Life Time Group Holdings, Inc. (LTH) Q3 2023 Earnings Report, Transcript and Summary

Greetings. Welcome to the Life Time Group Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ken Cooper of Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us for the Life Time Third Quarter of 2023 Earnings Conference Call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Bob Houghton, CFO. 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. There is a comprehensive discussion of risk factors in the company's SEC filings, which you are encouraged to review. 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 our net debt leverage ratio and free cash flow. This information along with reconciliations to the most directly comparable GAAP measures are included 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. I'm now pleased to turn the call over to Bob Houghton. Bob?

Thank you, Ken, and good morning, everyone. I'll walk you through some of our third quarter key highlights and metrics. Our revenue increased 18% to $585 million. The revenue in the quarter would have been approximately $2 million higher, if not for the delay in opening our Tampa Harbour Island takeover location. Also, our third quarter results last year included approximately $3 million in revenue related to two non-profitable triathlons that we sold earlier this year. The combined impact of these two items is about $5 million of revenue. Our adjusted EBITDA increased 101% to $143 million in the quarter compared to $71 million in the prior year quarter. Adjusted EBITDA margin increased by 10.1 percentage points to 24.4% versus 14.3% in the third quarter of 2022. Year-to-date revenue increased 23% to $1.66 billion. Year-to-date adjusted EBITDA increased 128% to $399 million compared to $175 million in the prior year-to-date period. Center memberships ended the quarter at approximately 784,000, an increase of roughly 56,000 or 8% compared to the prior year quarter. Total subscriptions ended the quarter at approximately 830,000. Average center revenue per membership increased to $722, an increase of 9% from $660 in the prior year quarter. Adjusted net income was $26.7 million compared to an $11.5 million adjusted net loss in the prior year quarter. Year-to-date adjusted net income was $91 million compared to an adjusted net loss of $67 million in the prior year period. Adjusted diluted EPS was $0.13 compared to a loss of $0.06 per share in the prior year quarter. Year-to-date adjusted diluted EPS was $0.45 versus a loss of $0.35 per share in the prior year period. Importantly, our net cash provided by operating activities was $115 million compared to $45 million in the prior year quarter. And year-to-date, net cash provided by operating activities was $331 million compared to $125 million in the prior year-to-date period. We are very proud that we have been able to reduce our net debt to adjusted EBITDA to 3.7x by the end of the quarter compared to 4.2x at the end of Q2 2023 and 7.6x at the end of Q3 2022. I will now turn the call over to Bahram.

Thank you, Bob. I'm extremely proud of the entire team at Life Time for working tirelessly and passionately to achieve all the priorities that we have set for the last three years since returning from the interruption of COVID. Our first priority was to restore the number of visits and dues revenue to our clubs. We have accomplished both of these in 2023. Our second priority was rebuilding our adjusted EBITDA margin to pre-COVID levels and beyond at adjusted EBITDA margin. Margins up 23%, 24% each quarter this year, we feel excellent for having accomplished that priority. Our third priority has been to reduce net debt to adjusted EBITDA at a very rapid rate. With $506 million of trailing 12 months EBITDA at the end of 3Q, we have now reduced the net debt to adjusted EBITDA to 3.7x, and we expect to be below 3x by the end of 2024. Another important objective was to increase our member engagement through enhanced programs and member experiences. Our visits per memberships are up approximately 24% through the first nine months of 2023 compared to the first nine months of 2019. Increased visits or engagement per membership has been a critical part of our strategy, and it is delivering the exact outcome we would expect. This creates stickier memberships, and we are now seeing lower attrition rates than we did in 2019. Clearly, our team is executing diligently to achieve all the priorities we have established sequentially to get us to this point. Now our next most important priority is to be cash flow positive after all capital expenditure without any proceeds from sale-leasebacks. The convergence of two things that I'm excited to share with you is helping us to achieve this very important priority, approximately two years ahead of what we thought is possible just a year ago. One, our strong outlook of adjusted EBITDA performance; and two, the significant asset-light opportunities our team has been working on will allow us to deliver a cash flow positive position in the second quarter of 2024. Getting to the position of self-funding all of the capital required to deliver double-digit growth without any sale-leaseback has been a long-time goal of the company. I couldn't be more excited to be working on delivering on this particular priority by the end of second quarter of next year. For the next quarter of this year, we expect to grow revenue between 17% to 20% compared to the same quarter in 2022 with an adjusted EBITDA margin of 23.5% to 24%, this will suggest revenue for the quarter of $555 million to $565 million and adjusted EBITDA of $131 million to $135 million. Important to highlight, we had planned several revenue expanding initiatives to launch in early fourth quarter. And at this point, we expect to roll out in 2024. While we are not providing any official guidance for 2024 at this time, I would like to make it clear that we expect double-digit growth, both for revenue and adjusted EBITDA in line with our earlier expectations. All the while more of this growth will be coming from more asset-light opportunities. Finally, we're expecting a couple of LOIs for additional sale-leaseback transactions. However, with the outlook of being able to deliver cash flow positive -- after all, capital expenditure by the second quarter of next year, we can be very patient and diligent in negotiating the most favorable sale-leaseback terms and determining whether to execute any additional transactions at this time. We now look forward to answering your questions.

[Operator Instructions] Our first questions come from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking our question. First one, maybe can you just talk a bit about your expectations embedded in the 4Q revenue outlook? It is a bit below where you implied previously. So is that driven by something you're seeing in membership joins or attrition or just some additional conservatism?

No, it's not in membership or attrition. The impact is typically when we go from $585 million of EBITDA -- revenue in the 3Q to the 4Q. For our size of the company now, there is at least $30-plus million, $35 million of revenue that doesn't exist between summer camps and other activities, summer activities. So most of the revenue drop is all from those. So we had initially intended to roll out a bunch of initiatives that are still in the process to sort of mitigate this drop. I don't really like to have any seasonal drops. So we're trying to find ways to add additional sales coming through programs and not services in the clubs, but like sales of apparels and nutritionals and stuff dynamic nutrition. And that rollout has been delayed now to early '24. So we basically went back to the typical business. Business isn't really doing anything different than we expected. The core business is in line.

Okay. Thank you. And maybe a follow-up on the sale-leasebacks and some of these asset-light opportunities. Forgive me if I missed this, but I don't think you reiterated the $300 million proceeds expected this year, so --

You are correct. At this point, we're waiting for some sale-leasebacks and LOIs to come in, and they have been delayed. So the folks that have been -- we've been in discussion to send those. They are still planning to send something, we're still waiting to get those. However, as I mentioned to you, clearly, at this point, the number one priority of the company is not sale-leaseback, it's not anything else, it's to actually deliver free cash flow positive after all of the capital we need for maintenance CapEx, interest as well as all of our growth capital from internally generated cash flow and deliver double-digit growth. That's the exact position we want to be in when the sale-leaseback market is attractive, we will do more sale leasebacks. At this point, we don't need them. So we will treat them exactly as they should. If they are within the -- these are 20- to 25-year initial terms with 2025-year options, they are very, very long-term transactions. And so, we're not going to do a long-term transaction because of a short-term blip on the interest rates.

Okay. That makes sense. That was kind of my question there. So it does seem it's just more of a short-term shift given the macro and rate it's just --

It's absolutely short. Yes. We have so much -- we literally have 100 asset-light opportunities in the pipeline right now. So we can continue to deliver beautiful locations, great growth for the company, without having to spend substantial amount of capital. And the cash flow of the company, the EBITDA that we have this year, the EBITDA for growing double digit for next year, it generates substantial free cash flow after interest and maintenance CapEx. It's more than enough for us to deliver double-digit top line and adjusted EBITDA growth without needing any external capital. This is exactly the ideal position for the company. Last year, I anticipated it would take about $700 million, $750 million of EBITDA to get there with the plan -- and this is, again, not including sale-leasebacks. That would have required to build those big clubs, which from ground up, were not asset-light, then going to asset light with the sale-leaseback, it would have postponed this situation to probably a couple of years later. But now with the EBITDA growing faster and asset-light opportunities getting stronger, we can deliver this asset -- we can deliver this important milestone early next year, which I'm super excited about.

Okay. Thanks Bahram. I’ll pass it on.

Thanks.

Thank you. Our next questions come from the line of Brian Nagel with Oppenheimer & Company. Please proceed with your question.

Good morning.

Good morning, Brian.

First off, congratulations on another nice quarter. The business continues to look very nicely here. So my first question, Bahram, and it's probably going to be a bit of a follow-up just to that prior question. We've talked a bit about for a while these asset-light opportunities. And clearly, this is key -- exploiting exploring these, sort of say, is key to you getting cash flow positive much earlier than you initially thought. So the question I have is as you look at the business, you step back, is there any -- do you compare the asset-light opportunities to your more traditional model in the traditional finance model? Is there any other offsets, so to say? Is there any other thing -- something we should consider with these asset-light opportunities despite them just, as [ indiscernible ] implied, using less capital?

Yes, there's a couple of different things with those, Brian. First of all, sometimes it will take a few more clubs to deliver the revenues of some of the other ones. And so, we will probably end up having more clubs opening. Some of them large, the similar size that are big, big, big clubs that we do ground up, and some of them will be smaller. We have some clubs where they're pretty much brand new clubs, it's all funded by landlords upfront. And then -- but at the end, we are also continuing to secure our locations that we've been working on for a long time to do the ground ups. So as you sort of shift the growth a little bit, you can see that in 2024, we can deliver double-digit growth, we can pay down some debt, particularly in the 3Q, 4Q, there's just nice cash flow coming in, just pure, pure cash flow after growth capital, everything included. And then as this EBITDA grows and then free cash flow grows, we can even literally fund some of the big boxes, ground-ups, all from internally generated cash flow. However, I just want to be clear, the company is committed to the sale-leaseback sort of proposition. We're not backing down from doing sale-leaseback, it's just timing. At this point, we just have to take a look and see if these LOIs come in, considering the fact that interest rates ultimately are going to go back down or they're going to assume that we're going to have a grade for 40 years, 50 years locked up based on today's rates. That's just [ asinine ] to go ahead and do a deal based on that. You just -- and particular, when the company has the ability to hold off and do those sale-leasebacks in the same condition. I've been adamant, we're not going to pay a ransom for sale-leaseback and we don't have to. So that's sort of the -- I really see the company being in an amazing position. It seems like every time we have an earnings release and we grow revenue, we grow EBITDA, and we grow margins, the focus goes on what people can pick on that would be negative. There is no -- there is nothing negative about our business. We're proud of our team for rocking and rolling with every objective that we put forward. And regardless of what the Street thinks, Brian, the company has set sequential priorities and knocked them down one after another. And that's what I'm most proud of with our company is the fact that everybody is just executing what's right for the entity.

That's very helpful, Bahram. Appreciate that. And if I can just ask one follow-up. So you called out in your comments, the, I guess, I would say, better member utilization of the facilities, which is obviously another huge positive here. The question you see -- is that across the chain or are there particular areas where that's truer? And then -- and I know you want to talk specifically about churn, but I guess we've got to think that we talked about this for a long time, that if your members are utilizing the facilities more frequently, they're far less likely to churn then. So there's a big financial positive, that's correct, right?

Both of those are -- first of all, your first question, it's universal. When we came out of COVID, I expect the attrition rate with having more promotions, having more programming, having more signature programs, I expected that attrition rate would be lower than 2019. To my surprise, it was consistently higher, but it was coming down. It was higher than 2019 but it had a trend that showed it was getting better, better, better. And then we started seeing roughly about July, August of this last year, the attrition rate sort of started kind of dropping below the 2019 levels. Now '22 and '23, we had a shift in student memberships where we used to put them -- automatically put them on hold for them and not counted attrition, and '22 we basically did away with that policy, and just to let them decide to either keep their own membership or drop out and then come back and join. The effect of that was $0.5 million to $1 million a month of incremental dues positive, but on paper, it shows higher attrition. Comparing apples and apples, when you take that anomaly out compared to 2019, our attritions have been lower almost every month, the last three, four months and what we're forecasting for the next two, three months as well. And so, it's really the outcome that we're looking for. But we are seeing consistently significantly more visits per membership, as I mentioned, 24% through the first nine months, and that's dramatic. That's a huge shift. The level of engagement of the customer is so much higher that we should expect to see lower attrition. And finally, we're seeing it.

That's very helpful. Again, congratulations. Thank you.

Thank you, Brian.

Thank you. Our next questions come from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

Bahram, I want to start with how is Dynamic Stretch progressing, right? Is that -- do you think that's still a $50 million opportunity next year or something like that? And then is there anything else -- I know nothing may be that big. Any other services or top line initiatives other than the retail stuff you talked about coming next year?

Dynamic Stretch, I think, is a $50 million opportunity next year. The answer is yes. It's a part and parcel with -- the rollout of that, it actually helps our trainers' engagement with the customers, it helps the pickleball customers. I mean it's just -- it's really -- it's a great program. I am pleased with the progress we're making with it. However, I think the big impact is going to show up in 2024. And then, look, we have been very sequential in our priorities. And right now, the club's core business is solid. That has been caught up. Obviously, like I said, the membership or swipes, people visiting the clubs in month of August, we basically almost in the mature clubs pretty much caught up with a number of visits in those mature clubs. This is not per membership. It's just total visits in 2019. These are all great sequential progresses we've made. Part of the other thing that we've done during this shift last three, four years, we have shifted more of our personal training revenue, which was a small group, into subscription business, which is all coming in dues with all the signature programs. So when you start looking at the overall picture, clubs are hitting same number of visits or more, they are having lower attrition rates. The dues revenues are significantly higher they've been, margins are better than they have been. So I feel like all of those things are working. And now with about 150-plus billion impressions a year, it's now an opportunity for Life Time sort of to start expanding on, all right, how do we use our brand, our network and our eyeballs? What other products and services customers can buy from us? So it's just now time for inventing and rolling out new initiatives to continue to grow the top line and the bottom line for the company out of the same square footage.

Okay. Great. And then on the -- back to the whole path to free cash flow, right, so what do you think is an acceptable cap rate? My guess is probably in the mid-6s. What's the prospect for adjustable cap rates? I think that was something you guys were considering. And then lastly, to sort of get to free cash flow positivity next year, it looks like CapEx has to be down around $400 million, give or take, by my math. Is that way off?

When you talk CapEx, you're talking maintenance CapEx and growth CapEx combined?

Total. Yes, total.

We can fund more than that. It will be probably $450 million plus, is that we can -- and more than $300 million of that will be for growth capital. It's building clubs, remodeling facilities that we take over or finishing our portion of the leasehold improvement with the clubs, the locations, the landlord is building out and handing over to us or we're taking over the space. So there's plenty of capital to be cash flow positive after all growth capital.

Okay. Thank you.

Thanks.

Thank you. Our next questions come from the line of Chris Carril with RBC Capital Markets. Please proceed with your question.

Hi, good morning. So, yes, Bahram, you talked a lot about just the rewiring of the business and the cost structure. But as they're about to lap some of the step-up in margins that you saw in the 4Q of last year, can you expand a bit more on how you're thinking about the next opportunities for potential margin expansion and EBITDA growth here going forward?

Yes. So as I mentioned in my remarks, I think the 23.5% to 24% EBITDA margin is sort of what I think the numbers. Can we do better? Possible. I just don't want to get anybody ahead of their skis with that. I think the key now is just to continue to grow the business. We get -- we have quite a few clubs that they are now just going to be ramping through to the newer clubs that we've opened. Overall, the business is going to grow more like it's recovered from COVID in '24 and then just the natural growth of same-store plus the new stores. And that's what is -- what we've always talked about doing a double-digit top line and bottom-line growth. But yes, I think the -- we're not going to have 101% EBITDA growth quarter-over-quarter, over $107 million that we posted last fourth quarter, but it will be a nice growth. I mean it will be still a very substantial growth as kind of market of $131 million to $135 million. So I'm proud of that. I mean that is significantly higher than what the numbers had been just before coming in today for the fourth quarter EBITDA. So the team is continuing to perform. I mean just the business is performing, team is performing, not having any major concerns about anything here.

Yes. Chris, it's Bob. Just to add a couple of points to that. We'll open eight clubs in the back half of this year. So we'll get a nice ramping benefit from all 8 of those clubs next year. And then because we've rewired the corporate office, that won't grow nearly as fast as revenue grows next year. So those will be a couple of contributors to our EBITDA dollar growth in 2024.

Got it. Okay. Thanks for all the details. And then I guess for my follow-up, can you maybe talk a little bit about what you're seeing from your more recent club openings in terms of demand levels, pricing observations? Any detail around what you're seeing in those recent openings would be great. Thank you.

So most of the clubs have been opening ahead of our projections in our dues revenue substantially more. And frankly, the just very quickly cash flow positive, contribution margin positive at the club level, you know, significantly faster than our previous models. I mean, when we look back into 2019 and back versus how we are opening clubs right now, they are sometimes contribution margin positive in just literally second or third month, which is pretty nice. I mean they're doing -- they are consistently beating the business plan for us.

Great. Thank you.

Thank you. Our next questions come from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Thanks for taking our questions this morning. Just as a follow-up to one of the previous questions, some of the initiatives that you had planned for the end of fiscal year '23 for revenue, is that then rolled into Q1? Or is it later into '24? And then our second question is just around membership fees. Can you talk a little bit more about what you're seeing with response to higher membership prices? And as we look into '24, how are you thinking about additional rate increases on your legacy memberships?

So great questions, Kate. First, I expect to roll these things out early. Now there are a number of things that we have to tie in and that's why the delay is. We are reworking our digital offering and then creating the online business, which is the products, apparel, nutritional products, dynamic nutrition, and our athletic events, our [indiscernible] business, all tie into one seamless engine to make it super easy for our customer. What we are not doing great right now, Kate, is we aren't taking advantage of all the different connections we have on all different programs we have, and we make actually purchasing things almost difficult for our customers. So there is an essential work being done to systematize all of that. So once you're in the app, you can make easy transactions. If you go to one of our athletic events and you want to buy the t-shirt associated with that, it would be a lot easier than it's happening right now. So there's kind of work being built. And as I talked about being sequential, I mean, the priorities that we had to get us to the point of $500-plus million of EBITDA, trumped all of these types of work. That was the number one priority. Now that we are there, we're working on these things. So it will continue to -- I hope it's the first quarter, but at the latest, it will be second quarter of 2024 that we would have those machines all tied up together and then pressing the opportunity for the customers. We are not focused on doing anything different than we've had. Any product that we put out there has to be absolutely the best. It has to be having the right why. And then as far as your second question, the way the prices were established for the company was a function -- as I've said repeatedly -- was a function of delivering the right experiences in the clubs. And COVID, while had many pain points for our company, also allowed us to sort of have a clean slate and really make some wholesale changes that was much tougher to make. And adjusting the price positioning of the clubs was one of those major things. For the most part, most of the clubs are in the right price point, in my opinion. I think maybe 20%, 25% of our clubs will have further opportunity to have the rack rate up a little bit in the next six months to 12 months. But the bulk of the price changes have been made, and we really like the way the balance of revenues coming from that, the engagement of the membership from that. We really like the experience that the club can provide based on really curating, all right, this club should have 6,500 memberships, not 9,500 memberships. But at 6,500 memberships, we will have more engaged customers. So all of those have been balanced out. I would say probably 80% of the work is complete, 85% is complete. It will be going to the markets that we have been behind in executing our own play with excellence. So we have to deliver the experience the customer is super thrilled with, and then you have the price opportunity to adjust the price because that's become secondary. But bulk of the price adjustments have been made. The difference is now is that we still have a significant amount of members who are paying below that rack rate, which we have repeatedly also explained we would not be taking them up to the full rack rate all at once. It will be just a little bit over years, and that creates loyalty with them. Lower attrition rates also provide revenue growth opportunities to the club.

Thank you.

Thank you. Our next questions come from the line of Dan Politzer with Wells Fargo. Please proceed with your question.

Hi, good morning, everyone.

Hi Dan.

I wanted to talk on a little bit of the center OpEx. That takes us out in - just said, it's been the biggest driver, I think, to your earnings base the last several quarters. This is an environment we keep hearing about rising costs across our companies that we cover. So I guess how are you thinking about OpEx and managing costs into 2024, either on a dollar basis versus 2023 or a per center basis? But I know this could be a little bit noisy given your evolving mix of new centers ramping and asset-light conversion. So any kind of high-level thoughts on 2024 and more on the cost side.

I've been -- I think that -- I think what you're saying is, are we expecting the cost of operations increase, right? Is that what you're asking?

Yes, whether it's labor, whether insurance, marketing, any -- in terms of your center OpEx, right, because that's just -- that's driven a lot of the upside at least relative to where we value. So as we think about going forward, maybe the puts and takes as you think about how the cost environment has been pretty much a challenge across the board here.

Yes, I don't really see that any specific unusual thing. I think, traditionally, you expect labor go up 1%, 2%, 3%, something like that. And that's part of just the inflation, inflationary factors, normal inflationary factors. But right now, we're not seeing any major challenges or problems. There's no employee challenges. There's no shortage of employees. There is more people applying to get work than they have in the past a couple two, three years. The number of people applying for personal training jobs have doubled. So I -- we really have no excuses for that, at least we don't.

Okay. Great. And then another kind of follow-up question on just the conversions. As you think about next year, I don't know if you've given a number specifically in terms of new units. I think we're usually penciling 10 to 12. So I think as we look in the website, I think maybe two of those are asset-light and seven are the big asset-heavy type build. So one, wanted to see if you have an expectation for a number of new units next year and maybe the mix. And then similarly, how we should think about the evolving change in whether it's dues per membership or mix of in-center revenues versus the other ancillary services as you shift to more of these asset-light conversions?

No, when we talk about asset light, it's not -- these are not a different business model than -- I appreciate you asking and giving us the chance to clarify this. We're not planning to deliver a different experience or a different product, a different price point with the asset light. It's just that they're just asset-light. We're taking over other assets, remodeling them to deliver the Life Time experience. The landlords are bringing us assets and giving it to us, and they're giving us significant TIs to take those assets. We think with the pressure on the real estate market, there's going to be a lot more of those coming up rather than a lot less. But we are not intending to deliver a different price point or a different experience. And I'm so glad you're asking so that there's no confusion here. It's just going to be still Life Time, it's still the same price point, so the same margins. Everything is the same. It's just we don't have to plop a huge amount of money upfront on our own. And look, again, I look at this company, obviously, super long term. three, four years from now, our EBITDA will be such that will allow us to build all of our ground ups out of internally generated cash flow as well. So -- and we still are committed to sale-leaseback. When the interest rates subside, start going the other direction, I think we'll have the opportunity and we immediately will take into that. In that point, if we take the sale-leaseback proceeds plus our internally generated cash flow, it's going to be way more cash flow than the company needs. So it's either one of the two things, reducing debt substantially more -- and that makes sense to a point -- and then I will go to the Board and ask for a share buyback plan put together and we have the ability to do that as well when it makes sense. Right now, I just want to be clear, the next important priority for me and the rest of the company, it puts Life Time in control of its own destiny. And that is what we have in our foresight for the second quarter of next year to be cash flow positive after we pay for all of our growth. I really appreciate the questions. I really -- one, I think that the questions you guys ask creates more clarity or helps you guys build your models. But for me and Life Time, we have just been sequentially getting done what's important for the company, and we're in a really great position right now.

Got it. And then just -- sorry, just to clarify. Was there a number of units for next year we should be penciling in? Is that 10 to 12 still a good number?

Yes, 10 to 12 is good. Just as I mentioned before, it may -- I wouldn't change your model because we need to provide more color for you guys, Dan. It may take a few more of these clubs to generate the same revenue growth. It may take 14 of them. But we are -- I was very clear on my remarks, we're not in a position to provide guidance for 2024 at this point. But there will be -- for the time being, you can plan at least 10 to 12, and there might be more. But I wouldn't say those -- if we did 14, it doesn't mean you will ramp up your revenue or your EBITDA. It just means some of these are going to be 60,000 square feet assets or 80,000 square feet assets, so they take more of them to accomplish that 120s do. So it's just a more flexible way of growing our top line and our bottom line.

Understood. I appreciate all the color. Thanks guys.

Thank you.

Thank you. Our next questions come from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Hi, guys. Good morning.

Good morning, Simeon.

Bahram, just on the last question because I think this might be helpful, could you help differentiate from asset-light models where you plan to partner with a third party who might be doing more of the heavy lifting and you collect a very high margin flow-through versus what I think sounds like might be really just getting opportunities to run the same existing approach to clubs you do, but getting lower cost because you get to benefit from other underperforming locations? Does that make sense?

I want you to ask that one more time. I couldn't quite hear you. It was --

Can you differentiate -- so the last one sounds like perhaps you're getting really good terms from underperforming assets from others. So the asset-light is the same model we know you for, but coming at it with a good basis as opposed to maybe when we had talked about living and work and other models where you could, from an asset-light perspective, partner with someone and it's not -- it actually might be a little bit of a different model. So is that -- is there a differentiation there?

Right. So that's a great question, Simeon. So the asset-light discussion and Life Time Work or Life Time Living is that we are basically using our brand, our $150 billion impressions, our IP, our management system, more like a Marriott or Hilton model, and it's just more of a license fee, management fee. That's the asset-light version of that. For the clubs, the asset-light right now, it's going to break down to two categories. And we have discussions and we have nothing worth anybody modeling anything with. If we do anything internationally, and I'm not talking Canada, but outside of the 2-, 3-hour flight time, we more likely would do those similar to the Life Time Living, Life Time Work, Hilton, Marriott model, asset-light, use our IP. From U.S., our contribution margin, our business model is so powerful that we want to run these. And I'm not suggesting we would never do a management deal. If it makes sense, we do it. But for the most part, Life Time's locations are actually owned and operated Life Time, whether is this through a lease or owning the facility. So your question of how this asset-light is coming, we're buying stuff for -- we're buying buildings today for less than the cost of just land. These are older clubs, and then we put the money into remodeling them. They're going to be 100,000 square feet facility for significantly less capital than we would have done if we had gone from ground up. So -- and/or sometimes landlords who have had other tenants who have not performed. They're taking those assets away and they're coming to us. The fact that we treated all the landlords -- and I've been saying this repeatedly -- absolutely properly during the time that people were not paying rent, we paid all the rent. And that Life Time's brand and reputation is allowing landlords come to us and make deals with us that they're completely asset-light for us, but we -- it's no different than we had built the rest of our clubs. Does that answer your question, Simeon?

Yes. Perfect. No, great explanation. And then just quickly, Bob, one quick one around the change in CapEx reporting. Is that just a 23 -- is that a change to how you're approaching CapEx spend or just how you're reporting it given the comments you've made around waiting to see the environment shifts in this year?

No. I want to be clear. I want to have full flexibility of how we shift capital to take advantage of all the opportunities ahead properly and still deliver the Life Time's standard of making sure everything is like new whether if they're 10 years old, 20 years old, 25 years old. But the -- that flexibility is what -- I don't want to create confusion for you guys. And if I want to take $50 million from one bucket into the other back and forth, it's just not -- it's not worth getting people confused over. So we're just going to report the total capital on growth and maintenance CapEx as one going forward.

So Simeon, just a reporting change, not a change in how we deploy.

Perfect. I want to make sure of that. All right. That's great guys. And best luck for the rest of the year.

Thank you so much.

Thank you. Our next question is coming from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Good morning. Hi Bahram, a couple of questions. The first is, can you give any commentary on kind of how 4Q membership trends are versus expectations? Have you seen any changes or hesitancy related to student loan repayments or anything like that?

How do I see memberships going? So look, we are -- we don't have a huge change of expectation from our membership, and that's due to the fact that new membership sales in our company really don't change the outcome of -- the net membership is what you're looking for. You have a little lower attrition, you could sell a few thousand less memberships in a month, but then lower attrition will set -- it's just really your net membership. And right now, we feel like we have been just right on forecast on our targeted dues revenue for the core there. It -- to be clear, it isn't like people are pouring in to sign up. So I don't know what you guys are seeing from your other services or businesses. It's moderate. It's not horrible, it's not great. It's just steady. But the beauty of our business is that it's a strong subscription base, and every given month of sales, new sales is 136, 140 of the total impact on our total revenue or EBITDA. So it's really less important. The net membership is the key, and we're doing well with that.

Got you. That's helpful. And then one of my other questions was just the center operations costs are running sort of flattish this quarter. How are you kind of holding the center operation costs per average center kind of flattish with the swipes going up?

That's a great question. So our center cost fluctuates because the type of revenue that comes in. So in the summer months, we have great revenue and a great margin of the summer camp. We have great revenue, but not great margin out of our increased activity on the pool deck. So you basically have a lot more customers coming in, but we have massive amounts of life cards. And so I think if you try to dissect it month by month, it's not even the same the three months of a particular quarter, if that's helpful at all for you. Like third quarter, July and August are more the same and September is totally different. So when you look at it in a 3-months basis, we are delivering -- the team is delivering better than the budget in terms of what I can tell you. So the numbers are on the top line and the bottom line -- on the top line is as good as what we had expected, and the bottom line slightly better as you can see in the results. But they're really like a fourth quarter there, the revenue mix shifts. We have about naturally, like I said, $20 million, $30 million less revenue that -- it's a summer revenue that doesn't exist in the fourth quarter. And so what we are balancing is to try to give you guys with all the different moves we make that steady 23%, 24% EBITDA margin, but that all comes in different forms of shapes.

Got it. That’s very helpful. Thanks so much.

Thanks Robbie.

Thank you. Our final question will come from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hi, good morning, guys. Thanks for squeezing me in. A lot of ground covered already, but really wanted to I guess, revisit kind of the conversion angle in a different way, which is you've talked a lot about why it makes sense strategically and financially, but is there any way to -- I think there's confusion in the market about what this really means for you guys. I mean is there any way to [ ring sense ] in terms of, this is what a conversion club ROI is or payback period? I mean I think we can conceptually get it directionally, but is there any way to put numbers around it to kind of show folks how powerful it is?

Yes. I mean, it's going to take a little work for us to create a dozen example for you guys of clubs. I mean, there are clubs that we have built to conversion that they have better returns than some of our best ground-ups. And when we have ground ups, that they're better than some of the conversions. But if you look at them in aggregate, if you take a look at all the clubs, if you look at Life Time today, these are people who think these are new stories. There are just no new stories. It's just the pace of it. In 2006, the company had, I know, 20, 30 clubs and I took over six or nine clubs at one time, massive change to our size of companies or much bigger clubs. And they -- sometimes they take a little longer, sometimes they take shorter. But today, when you look at it in a long-term view, every one of those clubs are amazing assets and everybody will think of them today as one of our ground ups. They don't think of them as something new. So you just got to think about the fact that we open a club, x amount of square footage, with the programs that we have, Strike and Ultrafit and GTX and Alpha and all the same programs, whether or not that box was this box or that box or how the outside of it is, the inside programming is all the same. And then it's the cost of, okay, how much money do you have to spend and how long in advance and before you get the first dollar of revenue, and these types of takeover, they just have a quicker turnaround, you get to revenue and EBITDA from them faster than you do when you go buy a piece of land and takes you three to four years before you have revenue coming from all those dollars that you spent over that period of time. So the right way to think about Life Time honestly is as a portfolio. We're big enough today at 170 locations. To look at this company as a portfolio, we manage a portfolio of assets. And it's the job of the entity and the executive team and the management of the company to sort of deliver a steady growth of revenue and EBITDA and memberships while we uphold the quality of our brands so it can give us the opportunity for other ways using our brand to grow revenue and have expansion there. Frankly, I think the results will speak for themselves. And we've -- I'm proud of what the team has delivered the last three years, and we expect to continue to grow revenue and EBITDA at a very, very nice pace despite whatever soft landing or hard landing that the market will offer. So what I have thought is the most important thing based on our assessment of the higher interest rates and the impact on different sides of the economy, and as I've mentioned to you guys the difficulties that I think the real estate market is going to see, we wanted to get to this cash flow positive after all of the capital we need for the growth a sooner time than later. And I'm just really, very happy where we are at with that.

Okay. Thanks Bahram. And if I can, just a super quick follow-up. You've talked in the past about how potentially, I guess, the right word is franchising some of your concepts or licensing some of your concepts, not locations, but Dynamic Stretch or something like that. That's still on the table in terms of generating some 100% fee-based income?

I would just tell you that Life Time is completely open-minded to benefit from the programming and the power of our brand. But we're always going to protect the brand. So we're not going to jump into what sounds great and have somebody bastardize, but Dynamic Stretch, Ultrafit, many of the programs we have could become a franchisable model at any given time we decide to do it. They are amazing programs with great success, and there is no way we couldn't do those as good as anybody else. So that's a possibility, but it's not a straight line in the game plan of the company at this moment.

Okay. Great. Thanks.

Thank you so much.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bahram Akradi for closing comments.

I appreciate everyone. Great questions. Hopefully, we provided the right color for you guys. Looking forward to be with you guys again in three months. Have a good day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.