what drove that modest increase versus the expected decline? And to what degree did the on-hold memberships contribute to that growth?

Bahram Akradi, CEO

The on-hold memberships really have not much of an impact on it at all. We are right in that 40,000, 45,000, 50,000 memberships on hold, I think is going to hold steady. Our major decision was how to run these programs that I just mentioned, so that the pool season would be less factor of the people who come in, if they're not going to come in for pool season, they come for pickleball, they come for ARORA because of those is the change in the slight loss of membership to a slight gain in memberships. And yes, we expect to outperform those metrics versus 2019 historically until the clubs have well surpassed their potential. And there's still quite a bit of potential. I still believe the other markets that they were behind, again, because of what I explained earlier, I expect by mid-summer next year pretty much all of our clubs surpassed the 2019 performance in traffic, not in membership but in swipes and in revenues, of course, both dues and in center.

Christopher Carril, Analyst

Got it. Bahram, I'm interested in hearing your thoughts on the competition in the health and wellness space. I know your product and experience are quite unique and have been a major focus for the company historically. I'm curious about your perspective on the rebuilding of the industry supply post-pandemic and how the competitive environment is changing.

Bahram Akradi, CEO

Yes. There is some pressure on the mid-level price points, which have always faced challenges. Currently, it seems there isn't much that can be done at that level. The high end remains stable, while the low end is crowded with various brands like Planet Fitness and Crunch, all likely to face challenges due to rising supply chain costs in construction. This may explain why some franchise models struggle to make their finances work. From my perspective, within the healthy lifestyle sector, we belong to a unique category. I haven't seen any competitors that can match us. Over the past year, our business model underwent significant changes to achieve the results we are presenting now, and it required the specific strategy we implemented. We focused heavily on growth for the past 18 to 24 months after a gradual reopening. After confirming our revenue recovery, we shifted our focus toward increasing our margins. I can't see any other approach leading to growth in the coming years. We have a strong pipeline with new opportunities on the way. Looking ahead, I anticipate substantial pre-tax income over the next three years. Upon reevaluating our position in mid-August, I realized that our significant loss carryover of about $500 million could be advantageous since we can utilize it with our pre-tax income over the next three years to offset it. Consequently, we decided not to sell older buildings to wash out our net losses, which I consider very valuable regarding our expected profitability. Instead, we are collaborating with our partners and landlords to fund new club openings, ensuring that the construction costs are covered and their corporate guarantees remain intact. This funding approach is already in place for many of our growth projects, whether in malls, residential areas, or office locations. We find ourselves in a strong competitive position, and I don't see our rivals emerging to challenge us. This year, we are set to achieve around 100 billion impressions, which positions us to generate over $2 billion in revenue while spending less than $12 million on direct marketing—only 0.5% of our revenue. In contrast, other fitness companies often allocate around 30% of their revenue to marketing. We're in a remarkable position, where the economic fundamentals of our business align well with the quality of our widely appreciated brand. The competitive landscape doesn't seem likely to impact Life Time negatively.

Christopher Carril, Analyst

Great. Thanks so much.

Operator, Operator

Thank you. We have the next question from the line of John Heinbockel with Guggenheim. Please go ahead.

Julio Marquez, Analyst

Hi, guys. Sorry about the technical difficulties earlier.

Bahram Akradi, CEO

That's okay. We forgive you, John.

Julio Marquez, Analyst

Just a quick question for you all. You mentioned broad-based efficiency opportunities, but I guess what are the one or two biggest buckets that you guys have identified? And if that happens to be in the clubs, how are you safeguarding the experience for your members? Thank you.

Bahram Akradi, CEO

Over the years, our business model has gradually shifted towards a more management style, which has its benefits. However, we've leaned more into that management approach over the last three years while addressing various priorities. Now, as we reassess, we aim to adopt a more ownership mindset across all our departments, creating a leader structure rather than just a manager structure. Our general managers are really enthusiastic about taking charge of their clubs. We've also developed new dashboards that allow them to see and operate their businesses with greater autonomy. We've removed a significant layer of costs from the corporate office that existed between the executive team and department heads in the clubs, such as regional leads, granting more power to the clubs. Additionally, we've implemented new systems throughout. I believe that our personal training services will achieve better margins in 2023 than they have historically. I also hope to see our corporate overhead become much less of a burden on the clubs compared to the past, as we've taken a proactive stance to ensure that corporate expenses will decrease instead of increase, even as our revenues are set to grow significantly next year. As a result, the costs allocated as a percentage for general and administrative expenses to the clubs should decrease by at least 1 to 1.5 percentage points.

Julio Marquez, Analyst

Great. Thank you.

Operator, Operator

Thank you. We have next question from the line of Simeon Siegel with BMO Capital Markets. Please go ahead.

Unidentified Analyst, Analyst

Hi. Good morning. This is Garrett on for Simeon. Thanks for taking our question. I'm just curious, just given the macro backdrop, you're seeing anything within your customer base outside of normal seasonality along the lines of increased churn or resiliency among your member base? And anything interesting there maybe you can note.

Bahram Akradi, CEO

Yes. For the most part, we are focusing strictly on our strategy. Over the last six years, we have shifted quickly to target the top 20% of the market. As you all know, the top 10% continues to spend more than any other category, and the next 10% remains unaffected. The top 20% is the least impacted. We haven't heard anyone express intentions to cancel their membership due to rising gas prices. The current environment is favorable for us. However, I want to emphasize that we plan for the worst while hoping for the best. We are taking a very cautious approach regarding our cash flow and liquidity. We will keep our revolving credit line available as a backup throughout the next year. But right now, we are not seeing any negative impacts on our customers, and we still anticipate substantial revenue growth through 2023.

Unidentified Analyst, Analyst

Okay. That's great to hear. And I guess just as a follow up, and Bahram you kind of touched on this a little bit, but any further detail would be great. Just understanding the real estate market and how that's evolving and kind of what you mentioned on cost and availability of our products for new builds. Are you seeing any changes there that are worth calling out across the sale leaseback and just kind of the new build CapEx that's worth noting?

Bahram Akradi, CEO

Yes. The market is essentially divided between those who engage in sale leasebacks and finance each unit to achieve the desired returns, aiming for a 10% cash-on-cash return. They typically need around 65% financing, give or take 5% to 10%, specific to the asset. Such investments can be challenging unless we are willing to accept a significantly high cap rate, which we are not. The current interest rate environment restricts investor activity, and if interest rates trend lower in a year or so, that part of the market could reopen. There are also large REITs, our partners, that generate substantial funds from operations and have ample capital available through considerable credit lines. They pay dividends on their deals, still needing to invest and grow. While interest rates may fluctuate slightly, they are unlikely to change dramatically. They can pursue selective deals, as our agreements consist of 20-year leases with 25-year options, attracting long-term investments from quality companies. I've always been confident in our ability to execute sale leasebacks based on Life Time's credentials and our established relationships. Regarding construction costs, expect fluctuations in prices for commodities like steel and concrete; they rise and fall, but labor costs, which comprise a significant portion of overall expenses, have increased and are unlikely to decrease significantly. We will not see construction costs returning to pre-COVID levels. The key factor is whether costs will stabilize at 10% to 15% higher, or 25% to 30% higher. Life Time has its own internal construction general contracting, helping to manage costs. We are strategically timing our project starts; currently, we own five large club parcels with necessary entitlements. Although we could initiate some projects now, we are holding off until we complete certain forward sale leasebacks and gain clarity on the broader economic landscape. Starting next quarter, we aim to show improved cash flow, and if we begin two, three, or four clubs six to nine months later, we have numerous opportunities that can still support over 10 new club openings from 2024 and beyond. We're confident in our growth prospects and our capability to address any challenges that may arise. We've navigated obstacles for 30 years, and we are fully prepared for any difficulties ahead, especially in the evolving macroeconomic environment.

Unidentified Analyst, Analyst

Great. Thank you. Appreciate the color.

Operator, Operator

Thank you. We have the next question from the line of Dan Politzer with Wells Fargo. Please go ahead.

Daniel Politzer, Analyst

Hi. Good morning, everyone, and thank you for taking my questions. So membership growth definitely came in better in the third quarter, and I appreciate that there's typically negative seasonality. But fourth quarter, you're guiding to down again. You have one center shipping out of the 3Q into the fourth quarter. So just what are the kind of the moving pieces there to think about why fourth quarter memberships would be down? And is there some conservatism built into that? Thanks.

Bahram Akradi, CEO

Yes, we need to approach our communication with a degree of caution. Our guidance may reflect a conservative outlook. We have indeed seen a more significant loss in memberships during the fourth quarter than what we anticipated, primarily due to seasonal trends. In September, October, and November, we typically lose memberships before leveling off in December, followed by substantial growth in January through July, which is our peak season. The loss of 3,000 memberships is not significant, as we typically see strong membership gains in January. This is a solid indication of our performance. Additionally, while we could make changes through promotional marketing or price adjustments, our current strategy is to avoid sales and promotions and instead let our product and services speak for themselves. We have maintained this approach for the past two years, and it has proven successful in generating higher revenues, better margins, and a stronger Net Promoter Score in 2023.

Daniel Politzer, Analyst

Got it. Thanks for all the detail. And then Bahram, you talked a lot about the efficiencies at the centers and the focus there on margins. I guess where we sit here today where average members' percenters call it 20% plus below 2019. And I think we've talked about that in the past. How are you thinking about staffing percent or the number of FTEs per center? Are you where you need to be? Is there room to cut there? Or are you still kind of ramping with some of the personal trainers that you said to hire through this year?

Bahram Akradi, CEO

I have given clear instructions to our clubs. While I am extremely dissatisfied with any reductions in frontline staff, our expectation is that these clubs operate at a level akin to Four Seasons or Ritz-Carlton standards. We will not reduce staff in the locker room or compromise on cleanliness. That is not where we are looking to save money. We have previously allocated too many resources to middle-level management from the corporate office down to the clubs. This is the only area where we are restructuring the business, ensuring more leaders are actively involved in demonstrating the work rather than remaining in offices for meetings and conference calls. This restructuring affects all areas, including personal training, the spa, and cafes, with the majority of changes centered around the corporate office and the layers between corporate and clubs. We have completely eliminated that middle management. For this quarter, we are not announcing any one-time charges; we are covering costs with overperformance. Our plan is to start with a clean slate in January, aiming for record revenue and margins, which will ultimately reflect in EBITDA, allowing you all to analyze the numbers accordingly.

Daniel Politzer, Analyst

Understood. Thanks for all the color.

Bahram Akradi, CEO

Thanks.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back over to Mr. Akradi for closing remarks. Over to you, Bahram.

Bahram Akradi, CEO

Yes. I'd like to take a couple of minutes in here and welcome Bob. He is an amazing partner. He is always on and always available to help truly seven days a week, CFO partner here. Tom has been an absolute gift for me for the last six, seven years. He's been an amazing partner. He has built an incredible finance team here that they can support Bob in everything he needs. As you guys know, I'm five years older, but Tom and I share the same exact birthday. We both are jet pilots, and we both do these crazy 100-mile mountain bike races. I fully expect to be doing a lot with Tom on a personal level as time goes on. He and I talk regularly. He's always available to me if I need something. I'm always available to him if he needs something. So I want to just truly give him my biggest marks of appreciation here with all of you guys here, and I want to have Tom say a few things before we hang up.

Tom Bergmann, President

Great. Thank you, Bahram. I really appreciate it. It's a great friendship and partnership we've had for almost seven years now, and I want to thank you for that. I want to thank all of our other executives at Life Time for all the support. And most importantly, thank the 30,000-plus team members out there. You guys are incredible. The energy you bring and the happiness you bring to our members every day is so impressive, and I've been grateful to serve this company for seven years and super happy with how it's positioned going forward. It's in really good hands and really well-positioned to drive profitability and growth for years to come. So thank you, everybody. It's been great working with you.

Bahram Akradi, CEO

I want to take a moment for Bob. Bob, please say hello to everyone.

Robert Houghton, CFO

Yes. Hello, everybody. It's great to be on the call with you this morning. Thrilled to be here at Life Time. A huge thank you to Tom for all his support during this transition that he and I have had, and thank you to Bahram for placing your trust and confidence in me as your next CFO.

Bahram Akradi, CEO

All right, guys. Thank you so much. We look forward to being on the call with you again at the beginning of 2023. And if you have any questions, feel free to reach out to any one of us three. Thank you so much.

Operator, Operator

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