Life Time Group - Q3 2024

Transcript

Operator (participant)

Greetings, and welcome to the Life Time Group Holdings, Inc. Q3 2024 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ken Cooper, Investor Relations. Please go ahead.

Ken Cooper (Head of Investor Relations)

Good morning, and thank you for joining us for the third quarter two thousand and twenty-four Life Time Group Holdings earnings conference call. With me today are Bahram Akradi, Founder, Chairman, and CEO, and Erik 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.

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 10-K filed with the SEC, and on the investor relations section of our website. With that, I will turn the call over to Erik.

Erik Weaver (EVP and CFO)

Thank you, Ken, and good morning, everyone. We appreciate you joining us this morning. We're excited to share with you our third quarter results, the full details of which can be found in the earnings release we issued this morning. For the third quarter, total revenue increased 18% to $693 million, 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 third quarter of last year.

Average revenue per center membership increased to $815 from $722 in the prior year period, as we continued to benefit from higher dues and increased in-center activity. Net income for the third quarter was $41.4 million versus $7.9 million in the third quarter of 2023. Adjusted net income was $56.3 million versus $26.7 million in the prior year period, an increase of $29.6 million. Diluted earnings per share was $0.19 compared to $0.04 per share in the third quarter of 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 third quarter was $180.3 million, an increase of 26% versus $143.0 million in the third quarter of 2023, and our Adjusted EBITDA margin of 26.0% increased 160 basis points as compared to the third quarter of 2023. Net cash provided by operating activities increased 32% to $151 million as compared to the third quarter of 2023. For the second consecutive quarter, we achieved positive Free Cash Flow. Free Cash Flow increased by $169 million-$138 million in the third quarter compared to the prior year period.

While this number includes sale-leaseback and land sale proceeds of $74 million 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 third quarter versus 3.7 times in the prior year period. With that, I will now pass the call over to Bahram. Bahram?

Bahram Akradi (Founder, Chairman, and CEO)

Thank you, Erik, 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 Erik 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. We responded to the challenges presented over the last four years, reinventing, transforming, and improving every aspect of Life Time. 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 Life Time. 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. 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's press release, we are raising revenue guidance to a range of $2.595 billion-$2.605 billion, and our Adjusted EBITDA guidance to a range of $658 million-$662 million. We are now looking forward to take your questions.

Operator (participant)

Thank you. Now to conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment please, while we poll for questions. Our first question is coming from Brian Nagel from Oppenheimer. Your line is now live.

Brian Nagel (MD and Senior Analyst)

Hey, good morning.

Bahram Akradi (Founder, Chairman, and CEO)

Morning.

Operator (participant)

Good morning, Brian.

Brian Nagel (MD and Senior Analyst)

Once again, congrats on a very nice quarter.

Bahram Akradi (Founder, Chairman, and CEO)

Thank you.

Brian Nagel (MD and Senior Analyst)

I have two questions. I guess one bigger picture, maybe one smaller picture. I'll put them together. But first off, the one on the bigger picture side. With all the work on the balance sheet, your debt, your debt ratio is now, you know, at or below the target you articulated previously. How should we be thinking about, so to say, the growth profile of Life Time going from here, particularly as we start looking towards twenty twenty-five and new openings?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah.

Brian Nagel (MD and Senior Analyst)

Then the second question I have, this is just shorter term. Just with respect to the guidance, so 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 fourth quarter as well? Thank you.

Bahram Akradi (Founder, Chairman, and CEO)

Okay. So, let me start with your first question. Our targeted EBITDA is debt to EBITDA 1.75-2.25. That's the range that I think is appropriate for our company, considering the fact that we own over $3 billion of market price on real estate, more like $3.5 billion. If we didn't have that, I would like to have our debt to EBITDA be 1-1.25, 1.5. So, you know, Life Time brand is such an incredible brand. It's paying such an incredible dividend. Our mindset has been the balance sheet has to match that brand. And, you know, thanks to our partners and our team, Erik, everybody, you know, 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, you know, in their own hands. So we have guided everybody over and over that $25 million-$30 million of net out of our pocket per location, and we, when I say that, and that's basically in our mind, it's sort of a large format equivalent, per about 100,000 sq ft, is what it's gonna take to build. We have probably about 100 different deals in the pipeline we're chasing right now. 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 two, we are able to generate, you know, incremental $50 million-100 million 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 gonna be significantly lower after what we were able to accomplish last, you know, couple days, for 2025, than it is in 2024 and 2023. But after the interest and the, what we call maintenance CapEx, modernization CapEx, we will have significant additional capital. We can start projects, expedite growth, and still maintain that free cash flow positive. So that's really what, you know, 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, Erik 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. All it means, it's the number we wanna share with you to make sure it- we don't go below that.

Erik Weaver (EVP and CFO)

... Yep, and just, yeah, just to add to that, the guidance, you know, we increased it because we're obviously seeing still very positive trends in the business. And so, you know, 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 17% on the revenue side and 21% on Adjusted EBITDA. So still very great, you know, momentum in the business that we're seeing.

Brian Nagel (MD and Senior Analyst)

Thanks, guys. I appreciate it.

Bahram Akradi (Founder, Chairman, and CEO)

Thank you.

Operator (participant)

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

John Heinbockel (MD)

Hey, Bahram, I want to start with the 100+ deals in the pipeline. How would you segregate those out, the ground-ups, right? Maybe take club takeovers, your various channels, right? Residential buildings. How would you segregate that out? And then, yeah, I know you talk about the 10-12 LFEs. What do you think is the organization's capacity? Can you eventually do more if you look out a couple of years, do more than the 10-12, or you would prefer to limit it to that?

Bahram Akradi (Founder, Chairman, and CEO)

No, actually, as it looks like right now, you know, next year could be that 10-12, 2025. 2026 right now, as the way the schedule rolls out, is already probably 12-14, 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 you know, the ground ups obviously are the ones that 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. So, what I can answer you and everybody else is you have to look at our...

You know, we're not building Sweetgreens. We're building anywhere from 40,000-50,000 sq ft to 120,000-140,000 sq ft, and on a variety of different real estate opportunities. So, and we have these deals in the pipeline, and each of them have their own schedule, that, you know, it's the right timing for the developer, for us, for the whole project. So they're gonna be lumpy. What I mean by that is, next year could be more of clubs that they're takeovers and transformations. The following year is gonna be a lot more our ground up. So what I would basically recommend to everybody is to really think about them as a blended, you know, half and half, at this point.

I think as we go into about three, four years from today, based on the number of conversations we're in, and based on the incredible results that the Life Time Living is producing for the Life Time Living, the owners of the actual buildings, in terms of ramp, they consistently were getting about 15%-20% more rent. Consistently, we have a retention that they have never seen before, is 20%, you know, 20% 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 five, six, seven of these locations in place, so they can look at the data. It's not just a, you know, thought process, it's actually facts supporting.

So, they, we are in a lot of those discussions. So I think as I look out four or five years out, John, I see there's gonna be probably a lot more of those coming online. But for right now, I would like to guide everyone to, hey, take a look at a three-year period of, you know, 30-40 locations in that three-year period. About a half and half is the right mix of ground up versus other stuff.

John Heinbockel (MD)

Then maybe as a follow-up on that, right? So I think about the in-center revenue spend, right, per month, per member. You know, 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? And is there anything you would want to do differently to accelerate that, or it just happens naturally?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah. There are two, three categories. One, we have really done a nice job. My team has done a nice job with DPT, with our Dynamic Personal Training, and that has been growing really nicely. But despite that, you have clubs that they're doing $5 million a year in DPT, and you have clubs that they're similar sized clubs doing $2 million. So we have always opportunity to go through best practices, do the top 25, bottom 25 clubs in terms, in each category, cafes, spa, PT, kids. We do that routinely. And then as more things are going really well, we have more time to focus on the areas where there's more opportunity. And that's exactly what's happening at Life Time. So I think there's still substantial opportunity to execute better across the board.

And when I say that, 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. So what we have, in aggregate, we have room to do better job with our F&B. We have aggregately room to do better job with spa and even with PT. Those are the key three big drivers of in-center. Of course, kids is also one, but we do a pretty good job with that. Now, Miora, which we talked about, you know, a while back, and I told you guys to not get excited about it, it's important. 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 it's doubling, September over August, October over September. 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, you know, I would say probably 40, 50 locations across the country. Not one in every club, but basically at least one, two, three in a per market, we can roll out Miora. 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, you know, the freestanding business has to. We already have the space. We already have the customers. We have the demand. So, we got that.

We have, we are just about to launch LTH, Life Time Health, brand. That's all of the supplements and nutritional products. We expect that business to grow substantially, over, you know, year on year. I mean, not 10% or 20%, but significantly more than that, in 2025. The digital is, you know, the digital subscription is growing, about 100,000 subscribers a month, so it's just been now over 1 million, 1.2 million subscribers. That will fuel the LTH partnerships revenue that will improve. That will increase the opportunities to sell 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. 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%-12% revenue EBITDA, just like I mentioned before, per year, which I think is a very respectable number. But we obviously aren't gonna be satisfied with that, and that's not the internal goal.

But we're not gonna commit to anything more. As I mentioned earlier, we do not want to disappoint you or any investor by overpromising and under-delivering.

John Heinbockel (MD)

Thank you.

Operator (participant)

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

Megan Alexander (ED)

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

Bahram Akradi (Founder, Chairman, and CEO)

No, I think, yeah, you might have misunderstood. Our target was to get to... You know, we're committed to get to the three, beginning of the under three, which is a critical point for so many investors. But many investors, some of the large BB bracket investors, basically said, "Hey, three is okay. We really don't want to even engage until it's really under two and a half times." We believe the company is a strong BB credit. Thank God, regardless of Moody's or S&P wanting to wait another quarter or two before they actually give that in a corporate rating. The investors hailed us by giving us the rate that matches a strong double B. 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 double B is exactly the numbers I told you. It needs to be under two times the EBITDA. For sure, if you don't have, you know, 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, you know, a $1.5 billion sale-leaseback. So that is what allows me to say, "Okay, let's go between 1.75-2.25 targets," and that number is easily going to...

We're gonna be our estimate, Erik's estimate right now, is we're gonna be under two point two five 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 wanna be. We wanna 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, it's 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.

Megan Alexander (ED)

That's really helpful. Makes a lot of sense. And maybe just to follow up on that, I think you said that you could do as much as $1.5 billion of sale-leasebacks. Obviously, the sale-leaseback proceeds have come in better this year than, you know, what you were talking about to start the year. Is that still mostly opportunistic? Are you starting to see cap rates that are, you know, closer to what you'd like to see? And how are you thinking about kind of the market for sale-leasebacks as we head into 2025?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah. Fantastic question, Megan. So it's gonna be incredibly robust. We are already getting inbound conversations from our partners that they'd like to have a couple hundred million dollars, $100 million worth of sale-leaseback, that if we can provide the assets. So let's think about it this way. If we were to build, you know, 10 ground up facilities, that could take as much as, you know, $600 million of capital, all in. What we keep telling everybody and we keep reiterating, is 25-30 million. So if you take that number, take even the 30 million off of it, on 10 of those, that's three hundred million dollars, $250 million bucks.

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 a half a dozen clubs we built just in the last year or two, paid for all of the ground up. You know, very, very amazing assets, large format, super large, but we still own all the real estate. We haven't taken those to sale leaseback. So when the incoming offers are attractive, and I think by middle of next year, we will see sale leasebacks, based on our credit, more favorable than the best sale leasebacks we've ever done.

I expect us to do about $250 million-$300 million worth of sale-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 $25million-$30 million. Does that make sense?

Megan Alexander (ED)

Makes a lot of sense.

Bahram Akradi (Founder, Chairman, and CEO)

All right. Thank you so much, Megan.

Operator (participant)

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

Chris Woronka (Senior Analyst)

Hey, guys.

Bahram Akradi (Founder, Chairman, and CEO)

Hello.

Chris Woronka (Senior Analyst)

Good morning.

Bahram Akradi (Founder, Chairman, and CEO)

Good morning, Chris.

Chris Woronka (Senior Analyst)

Hey, Bahram. Morning. So Bahram, when you talk about the, you know, 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... You know, obviously you're solving for an ROIC, you're solving for some kind of free cash flow yield ultimately. Do you think it tends to- do you tend to think you'll be more surprised on revenue upside or, in the case of, you know, an existing center or something like that, or a takeover, is there more opportunity to just get a better, whether it's rent or, you know, it's an existing club, better operating model?

Is there any way to think about which opportunity means more to you?

Bahram Akradi (Founder, Chairman, and CEO)

Not at all. I would... I'll give you just two examples. Two, one club has been open in Tampa. One, we took two clubs last year, and 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. Both of them, incredible deals. You know, it's a, it starts as a lease, landlord's providing some additional TI dollars. We go in and we gut 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, so it just cuts through some challenges, but you know, 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 four years, it takes a year or eighteen months to do so, then we expect it to deliver exactly the same type of return. Our business plan isn't gonna go into these things and be excited about it, if it has a lower rate of return than the other things we do.

That rate of return, generally speaking, is in that 30%-40% IRR on a net invested capital basis. We always look at these the same way. There are others, and then there are some that are, you know, strategic. You might take over some assets because it's extremely strategic. You're intending to do something with tennis or pickleball or some other deal that it blends in.

But, you know, I really just wanna make your work, all of your work, easy enough, is that if you think about how we are guiding you with the $25 miilion-$30 million net invested capital per large format equivalent, really what we need to maybe try to help you guys with, that is to try to give you a schedule of opening as soon as we can commit to it, for, you know, how many hundreds of thousand sq ft 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, you know, 2026, you're gonna get 12 all ground up clubs. Twenty-seven, 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.

Chris Woronka (Senior Analyst)

Okay. Thanks. Thanks, Bahram. That's super, super helpful. And, yeah, we'd certainly appreciate any color on that. I have a quick follow-up, if I could, and that's just on the LT, the LTH, the branded things you'll be doing. Is there any way to, you know, put together a framework now for how big that opportunity is and how you measure it? Is it gonna be based on, per, you know, revenue you ultimately generate per digital member plus in-center member? Or, you know, how are you gonna know that you've reached the full potential, whenever you do?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah, I know. I think you might want to look at companies like Thorne. Look at the top 4, 5, high quality. And I'm gonna give some props to Thorne because, you know, I take a bunch of their product myself. Other than my products, are generally either LTH or Thorne. But there are other really great brands. Take a look at 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. And that's why, you know, I take about 80 supplement pills a day. I'm not gonna put anything in my body that is not tested for what it is. So we have been, we've had this discipline for 20+ years to produce the absolute best products.

We didn't really didn't have enough scale between, you know, for to really put energy behind it. But now, I emphasize, with the Life Time subscription growing at 100,000 subscribers a month, athletic events is growing, our partnerships is growing, the brand is 130-140 billion impressions, and it's gonna keep growing. Now is the time to say, "Okay, we can build a business that, yeah, five years, ten years, could be easily a $500 million, billion dollar supplement business." And so. And nobody has a better right to win in that space than Life Time. So my long term, not 2024 or 2025, my long-term vision is that, you know, we haven't built a $500 million business out of that, then I really have not achieved my vision with that thing.

So I think it's, and it's not just about money. It is, 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 gonna find half the stuff they say is in there is not there, or they're not in the quantities they say it's there.

Chris Woronka (Senior Analyst)

... Okay. Thanks, thanks, Bahram. Very, very insightful.

Bahram Akradi (Founder, Chairman, and CEO)

Thank you.

Operator (participant)

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

Michael Hirsch (VP)

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

Bahram Akradi (Founder, Chairman, and CEO)

So, Michael, this is Bahram. I'm gonna start taking those forty pills with my shake and give a chance to Erik to give you some good stuff. Erik, come on.

Erik Weaver (EVP and CFO)

Yeah. No. Yeah, we're still benefiting a little bit this year, you know, from some of the pricing, but the 4%-5% is still what we're modeling long term. So for next year and going forward, that's gonna begin to normalize into that, you know, 4.5% range.

Michael Hirsch (VP)

Okay. Thank you. And then, as my follow-up, I know you mentioned 10-12 new openings for 2025. You had opened 2 new centers during the third quarter, 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 10-12 target?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah. Yeah, 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, 2026 looks like we make up for everything in 2024 and more, all with big, humongous clubs, so it's just getting delayed into the twenty-six. But they're still coming. And we have a pretty good opportunity to get some additional deals done. It's not done yet 100%, but we are working on some additional growth, potentially, yes, for twenty-five.

So it's really irrelevant because, 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 keep enough latitude for how we execute that on our own, and we've known we have so much, and we've told you, we have so much, you know, 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 dues growth opportunity in the entire portfolio.

By the time it drops down to 4% or 5%, whenever that is, we will then have to have a very, very robust, new club opening and additional growth like Miora 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.

Michael Hirsch (VP)

Thank you.

Bahram Akradi (Founder, Chairman, and CEO)

Hmm.

Operator (participant)

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

Alex Perry (Director)

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

Erik Weaver (EVP and CFO)

Yeah. This is Erik. So a couple of things here. We're still seeing really great flow-through from our membership dues. So that's one big piece. The retention, you know, as you mentioned, continues to be very strong. You also probably saw in our release our same-store sales was, you know, north of 12%. And another big driver of that, and Bahram 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.

Bahram Akradi (Founder, Chairman, and CEO)

Alex, to speak 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 Life Time, they really do love Life Time. We have the best retention I have, you know, ever seen in the history of the company in thirty-four, thirty-five years. And on top of that, it's really like... It looks like it could be, like, even better than that in twenty twenty-five. So, we're at this point, you know, retention, again, it's not a number we're gonna continue to give, but I have given it during the presentation with the debt guys, so I just want to... We're gonna finish the year north of 70% in retention.

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 where we're working, trying to kind of create more products for that. But that's the reason. The retention is really the key, and as it results into the dues, and once you have a strong dues, everything else will follow.

Alex Perry (Director)

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

Bahram Akradi (Founder, Chairman, and CEO)

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 third place, second 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 an all-time high. And we are working... We're 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, Bahram, you know, president of the club operations, real estate, and then everybody, all the RVPs and all the lead generals.

So as we roll that out, you know, 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, you know, clubs have 3,000 visits a day. At that level, we really don't want any more visits in that club per day. It's busy throughout the day. Now, the key is, okay, maybe there's an enrollment fee. You know, we're now, you know, starting more locations. You know, we started with just a few. Now we're looking at other locations where we have to raise the enrollment fee from a few hundred bucks, $300-$1,000, $500, in order to manage that type of club.

The clubs that they're sitting at 55,000, this is a large format location equivalent. 55,000, you know, swipes, 60,000 swipes in a month. They have room to get more memberships, so there's not necessarily, you know, 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, four weeks, six weeks, there has been quite a few clubs that they've gotten that rack rate moved, a little bit. 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.

Then the real big thing is that gap between the pricing of a rack rate, and once you run that rack rate for a month or two, and it's clear indication that the customer is like, "Oh, that's completely unacceptable rate." Nobody's having a hard time with it. So now that you know that, you've tested that price. Then the gap is everybody who's paying below that rate. It gives you that, you know, $17 million, $18 million, $19 million that we've told you. That there's a difference between what people are paying versus if everybody pays the rack rate. That creates that reservoir that way you can basically draw from.

Two 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, you know, a $10, $15, $20 legacy price increase, you know, per year for those people paying 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. 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.

Alex Perry (Director)

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

Bahram Akradi (Founder, Chairman, and CEO)

Thank you.

Operator (participant)

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

Alex Fuhrman (Senior Research Analyst)

Great. Thanks very much for taking my question. Bahram, you alluded to this a little bit, in you know, what you were just saying, but you know, it looks like over the past couple of months, just in September and October, you've taken up the new member price at a pretty meaningful number of your clubs here. You know, 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?

... you know, now that the gap between what they're paying and the rack rate is expanding?

Bahram Akradi (Founder, Chairman, and CEO)

It's a good question, and no, it's not just those clubs. So we go through, I think, probably seven, eight times a year. You know, there are three, four months that we skip, but that 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. It is just, it can be. It's not hitting, you know, all members of five clubs or all members of four. It basically goes across the whole membership platform. If 500,000 people are paying below rack rate, as an example, or 600,000 people are paying below rack rate, it will sort through those. So these guys signed up six months ago.

They're paying below the rack rate. They're not going to get a dues increase right now. We don't generally give dues increases more than once a year. So there is a very, very sophisticated AI algorithm that we have developed over the last, I want to say, seven, eight 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, 40, 50 thousand letters go out or the in- notices go out. We hardly see any incremental attrition out of it. So we have fine-tuned that extremely well.

Alex Fuhrman (Senior Research Analyst)

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

Bahram Akradi (Founder, Chairman, and CEO)

Thanks.

Operator (participant)

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

Owen Rickert (VP and Senior Equity Research Analyst)

Hey, Bram. Hey, Erik. Congrats again on another phenomenal quarter.

Bahram Akradi (Founder, Chairman, and CEO)

Thank you.

Owen Rickert (VP and Senior Equity Research Analyst)

It sounds like the vast majority of clubs are very high performing, 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 do you look at these locations, and what is the plan going forward with these ones?

Bahram Akradi (Founder, Chairman, and CEO)

Yeah. So look, internally, what we are running is a comprehensive business plan. It'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? 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, you know, make some changes in the leadership of the business? It doesn't, you know, 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 in that, and then we will go appropriately execute all those things.

So it's more... It's a phenomenal question. 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, you know, strategy process in place that basically evaluates that, and then we go systematically execute against it.

Owen Rickert (VP and Senior Equity Research Analyst)

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

Bahram Akradi (Founder, Chairman, and CEO)

Thank you so much.

Operator (participant)

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

Hey. Good morning, guys. Thanks for taking my question. I just had one on the incremental flow through. Maybe this one's for Erik. Just on the marginal flow through of revenue to EBITDA. It looks like it's been running around, you know, 30%-35% over the past several quarters. And, you know, 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? You know, it looks as though you guys would get some fixed cost leverage, but, you know, obviously there's some puts and takes in there, so maybe you could just walk us through those.

Thank you.

Erik Weaver (EVP and CFO)

Yeah, I mean, you know, one of the things that we've really said is we want to make sure that, you know, we're leaving ourselves enough room to, you know, kind of reinvest back into the centers as we need to. So, you know, as we look into Q4 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 dues side, as we mentioned before, you know, Bahram talked about retention, so we get a lot of flow-through from that. So that's one of the main drivers.

Then, as I mentioned on the DPT side, that's also been very, very strong for us, especially in the third quarter.

Bahram Akradi (Founder, Chairman, and CEO)

Yeah. The caution that we are wanting to issue is that we guided you guys to 23.5%-24.5% 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. 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 Erik said, we like to guide to a number that we don't disappoint.

You know, now I would suggest, you know, 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, they're like new, the team members are getting the proper, adequate education, they get the proper incentives. And, if we have more than takes all of 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, you know, I don't know how many companies actually are delivering 25% EBITDA margin. 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 twenty-five. Don't get overexcited. You know, as we grow the, you know, some of the challenging areas, the spa, cafe, when they grow, they're gonna actually drag the margin back down. Now, the total... the club is gonna make more money, but the margin is gonna get pressed, because they will never deliver, 25% EBITDA margin. So it's a better engagement. The more people are doing the cafe, the more people go to the spa, the better it is for more engagement. You get more dues, which is great. That's a great margin. The negative side of it, the margin on those businesses are very low.

Operator (participant)

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, Bahram Akradi, for closing remarks. Please go ahead.

Bahram Akradi (Founder, Chairman, and CEO)

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 fourth quarter into next year, and looking forward to continue to deliver what we promised to you. And I couldn't be more grateful to the Life Time team for literally just passionately delivering and giving the results that you guys are seeing. So with that, I'm gonna thank you guys and have a great day.

Operator (participant)

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 participation.