Life Time Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 7 speakers on the call.

Operator

Greetings and welcome to the Lifetime Group Holdings Inc. Q3 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It's now my pleasure to turn the call over to Ken Cooper, Investor Relations. Please go ahead.

Speaker 1

Good morning and thank you for joining us for the Q3 2024 Lifetime Group Holdings Earnings Conference Call. With me today are Bahram Akroti, Founder, Chairman and CEO and Eric Weaver, Executive Vice President, CFO. During the 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. There is a comprehensive discussion of risk factors in the company's SEC filings, which you are encouraged to review. The company will also 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.

Speaker 1

This information along with the reconciliations to the most directly comparable GAAP measures are included when applicable in the company's earnings release issued this morning, our 8 ks filed with the SEC and on the Investor Relations section of our website. With that, I will turn the call over to Eric.

Speaker 2

Thank you, Ken, and good morning, everyone. We appreciate you joining us this morning. We're excited to share with you our Q3 results, the

Speaker 3

full details of which can

Speaker 2

be found in the earnings release we issued this morning. For the Q3, total revenue increased 18% to $693,000,000 driven by a 20% increase in membership dues and enrollment fees and a 16% increase in in center revenue. Center memberships increased 5% compared to last year to end the quarter at more than 826,000 memberships. When combined with our digital on hold memberships, total memberships ended the quarter at approximately 877,000. Average monthly dues were $198 up approximately 13% from the Q3 of last year.

Speaker 2

Average revenue per center membership increased to $8.15 from $7.22 in the prior year period as we continued to benefit from higher dues and increased in center activity. Net income for the Q3 was $41,400,000 versus $7,900,000 in the Q3 of 2023. Adjusted net income was $56,300,000 versus $26,700,000 in the prior year period, an increase of $29,600,000 Diluted earnings per share was $0.19 compared to $0.04 per share in the Q3 last year and $0.26 per share on an adjusted basis compared to $0.13 in the prior year period. This was an increase of 100% versus the prior year period. Adjusted EBITDA for the Q3 was $180,300,000 an increase of 26% versus $143,000,000 in the Q3 of 2023 and our adjusted EBITDA margin of 26.0 percent increased 160 basis points as compared to the Q3 2023.

Speaker 2

Net cash provided by operating activities increased 32% to $151,000,000 as compared to the Q3 of 2023. For the 2nd consecutive quarter, we achieved positive free cash flow. Free cash flow increased by $169,000,000 to $138,000,000 in the 3rd quarter compared to the prior year period. While this number includes sale leaseback and land sale proceeds of $74,000,000 for the quarter, we achieved positive free cash flow prior to these proceeds. We reduced our net debt to adjusted EBITDA leverage to 2.4 times in the 3rd quarter versus 3.7 times in the prior year period.

Speaker 2

With that, I will now pass the call over to Bahram. Bahram?

Speaker 4

Thank you, Eric, for doing such a fantastic job. And let me extend my thanks to our more than 41,000 team members who made this great performance Eric just shared with you possible. I'm going to keep my remarks very short. The numbers speak for themselves. As many of you know, I am never satisfied, but I am as pleased as I've ever been with the accomplishments of our entire team over the last few years.

Speaker 4

We responded to the challenges presented over the last 4 years, reinventing, transforming and improving every aspect of Lifetime. We elevated our brand. We've evolved our clubs. And today, we're engaging with our members deeply and profoundly as never before. Our members love Lifetime.

Speaker 4

At the same time, we have rewired our business and organizational structure to maximize efficiency. Today, we are by far the best version of ourselves that we have ever been. We offer the highest quality member experiences in the best facilities in the health and leisure industry. Our momentum has been spectacular and it continues today. We exceeded every financial goal and every performance metric we set for ourselves: membership, retention, revenue, adjusted EBITDA, free cash flow and EPS.

Speaker 4

Now that we have deleveraged our balance sheet and we are generating free cash flow, our focus will be on continuing to deliver double digit revenue and adjusted EBITDA growth. As you read in this morning press release, we are raising revenue guidance to a range of $2,595,000,000 to $2,605,000,000 and our adjusted EBITDA guidance to a range of $658,000,000 to $662,000,000 We are now looking forward to take your questions.

Operator

Thank you. You. Our first question is coming from Brian Nagel from Oppenheimer. Your line is now live.

Speaker 5

Hi, good morning.

Speaker 4

Good morning. Good morning, Brian.

Speaker 5

Once again, congrats on a very nice quarter.

Operator

Thank you. I have two questions.

Speaker 5

I guess one bigger picture maybe one smaller picture. I'll put them together. But first off, Bahram, on the bigger picture side, so with all the work on the balance sheet, your debt ratio is now at or below the target you articulated previously. How should we be thinking about, I sort of say, the growth profile of lifetime going from here, particularly as we start looking towards 2025 and new openings? Then the second question I have, this is just shorter term.

Speaker 5

Just with respect to the guidance, once again, you beat Street estimates, you lifted guidance for the year. You don't give quarterly guidance now, but I guess the question I'm asking is, are you actually with this guidance increase lifting your own internal targets for the Q4 as well? Thank you.

Operator

Okay.

Speaker 4

So we let me start with your first question. Our targeted EBITDA is our debt to EBITDA is 1.75 to 2.25. That's the range that I think is appropriate for our company considering the fact that we own over $3,000,000,000 of market price on real estate, more like $3,500,000,000 If we didn't have that, I would like to have our debt to EBITDA be 1 to 1.25, 1.5. So Lifetime brand is such an incredible brand. It's paying such an incredible dividend.

Speaker 4

Our mindset has been the balance sheet has to match that brand. And thanks to our partners and our team, Eric, everybody, we kind of had been steadfast to getting that leverage where we want to. The other thing that I have in mind is a company that is cash flow positive after its growth capital is a different kind of company. It's the kind of company that basically has the destiny of in their own hands. So we have guided everybody over and over that $25,000,000 to $30,000,000 of net out of our pocket per location and when I say that and it's basically in our mind sort of a large format equivalent per 100,000 square feet is what's going to take to build And we have probably about 100 different deals in the pipeline we're chasing right now.

Speaker 4

The pipeline looks very good for 2025, looks even better for 2026 and 2027. And we will manage the growth so that, a, we can continue to deliver excellent results and continue to make sure we uphold our brand and 2, we are able to generate incremental $50,000,000 to $100,000,000 of free cash flow per year. The rest of it is intended to grow the company. So we have substantial free cash flow after interest, which is now going to be significantly lower after what we were able to accomplish last couple of days for 2025 than it is between 2024 and 23. After the interest and what we call maintenance CapEx, modernization CapEx, we will have significant additional capital.

Speaker 4

We can start projects, expedite growth and still maintain that free cash flow positive. So that's really what the first question. The second question is, look, we have always guided you guys with a number that we foresee hard to miss. We want to incorporate any potential macro headwinds or anything conservatively, make sure the number we give you, Eric and I, is one that we have a very, very high level of confidence that we can deliver. It doesn't mean that's all it can be.

Speaker 4

All it means is the number we want to share with you to make sure if we don't go below that.

Speaker 2

Yes. And just to add to that, the guidance, we increased it because we're obviously seeing still very positive trends in the business. And so the implied guidance for Q4 on a revenue basis is about 15% year over year growth and about 16% on adjusted EBITDA. And then for the second half, it's 2017% on the revenue side and 21% on adjusted EBITDA. So still very great momentum in the business that we're seeing.

Speaker 4

Thanks guys. I appreciate it. Thank you.

Operator

Thank you. Next question is coming from John Heinbockel from Guggenheim Securities. Your line is now live.

Speaker 5

Hey, Bahram, I want to start with the 100 plus deals in the pipeline. How would you segregate those out,

Speaker 4

the ground ups,

Speaker 5

right, maybe take club takeovers, your various channels, right, residential buildings. How would you segregate that out? And then, I know you talk about the 10 to 12 LFEs. What do you think is the organization's capacity? Can you eventually do more if you look at a couple of years, do more than the 10 to 12?

Speaker 5

Or you would prefer to limit it to that?

Speaker 4

No. Actually, as it looks like right now, next year could be the 10% to 12%, 25%, 26% right now as the way the schedule rolls out is already probably 12 to 14 and I think that number can expand. So we have this pipeline and we're working on deals and some of the gestations are much longer than others. And we the ground ups, obviously, are the ones that they take longer time to put together. The ones that go into the high rise resi buildings, those take a long time, but there are deals we're working on those, but they have been in the pipeline for a long time.

Speaker 4

So as it what I can answer you and everybody else, if you have to look at our we're not building sweet greens. We're building anywhere from 40000, 50000 square feet to 1 100 and 20,000, 30,000, 40000 square feet and on variety of different real estate opportunities. So and we have these deals in the pipeline and each of them have their own schedule that is the right timing for the developer, for us, for the whole project. So they're going to be lumpy. What I mean by that is next year could be more of clubs that their takeovers and transformations, the following year is going to be a lot more are ground up.

Speaker 4

So what I would basically recommend to everybody is to really think about them as a blended half and half at this point. I think as we go into about 3, 4 years from today, based on the number of conversations we're in and based on the incredible results that the lifetime living is producing for the lifetime living, the owners of the actual buildings In terms of ramp, consistently we're getting about 15%, 20% more rent. Consistently, we have a retention that they have never seen before is 20 percent attrition rate in that side of the business for them versus as much as 40 in other apartment buildings. And of course, we ramp these faster. So that has increased and we now have 5, 6, 7 of these locations in place.

Speaker 4

So they can look at the data. It's not just a thought process. It's actually fact supporting. So they we are in a lot of those discussions. So I think as I look out 4, 5 years out, John, I see there's going to be probably a lot more of those coming online.

Speaker 4

But for right now, I would like to guide everyone to, hey, take a look at a 3 year period of 30 to 40 locations in that 3 year period, about half half is the right mix of ground up versus other stuff.

Speaker 5

And then maybe as a follow-up on that, right? So I think about the incentive revenue spend, right, per month per member is I think it's like $75 It certainly in theory could be higher than that, right, if people are engaging with all your offerings. But I think you've also not wanted to do a hard sell there. How do you think about expanding that wallet share over the next several years? Is there anything you would want to do differently to accelerate that or it just happens naturally?

Speaker 4

Yes. So there are 2, 3 categories. 1, we have really done a nice job. My team has done a nice job with DPP, with our dynamic personal training, And that has been growing really nicely. But despite that, you have clubs that they're doing $5,000,000 a year in DPT and you have clubs that they're similar sized clubs doing $2,000,000 So we have always opportunity to go through best practices through the top 25, bottom 25 clubs in terms in each categories, cafes, spa, PT, kids.

Speaker 4

We do that routinely. And then as more things are going really well, we have more time to focus on the areas where there is more opportunity. And that's exactly what's happening at Lifetime. So I think there is still substantial opportunity to execute better across the board. And when I say that is there are some clubs that are doing amazing exceptional performance in PT or in food or in spa and then there are clubs who are not.

Speaker 4

So we have in aggregate, we have room to do better job with our F and B. We have aggregate lead room to do better job with spa and even with PTE. Those are the 3 big drivers of in center. Of course, kits is also one, but we do a pretty good job with that. Now, Miura, which we talked about a while back and I told you guys to not get excited about it, it's important.

Speaker 4

You still don't get excited about it. My goal was to deliver a customer journey that is fantastic. We've done that. Then the goal was to create a profitable unit business model. We are doubling our revenue right now, sometimes by the week, sometimes by the month over month for sure is doubling, September over August, October over September.

Speaker 4

And once we have that and the goal for that is end of this year, once we have a model that is absolutely perfect, then I would say probably 40, 50 locations across the country, not 1 in every club, but basically at least 1, 2, 3 in per market, we can roll out Miura. The beauty of that is you need the IP, we have it. You need the Chief Science Officer, we have it. You need space, so we don't have to like freestanding business has to go. We already have the space.

Speaker 4

We already have the customers. We have the demand. So we got that. We have we are just about to launch LTH, lifetime health brand. That's all of its supplements and nutritional products.

Speaker 4

We expect that business to grow substantially over year on year. And I mean not 10% or 20%, but significantly more than that in 2025. The digital subscription is growing about 100,000 subscribers a year, we are a month, since it's been now over 1,000,000,001,002 subscribers. That will fuel the partnership, LP Partnerships revenue that will improve that will increase the opportunities to their LTH products, our apparel that we partner with the different partners and the products of other partners. So we anticipate continuing to roll out opportunities to expand the revenue of the company and EBITDA of the company on an incredibly asset light format based on the power of our brand and our footprint.

Speaker 4

As we are expanding that footprint, building more incredible exceptional brand building as well as revenue square foot building locations, we continue to look for ways to expand our revenue and EBITDA and deliver more asset light. So we expect to deliver. Now we don't want to commit to more than a very low double digit revenue and EBITDA for the 10% to 12% revenue EBITDA, just like I mentioned before, per year, which I think is a very respectable number. But we obviously aren't going to be satisfied with that and that's not the internal goal. But we're not going to commit to anything more.

Speaker 4

As I mentioned earlier, we do not want to disappoint you or any investor by over promising and under delivering. Thank you.

Operator

Thank you. Next question is coming from Megan Alexander from Morgan Stanley. Your line is now live.

Speaker 6

Hey, good morning. Wanted to just maybe touch on the change in the leverage target around two times you're talking about at that midpoint versus the 2.5 ish prior. Can you just talk about the thinking around that a bit for us?

Speaker 4

No. I think you might have misunderstood. Our target was to get to we committed to get to the 3 beginning of the under 3, which is a critical point for so many investors. But many investors, some of the large, large false bracket investors basically said, hey, 3 is okay. We really don't want to even engage until it's really under 2.5 times.

Speaker 4

We believe the company is a strong BB credit. Thank God, regardless of Moody's or S and P wanting to wait another quarter or 2 before they actually give that in a corporate rating. The investors hailed us by giving us the rate that matches the strong BB. So we are very, very grateful for what we were able to accomplish this last week. But the target that I believe makes a company a strong BB is exactly the numbers I told you.

Speaker 4

It needs to be under 2 times debt to EBITDA. For sure, if you don't have real estate assets, what gives me the comfort to be between 1.75 and 2.25 is the fact that our entire debt could be completely retired by just doing $1,500,000,000 sell leaseback. So that is what allows me to say, okay, let's go between $1,750,000,000 to $2,250,000,000 target. And that number is easily going to we're going to be our estimate average estimate right now is we're going to be under 2.25 by end of the year, which gives us at least one more step down on our revolver. So we just feel like that's where we want to be.

Speaker 4

We want to have a brand and a balance sheet that they're both excellent and we get the cheapest cost of capital. But it doesn't by no means, Megan, is going to restrict our growth opportunity. We can grow inside of that envelope as much as we really feel like the growth opportunities are there.

Speaker 6

That's really helpful. It makes a lot of sense. And maybe just to follow-up on that. I think you said you could do as much as $1,500,000,000 of sale leasebacks. Obviously, the sale leaseback proceeds have come in better this year than what you were talking about to start the year.

Speaker 6

Is that still mostly opportunistic? Are you starting to see cap rates that are closer to what you'd to see? And how are you thinking about kind of the market for sale leasebacks as we head into 2025? Yes. Fantastic question, Megan.

Speaker 6

So it's going

Speaker 4

to be incredibly robust. We are already getting inbound,

Operator

sort

Speaker 4

of conversations from our partners that they like to have a couple of $100,000,000 $100,000,000 worth of sale leaseback that if we can provide the assets. So let's think about it this way. If we were to build 10 ground up facilities that could take as much as $600,000,000 of capital all in. What we keep telling everybody and we keep reiterating is $25,000,000 to $30,000,000 So if you take that number, take even the $30,000,000 off of it on 10 of those, that's $300,000,000 $350,000,000 The other portion of it is recycling at clubs that we have already built, if you know what I'm saying to you. So we have right now at least half a dozen clubs we built just in the last year or 2, paid for all of the ground up, very, very amazing assets, large format, super large.

Speaker 4

But we still own all the real estate. We haven't taken those to sell these back. So when the incoming offers are attractive, And I think by middle of next year, we will see sell leasebacks based on our credit more favorable than the best sell leasebacks we've ever done. And I expect us to do about $250,000,000 to $300,000,000 worth of sell leaseback on an annual basis, take that money and recycle it so that the net invested capital in each new ground up is no more than $25,000,000 $30,000,000 Does that make sense?

Speaker 6

Makes a lot of sense.

Speaker 4

All right. Thank you so much, Megan.

Operator

Thank you. Next question is coming from Chris Woronka from Deutsche Bank. Your line is now live.

Speaker 5

Hey, guys. Good morning.

Speaker 4

Good morning, Chris. Hey, Brian.

Speaker 5

Good morning. So, Brahm, when you talk about some of the, I guess, club takeovers or conversion opportunities, right, that are separate and distinct from the new builds, When you look at those existing assets, is there obviously, you're solving for an ROIC, you're solving for some kind of free cash flow yield ultimately. Do you think it tends do you tend to think you'll be more surprised on revenue upside or in the case of an existing center or something like that or a takeover, is there more opportunity to just get a better whether it's rent or it's an existing club, better operating model? Is there any way to think about which opportunity means more to you?

Speaker 4

Not at all. I would I'll give you just two examples. 1 club has been opened in Tampa. 1 we took 2 clubs last year and the last year we took them from the landlord basically gave it to us with a great TI package, one in Tampa, one in Detroit in Atlanta. The Tampa Club just opened this year and this summer, August, I think, and the Atlanta facility will open in November.

Speaker 4

Both of them incredible deals. It starts as a lease, landlords providing some additional TI dollars. We go in and we got those things out. When we take a club out from somebody else, many times it's just like a new build. The benefit is you already have the right zoning, you already have that location is approved for a club business.

Speaker 4

So it cuts through some challenges, but we literally design it, redesign it from the get go. And sometimes what we're getting is really a piece of land, we're getting a shell and the fact that it's already zoned for that use. But then it's completely rebuilt from scratch like a brand new club. Now because you have the zoning, you have the curb and gutter, you have all that, instead of taking 4 years, it takes a year or 18 months to do so. Then we expect it to deliver exactly the same type of return.

Speaker 4

Our business plan isn't going to go into these things and be excited about it if it has a lower rate of return than the other things we do. So and that rate of return, generally speaking, is in that 30% to 40% IRR on a net invested capital basis. We always look at these the same way. And so there are other and then there are some that are strategic. You might take over some assets because it's extremely strategic.

Speaker 4

You're intending to do something with tennis or pickleball or some other deal that it blends in. But I really just want to make your work, all of your work easy enough is that if you think about how we are guiding you with the $25,000,000 $30,000,000 net invested capital per large format equivalent, really what we need to maybe try to help you guys with best is to try to give you a schedule of opening as soon as we can commit to it for how many hundreds of 1000 square feet per quarter is probably the better way to go about it. Otherwise, it is really, really hard to create a model that anticipates, oh my god, 26, you're going to get 12 all ground up clubs and 27, you might get something a little bit different. So it's just we will try to manage that and simplify it and give you guys a way to model much easier.

Speaker 5

Okay. Thanks, Bahram. That's super helpful. And yes, we'd certainly appreciate any color on that. A quick follow-up, if I could.

Speaker 5

And that's just on the LTH, the brand branded things you'll be doing. Is there any way to put together a framework now for how big that opportunity is and how you measure it? Is it going to be based on per revenue you ultimately generate per digital member plus in center member or how are you going to know that you've reached the full potential whenever you do?

Speaker 4

Yes. No, I think you might want to look at companies like Thorn. Look at the top 4, 5 high quality, and I'm going to give some props to Thorne because I take a bunch of their product myself other than my products are just generally either LTH or Thorne. But we but there are other really great brands. Take a look at really, really high quality brands, high quality production, which is very rare to come by, very hard to trust nutritional products because they're not regulated like the drugs are.

Speaker 4

And that's why I take about 80 supplement pills a day. I'm not going to put anything in my body that is not tested for what it is. So we have been we've had this discipline for 20 plus years to produce the absolute best products. We didn't really didn't have enough scale between for to really put energy behind it. But now I emphasize with the lifetime subscription growing at 100,000 subscribers a month, athletic events is growing.

Speaker 4

Our partnerships is growing. The brand is 130,000,000,000,000, 40,000,000,000 impressions and it's going to keep growing. Now is the time to say, okay, we can build the business that 5 years, 10 years could be easily a $500,000,000 $1,000,000,000 supplement business. And so and nobody has a better right to win in that space than lifetime. So my long term, not 2024 or 2025, my long term vision is that we haven't built a $500,000,000 business out of that, then I really have not achieved my vision with that thing.

Speaker 4

So I think it's and it's not just about money. This is a place where we really can do some incredible good for the society because there just aren't that many supplement lines that you take and you take it to a lab, you have them tested and you're going to find half the stuff they say is in there is not there or they're not in the quantities they say is there.

Speaker 5

Okay. Thanks, Bahram. Very insightful.

Speaker 4

Thank you.

Operator

Thank you. Next question today is coming from Michael Hirsch from Wells Fargo. Your line is now live.

Speaker 3

Thank you for taking my questions. At your Investor Day, you announced your long term target of 4% to 5% growth from fully ramped centers. 2024 exceeded that. So I'm just wondering how should we think about this for 2025?

Speaker 4

So Michael, this is Bahram. I'm going to start taking those 4 d pills with my shake and give a chance to Eric to give you

Speaker 2

some good stats. Eric, come on. Yes. We're still benefiting a little bit this year from some of the pricing. But the 4% to 5% is still what we're modeling long term.

Speaker 2

So for next year and going forward, that's going to begin to normalize into that 4.5% range.

Speaker 3

Okay. Thank you. And then as my follow-up, I know you mentioned 10 to 12 new openings for 2025. You had opened 2 new centers during the Q3 and then the Atlanta location in November. So I'm just wondering, was there anything specific in 2024 that led to around 7 new openings versus the 10 to 12 target?

Speaker 4

Yes. We've had some delays in projects getting pushed back. Well, like I said, again, you got to look at this in a multi year rather than a year by year, because as of right now, 26 looks like we make up for everything in 24 and more, all with big humongous clubs. So it's just getting delayed into the 2020, but they're still coming. And we have a pretty good opportunity to get some additional deals done.

Speaker 4

It's not done yet 100%, but we are working on some additional growth potentially yet for 425. So it's really irrelevant because we as we've told you, we've been very, very methodical about delivering the numbers that we commit to you in terms of top line and bottom line, and then keeping off latitude for how we execute that on our own. And we've known we have so much and we told you, we have so much momentum in our core business that we could manage to a slower openings right now to make sure we are capturing that in center opportunity and the 2's growth opportunity in the entire portfolio. By the time it drops down to 4%, 5%, whenever that is, we will then have to have a very, very robust new club opening and additional growth like Miura or LTH and the LTH partnership to continue to deliver that double digit growth, which is a strong desire of the company. But we'll figure out a way to deliver what we commit to you.

Speaker 5

Thank you.

Operator

Thank you. Next question is coming from Alex Perry from Bank of America. Your line is now live.

Speaker 3

Hi. Thanks for taking my question. I just wanted to go back to the guidance raise a bit. What gives you confidence to lift the guide? And maybe sort of dissect the pieces for us.

Speaker 3

Is it you're seeing less membership churn than you would normally seasonally see? Are you baking in higher expectations for pricing, which continues to be a tailwind for you? Just maybe go through some of the pieces that led to the raise? Thanks.

Speaker 2

Yes. This is Eric. So a couple of things here. We're still seeing really great flow through from our membership dues. So that's one big piece.

Speaker 2

The retention, as you mentioned, continues to be very strong. You also probably saw in our release, our same store sales was north of 12%. And another big driver of that, and Ram talked about it earlier, was our DPT. So we continue to see very strong demand in DPT, which is a big driver of that. So all of those things are again as we've talked about just the consumer continuing to show strong demand gives us absolute confidence in being able to raise that guidance.

Speaker 2

Alex, to speak

Speaker 4

to you with a little more color, we've told you over and over, we told all of you guys that we are seeing the best retention. When I say the customers love Lifetime, they really do love Lifetime. We have the best retention I have ever seen in the history of the company in 34, 35 years. And on top of that, it's really like it looks like it could be like even better than that in 2025. So, we're at this point retention, again, it's not a number we're going to continue to give, but I have given it during the presentation with the debt guys.

Speaker 4

So I just want to we are going to finish the year north of 70% in retention. And for anybody who really understands this business, there is no more important metric than that retention, just no different than our partner business. It's really strong and the brand is resonating with the customer and is giving us additional opportunities over working trying to kind of create more products for that. But that's the reason. The retention is really the key.

Speaker 4

And as it results into the dues, And once you have a strong dues, everything else will follow.

Speaker 3

Perfect. And then just on pricing, are you expecting the same level of year over year price lift as we move into the Q4? And then as you think about your pricing structure for next year, as we move into 2025, will you likely reset prices even higher to start the year given the membership demand you're seeing? Thanks.

Speaker 4

Look, I think we have largely repositioned the company to where we want to be. We want to be the athletic country club destination. It's not a gym, it's people's 3rd place, 2nd place, as we see with our customers. They're now using the facilities, just about on average every other day. So that is this another reason for the strong retention is this engagement that is at all time high.

Speaker 4

And we are working strongly on actually, okay, what can we do right now to deliver even more exceptional desirability in every aspect of our business. That's really the strategic work that is taking place today with me, Peram, President of the Club Operations, Real Estate and then everybody, all the RVPs and all the lead generals. So as we roll that out, we see that getting that demand at the level that we are creating gives you pricing power. And then the way to adjust the price is really a function of clubs have 3,000 visits a day. At that level, we really don't want any more visits in that club per day.

Speaker 4

It's busy throughout the day. Now the key is, okay, maybe there's an enrollment fee. We're now starting more locations. We started with just a few. Now we're looking at other locations where we have to raise the enrollment fee from a few $100 $300 to $1,000 $500 in order to manage that type of club.

Speaker 4

The clubs that they're sitting at 55,000 this is a large format location equivalent, 55,000 swipes, 60,000 swipes in a month. They have room to get more membership. So there's not necessarily we got to get that club yet to 70,000, 80,000 people going to. So it's club by club, location by location. We have opportunity right now, I think this last few weeks or weeks, 6 weeks, there has been quite a few clubs that they've gotten that rack rate moved a little bit.

Speaker 4

And based on everything I just told you, it's not just because we want to raise rates or something like that. It's really managing to the club experience, the right customer mix into a particular club. And then the real big thing is that that gap between the pricing of a rack rate and once you run that rack rate for a month or 2 and it's clear indication that the customer like, oh, that's completely unacceptable rate. Nobody is having a hard time with it. So now that so that you know that you've tested that price.

Speaker 4

Then the gap is everybody who's paying below that rate. It gives you that $17,000,000 $18,000,000 $19,000,000 that we've told you. That is a difference between what people are paying versus if everybody pays the rack rate that creates that reservoir that you can basically draw from. 2 ways to draw from it, either people churn, new people coming in, same number of swipes, you get more dues for it or same number of memberships or you pass on a $10 $15 $20 legacy price increase per year for those people staying below the rack rate. They're happy because they're still ending up paying below the rack rate and they recognize we appreciate their loyalty to the company.

Speaker 4

And we're good and you guys are good and the investors are good because you keep getting this natural same store coming through even when other retailers don't have the opportunity to fight maybe a little bit of a tough macro and then maybe their sales go down 2%. We are buffered extremely well for that.

Speaker 3

Perfect. That's incredibly helpful. Best of luck going forward.

Speaker 4

Thank you.

Operator

Thank you. Next question is coming from Alex Fuhrman from Craig Hallum. Your line is now live.

Speaker 2

Great. Thanks very much for taking my question. Bahram, you alluded to this a little bit in what you were just saying. But it looks like over the past couple of months just in September October you've taken up the new member price at a pretty meaningful number of your clubs here. Does that mean we should expect to see you starting to kind of reach out to new members over the next couple of months in those clubs who now there's a gap between what they're paying and the rack rate is expanding?

Speaker 4

It's a good question. And now it's not just those clubs. So we go through, I think, probably 7, 8 times a year. There are 3, 4 months that we skip, but there's like 40,000 or 50,000 or 30,000, whatever the program, the AI is suggesting, members will get that lovely dues increase letter. And we have like very systematic categories.

Speaker 4

It's just it can be it's not hitting all members of 5 clubs or all members of 4. It basically goes across the whole membership platform. If 500,000 people are paying below rack rate as an example or 600,000 people paying below rack rate, it will sort through those, say, oh, these guys signed up 6 months ago. They're paying below the rack rate. They're not going to get a dues increase right now.

Speaker 4

We don't generally give dues increases more than once a year. So there's a very, very sophisticated AI algorithm that we have developed over the last, I want to say, 7, 8 years. And it's gotten significantly better. And I've seen the best version of it this year over even last year, where right now, we hardly see any incremental attrition when those 30,000, 40,000, 50,000 letters go out or the notices go out, we hardly see any incremental attrition out of it. So we have fine tuned that extremely well.

Speaker 2

Okay. That's really helpful. Appreciate the color. Thanks, Brahm. Thanks.

Operator

Thank you. Next question is coming from Owen Rickert from Northland Capital Markets. Your line is now live.

Speaker 1

Hey, Brahm. Hey, Eric. Congrats again on another phenomenal quarter. Thank you. And it sounds like the vast majority of clubs are very high performing.

Speaker 1

But if we take a look at some of the clubs in the portfolio that may be not as high performing, what's the goal with these? Is it renovation of the clubs, getting new equipment, providing more offerings? I guess just all in all, how

Speaker 4

do you look at these locations? And what is

Speaker 2

the plan going forward with these ones?

Speaker 4

Yes. So look, internally what we are running is a comprehensive business plan that's in the works right now for every single location of the company, every single location. What is the vision for that particular location? What's the opportunity? Where are we at to that opportunity?

Speaker 4

What are the things we need to do? Do we need to change programming? Do we need to change facility? Do we need to add? Do we need to make some changes in the leadership of the business?

Speaker 4

It doesn't really stop or end at one of those. It's a comprehensive analytical plan, full detailed business plan for every location. So we know what is the ultimate opportunity of that at least for this time at this time in that. And then we will go appropriately execute all those things. So it's more it's a phenomenal question.

Speaker 4

I'm just not going to give you the exact answer. The only thing I can tell you is that we have a very, very robust strategy process in place that basically evaluates that and then we go systematically execute against it.

Speaker 1

Perfect. That was very helpful. Thanks guys and congrats again on the quarter.

Speaker 4

Thank you so much.

Operator

Thanks. The next question is coming from Logan Wright from RBC Capital Markets. Your line is now live.

Speaker 3

Hey, good morning guys. Thanks for taking my question.

Speaker 4

I just had one on

Speaker 3

the incremental flow through, maybe this one's for Eric. Just on the marginal flow through of revenue to EBITDA, it looks like it's been running around 30% to 35% over the past several quarters. And obviously, I know you guys aren't sort of guiding us towards margin expansion. But just given the incremental flow through over the past several quarters, I guess I'm sort of curious what would be the puts and takes potentially driving that incremental flow through down such that margins would be in the similar range? It looks as though you guys would get some fixed cost leverage, but obviously there's some puts and takes in there.

Speaker 3

So maybe you could just walk us through those. Thank you.

Speaker 2

Yeah. I mean, one of the things that we've really said is we want to make sure that we're leaving ourselves enough room to kind of reinvest back into the centers as we need to. So as we look into Q4 and forward, we're doing things to make sure that we're making those clubs like new and making sure that all the repairs and maintenance and all that keeping it in that like new condition. So that's going to be one of the things that we're investing in. But again, on the flow through, we're continuing to see it on the due side.

Speaker 2

As we mentioned before, Brown talked about retention. So we get a lot of flow through from that. And so that's one of the main drivers. And then as I mentioned on the DPT side, that's also been very, very strong for us, especially in the Q3.

Speaker 4

The caution that we are wanting to issue is that we guided you guys to 23.5% to 24.5 percent on EBITDA margin from beginning of the year. And the question was asked why can't you you guys are all smart people. You look at the numbers. Why can't you do more? So we said we didn't say we can't do more.

Speaker 4

We just don't want to have you go tweak your models and keep ratcheting it up. There is no reason for that because number one goal of mine as the visionary founder of the company is to make sure the brand continues to elevate and not goes backwards. And therefore, just like Eric said, we like to guide to a number that we don't disappoint. Now I would suggest, hey, don't take it much higher than 25% EBITDA margin. Now we want to invest into our brand, into our programming, into our facilities to make sure the clubs are modernized.

Speaker 4

They're like new. The team members are getting the proper adequate education, they get proper incentives. And if we have more than takes all of those doing all those things, then we let it pass through. But I think the wise thing to do is to keep that margin at the range that we guide you guys to. And I don't know how many companies actually are delivering 25 percent EBITDA margin.

Speaker 4

I don't know that this is a win that is a game that anybody can win if you keep ratcheting those expectation up higher and higher and higher, eventually the company starts doing wrong things to achieve this ludicrous expectation. So I guide super strong to all of you to maintain that 25, don't get over excited. As we grow the some of the challenging areas, the spa, cafe, when they grow, they're going to actually drag the margin back down. Now the total the club is going to make more money, but the margin is going to get pressed, because they never they will never deliver 25% EBITDA margin. So it's a better engagement.

Speaker 4

The more people are doing the cafe, the more people go to the spa, the better it is for more engagements, you get more dues, which is great. That's a great margin. The negative side of it, the margin in those businesses are very low.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Founder and CEO, Brahm Akradi for closing remarks. Please go ahead.

Speaker 4

Thank you so much. I really appreciate all of you, analysts, investors. We are really, really happy about the accomplishments this year. We feel like we're in a really, really great position to go into the Q4 into next year and looking forward to continue to deliver what we promised to you. And I couldn't be more grateful to the Lifetime team for literally just passionately delivering and giving the results that you guys are seeing.

Speaker 4

So with that, I want to thank you guys and have a great day.

Operator

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

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Earnings Conference Call
Life Time Group Q3 2024
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