Life Time Fitness Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: Life Time (LTM)

Life Time Fitness (NYSE:LTM)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET


John Heller

Bahram Akradi - Founder, Chairman, Chief Executive Officer and President

Michael R. Robinson - Chief Financial Officer and Executive Vice President


Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Paul Swinand - Morningstar Inc., Research Division

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Q4 and Total Year 2012 Life Time Fitness Inc. Earnings Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. John Heller, Senior Director, Investor Relations and Treasurer. Please proceed.

John Heller

Thanks, Dominic. Good morning, and thank you for joining us on today's conference call to discuss the fourth quarter and full year 2012 financial results for Life Time Fitness. We issued our earnings press release this morning. If you did not obtain a copy, you may access it at our website, which is

Concurrent with the issuance of our fourth quarter results, we have filed a Form 8-K with the SEC, which also includes the press release. On today's call, Bahram Akradi, our Chairman, President and CEO will discuss key highlights from our fourth quarter and our operations. Following that, Mike Robinson, our CFO, will review our financial highlights and provide financial guidance for 2013.

Once we have completed our prepared remarks, we will answer your questions until 11:00 a.m. Eastern Time. At that point in the call, Dominic will provide instructions on how to ask a question. In order to give as many as possible the chance to ask a question, please limit yourself to only one question.

I will close with a tentative date of our first quarter 2013 earnings call. Finally, a replay of this teleconference will be available on our website at approximately 1 p.m. Eastern Time today.

Today's conference call contains forward-looking statements, and future results could differ materially from those statements made. Actual results may be affected by many factors, including the risks and uncertainties identified in our SEC filings.

Certain information in our earnings release and information disclosed on this call constitute non-GAAP financial measures including EBITDA, free cash flow and other non-GAAP operating measures. We have included reconciliations of the differences between GAAP and non-GAAP measures in our earnings release and our Form 8-K. Other required information about our non-GAAP data is included in our Form 8-K.

With that, let me now turn the call over to Bahram Akradi. Bahram?

Bahram Akradi

Thanks, John. I'm pleased to be here to share my thoughts and perspectives on our 2012 results and plans for 2013.

Last year, we set 4 main areas of focus for 2012. We have succeeded in all 4 areas. I would like to briefly address them here. And then I'll be glad to answer any question on them in the Q&A later in the call.

First, we set our sight on achieving low-double digit revenue growth for 2012. We succeeded with over 11% top line growth for the year. Our pricing strategy were very successful and our center growth at nearly 13 -- and our in-center growth of nearly 13% for the year continued its strong performance as well.

Second, we focused on consistently delivering excellence in our programming at every center. The strides we have made are showing in continued growth in our in-center revenue and the responses we get from our members.

Third, our ROIC improved 40 basis points in 2012 as we drove more revenue and profit through our existing base of centers even while we made additional investments in growth initiatives and infrastructure. In the process, our balance sheet strengthened with our debt-to-EBITDA leverage dropping to nearly 2:1.

And fourth, we continued the growth of our Healthy Way of Life brand. Our program, services and events are all driven from the member point of view and with our Healthy Way of Life approach in mind. Our launch of the Commitment Day movement, which aims to inspire a healthy America by promoting members and general customers alike to commit to a healthy eating, exercise and personal responsibility, is just one example.

Now I would like to walk through a few of our key financial metrics for the year ended 2012. We saw double-digit growth for the year on all of the following metrics: Total revenue at over 11%, in-center revenue of nearly 13%, ancillary revenue at 53%, operating income at 20%, EBITDA at 19%, net income at over 20% and EPS at over 17%. We are proud of these results.

We grew our dues revenue at 9.7% versus 1% growth in membership count. If you exclude the effect of the LFF acquisition and its attrition impact, membership growth was 2.4%. This speaks clearly to our long-term stated strategy of growing dues, something we have been doing consistently for almost 20 years. We see no reason to believe we cannot continue this well into the future.

Our attrition rate in the fourth quarter was 10.4% versus 9.6% last 4Q. For the full year 2012, attrition was 38.2% versus 35% in 2011. Excluding the impact of the LFF acquisition, attrition was 11.1% for the quarter and -- 10.1% for the quarter and 36.9% for the year, just under the 37% expectation we discussed on the third quarter call.

While our true attrition rate has been on the rise, the way we have been calculating and reporting the metric will overstate attrition for our full membership subscription population. The attrition rate we have reported is calculated by dividing the number of attritions, which we will define as memberships leaving Life Time Fitness from both our access membership and our non-access membership by only the total number of access membership versus dividing by total membership.

While this number was not very big early on, now with the significant growth in our non-access subscription in recent years and new non-access subscription such as Life Time weight loss and Life Time health that we will soon be selling, we feel it's appropriate to talk about attrition, in terms of our total subscription. Therefore, starting in 2013, we're going to disclose our membership and attrition metrics differently. We will now divide the total number of attritions for both access and non-access subscription by the total number of access and non-access subscriptions. We will also report the access and non-access subscription total separately in 2 categories. We will refer to them as access membership or subscription and non-access membership or subscription. We will report the membership levels for each category and we will then give the attrition rate for all memberships combined. We believe this provides the most accurate reflection of our true attrition rate in our business.

To aid in this transition, we will be posting on our website attrition statistics using the new methodology going back 3 years.

As we look at 2013, we believe attrition directly will have a trend up, with a key element of this increase caused by the higher turnover of our non-access subscription. This is the part of story, which is not great, and we're going to do everything we can to counter this by significantly enhancing the value proposition of non-access membership.

I would like to take you back to a statement I made last year about our desire to drive faster growth rate. While I would like to be in a place to deliver faster growth in 2013, we are more on track to get there in 2014 and beyond.

Starting this fall, we plan to begin delivering a new club nearly every other month into the foreseeable future. A large percentage of these new centers will be located in high demographic markets and should bring higher average monthly dues and in-center revenues per center than our overall portfolio.

Our real estate pipeline for potential new centers in 2014, 2015 and beyond is filling up very nicely. Our development and construction group is ready to deliver the unit level growth we're talking about.

We're expanding our subscription offering with 3 promising new non-access options: myHealthCheck, Life Time health and Life Time weight loss we call Solera [ph].

Overall, over the last several years, we have invested time, money and technology to develop these platforms. They have been in incubation with little to no contribution to revenue. In 2013, they will be in infancy stage. They will contribute a small amount to revenue and we expect they will be mainly neutral to earnings, but they will have great potential for improved growth in 2014 and beyond. These micro strategies are all synergistic and part of our macro strategy to build a Healthy Way of Life company far more diversified than simply being the best gym operator.

We're focused on bringing our existing ancillary businesses to profitability. We're targeting both our myHealthCheck and our events and media businesses to be EBITDA neutral to slightly positive in 2013. And we expect our Life Time health and Life Time weight loss businesses to be EBITDA positive in 2014. These all serve to enhance our brand, differentiate our business and drive subscriptions inside and outside the centers.

Finally, I want to thank all Life Time team members for all their efforts in the past year. It is their passion and hard work that delivers the excellent member experience that is the foundation of our success all these years. To be exact, 2012 is a full 20 years we have driven strong growth in revenue, EBITDA and net income.

With that, I will now turn it to Mike Robinson, our Chief Financial Officer. Mike?

Michael R. Robinson

Thanks, Bahram. Let's start by discussing in more detail some of the events and initiatives that have occurred over the past few months.

The company achieved the diluted earnings per share criteria for 2012 required for the vesting of the remaining 50% of the long-term performance-based restricted stock approved by the Compensation Committee of our Board of Directors in June 2009.

During the fourth quarter of this year, the company recognized a noncash share-based compensation expense of $700,000 pretax versus $7.7 million in the fourth quarter last year. The results we reported in the earnings release and discussed in this call are inclusive of these expenses. The total impact of this expense in 2012 was $0.04 per share versus $0.16 last year.

In May of 2012, the Compensation Committee of the Board approved the grant of long-term performance-based restricted stock for approximately 50 members of senior management. The committee approved this grant to serve as an incentive to our management team to achieve certain cumulative diluted EPS and ROIC targets in 2015 and 2016. The EPS targets are 1.5x the compound annual growth rate under our current long-range plan, and the ROIC targets are 1.1x the ROIC under our current long-range plan. We do not believe the achievement of either of the cumulative EPS or the ROIC targets is currently probable and have not taken any compensation expense related to this plan.

Our initial remodel and dues price repositioning of the 9 former Lifestyle Family Fitness facilities in Ohio, Indiana and North Carolina we acquired in late 2011 was completed in the third quarter. As a reminder, at the acquisition date, the membership of these centers came in at less than half the average monthly dues of our current portfolio, which lowers our average revenue-per-membership company-wide.

As a part of the transition and in conjunction with the remodels, we have raised the dues in these centers substantially, and in some cases, over 100%. Obviously, this has increased the attrition of memberships, which we fully expected.

Our goal is to attract the demographic that better fits our differentiated model. We have seen positive results from these moves. Even after we absorbed these transition and integration costs in 2012, we saw slightly positive contribution from this acquisition in 2013 -- I'm sorry, in 2012.

In August of 2011, the Board of Directors approved the share buyback plan, allowing for the purchase of up to 60 million of shares in the open market for a 2-year period. In the fourth quarter of 2012, the company spent $19.1 million to repurchase approximately 425,000 shares on the open market at an average price of just under $45. We have approximately $41 million remaining under the plan. This buyback offset shares coming into the share count from the tranche vesting of the performance share plan, thus, there was minimal effect on EPS in the fourth quarter.

Now let me talk about attrition and retention. As we expect, our core attrition is best in our Diamond and Onyx centers and highest in our Bronze and Gold centers.

In our Platinum centers, memberships attritted approximately our core average of nearly -- of 36.9%. Attrition levels in our Onyx and Diamond centers are significantly below our overall rate. In fact, Diamond center attrition is below 30%. Today, roughly 14% of our memberships are Onyx and Diamond. These memberships bring in much higher dues and in-center revenue-per-membership than the overall average. For the memberships that attritted out and we replaced with new memberships, we are seeing a healthy increase in average dues. In effect, trading lower dues membership for a higher one.

As Bahram said earlier, starting in 2013, we are changing the way we will present our membership and attrition metrics. The growth in our non-access membership, coupled with the new non-access subscriptions we will soon be selling have made the current attrition calculation not reflective of our total business. Our current attrition calculation takes all memberships that completely leave Life Time fitness and divides it into only access memberships.

This was an appropriate measure when the non-access membership was simply a frozen membership and there were no other subscription products. Today, the non-access subscription product is developing into a more encompassing offering.

Coinciding with this growth, we are also working on offering new subscriptions, which we plan to sell directly to the consumer instead of first selling an access membership. These new subscriptions make it more appropriate to talk about attrition, in terms of total subscriptions in the attrition calculation, not just access memberships. So going forward, we will state attrition as total terminations divided into total memberships.

At quarter and year end, we will give this attrition rate, along with the membership balances of our access membership and non-access memberships or subscriptions. The non-access bucket will include what we used to call Flex Memberships and other non-access memberships. We believe this will provide the most accurate reflection on the true attrition rate in our business.

To aid in the transition, we will give attrition statistics using the new methodology going back 3 years, which will be available at the IR section of our website today.

The trailing 12-month attrition rate used, using this new technology was 33.5% in 2012, compared to 31.3% in 2011. If you adjust for the LFF acquisition, 2012 totaled 32.3%. A key element in the increase from 31.3% to 32.3% was an increase in memberships leaving our non-access membership base.

In addition to the new attrition and membership statistic metrics, we will introduce average dues for access and non-access membership. Revenue per access memberships will also replace revenue per membership in our statistics as well.

The estimated life of a membership is 33 months, unchanged from last quarter. We finished the year at 682,621 access memberships. This was a 1% increase from the end of 2011.

Excluding the impact of the Lifestyle Family Fitness acquisition, memberships grew 2.4% for the year. The result is a stronger, better membership base paying higher dues rate. Again, we clearly see this in our total dues growth.

In 2013, we anticipate access membership growth of 2% to 3%. We expect lower growth in the first half of the year, given only one center opening. Membership growth should rise in the second half, driven by the 2 scheduled center openings.

The total number of non-access subscription memberships at the end of the fourth quarter increased to 104,382, compared to 92,806 at the end of 2011.

The number of open centers at December 31, 2012, was 105, compared with 101 at December 31, 2011. 60 are our large current model and 83 have been opened up more than 3 years, which we classify as mature centers. We operate approximately 10 million square feet of fitness facilities, including our acquired centers.

Our total revenue is $275.3 million for the quarter, which was up 9.7% from last fourth quarter. Our main revenue drivers are as follows: Membership dues revenue grew 7.6% for the quarter, a powerful dues stream accounts for 65% of our revenue.

Similar to Q4 2011, in December of 2012, we successfully instituted a small price increase across a significant majority of our existing membership base. This amounted to roughly a 1% to 2% price increase.

In-center revenue grew by 12.5% in the quarter, led by tennis member activities and personal training. We are strategically driving this growth by increasing our products and services in our portfolio in sending members to use these services through our LTBuck$ affinity program and continuously enhancing our connectivity initiatives. Our focus is to drive more member involvement, which we expect will improve member retention and customer satisfaction.

Other revenue grew 48.6% for the quarter, driven by our events business and our Chronotrack event's timing and registration business. Other revenue also includes our media and health businesses. All of these ancillary businesses are designed to drive brand, further product differentiation and support and grow our subscription business.

Our revenue productivity measure metrics are strong and consistent across the board. Our fourth quarter same-store sales were up 3.6% for the quarter and 4.3% for the year. While our 37-month mature same-store sales were up 3% for the quarter and 3.7% for the year.

Revenue per membership for the fourth quarter was $393 per membership, which was up 3.5%. Excluding the impact of the Lifestyle Family Fitness centers, revenue per membership was $399, up 4.5%. In-center revenue per membership of $122 was up 7.1% in the quarter. Excluding the Lifestyle centers, in-center revenue per membership was $125, up 8.1%. As expected, the lower dues in smaller facilities with fewer revenue-driving amenities such as cafés and spas and the LFF acquisition lowered our revenue-per-membership statistic in 2012.

Now I would like to discuss our cost structure.

Operating margin was 16%, an increase of 130 basis points from 14.7% in Q4 2011. These results included approximately $4.5 million of incremental costs, including $2.9 million associated with Commitment Day. Approximately $1.2 million is the result of super storm Sandy and other insurance cost of about $400,000 in Q4 2012.

Result includes approximately $6.7 million for incremental performance share-based compensation expense in Q4 2011.

For the quarter, center operating costs improved 180 basis points over 2011 Q4. Leverage from the increased dues revenue and mix changes continues to drive this margin improvement. In addition, we are seeing margin improvement year-over-year in our lower margin in-center businesses.

Reduced lease expense from the buyout late last year -- late 2011 of 6 former leased properties also contributed to this improvement. For the full year 2012, we delivered a 250-basis-point increase in-center operating margin, driven by the leverage discussed previously. This improvement more than offset increased costs in excess of enrollment fees, which total over $20 million for the full year 2012, as compared to nearly $15 million in 2011.

In 2013, we expect continued margin improvement at a lower rate driven by pricing leverage, more than offset -- more than offsetting continued high net membership acquisition costs.

For the quarter, marketing and advertising costs were up 10 basis points. We continue to invest in our LT Buck$ affinity program and marketing spend in new events and other corporate initiatives. These programs are showing results as evidenced by our strong growth in dues and in-center revenue.

For 2013, we expect higher margin cost, as a percent of revenue, driven by more presale activity for 2013 openings, as well as presale activity for the early 2014 openings.

For the quarter, G&A expense was down 160 basis points from last year's fourth quarter, as a percent of revenue, at 5.3%. This includes noncash performance share-based compensation expense of $500,000 in Q4 2012 versus $5.9 million in Q4 2011.

While focused on controlling and leveraging core G&A elements, we continue to invest in expanding our consumer-facing technology, including online scheduling, mobile applications and web sales. These initiatives are designed to further enhance member connectivity and drive more product and service differentiation. For 2013, we expect G&A to generally remain flat, with leverage from core G&A spend balancing our investment in consumer technology.

For the quarter, other operating expense was up 130 basis points, including approximately $2.9 million in costs related to the roll out of the inaugural Commitment Day 5k event. We continue to invest in our athletic events businesses, including the Chronotrack acquisition, the myHealthCheck business infrastructure and cost of sales related to our media business.

While other operating expense is increasing as a proportion of our total cost structure as we expect, we are seeing significant top line growth related to these synergistic Healthy Way of Life businesses. The associated revenues related to these operating expenses grew by 48% over the same period last year driven by growth in our events business, including the Chronotrack acquisition discussed earlier.

In 2013, while we expect these costs to continue to grow slightly as a percent of revenue due to the growth of ancillary revenue, we expect the quarter-over-quarter relationship to improve gradually over time as we grow these revenues.

Depreciation and amortization was up 70 basis points for the quarter to 10.8%. This increase was expected as we absorbed the incremental depreciation from the former leased facilities we purchased in December 2011. The LFF in Atlanta tennis center acquisitions and the increased remodel activity from these same acquisitions, as well as increased depreciation and amortization expense from the acquisitions such as Chronotrack.

In 2013, we expect depreciation, as a percent of revenue, to be slightly higher the first half of the year, then flatten out as we anniversary major investments.

Interest expense, net of interest income, increased to $6.1 million from $4.9 million last fourth quarter. This increase in the interest expense reflects the impact of the W.P. Carey mortgages we assumed as a part of the 6-center lease buyout at the end of 2011. Interest, as a percent of revenue, is expected to increase in 2013, as our debt balances increase from funding growth in construction progress.

Our tax rate for the quarter was approximately 38.5%, down from 38.6% last fourth quarter. We expect our 2013 tax rate to be approximately 40%. That brings us to net income for the quarter of $23.4 million, up 18.1% over fourth quarter 2011.

Weighted average diluted shares for the fourth quarter totaled $42 million. The impact of the share buyback in the fourth quarter was mostly offset by the issuance of shares in connection with the vesting of the noncash incentive share-based compensation expense. We currently expect the share count to increase about 1% in 2013.

Overall, we achieved diluted EPS of $0.56 in the fourth quarter, up 16.2%. For the year, we achieved diluted EPS of $2.66, which is a 17.4% increase over 2011.

My next topic will be cash flow and our capital structure. Our cash flow from operations totaled $52.9 million for the fourth quarter. For the full year, we delivered over $255 million in operating cash flow, up 12%.

For the quarter, free cash flow was slightly negative. And for the full year, it's approximately $31 million before acquisitions.

Please keep in mind, we intend to increase investment in long-term growth opportunities, including square footage expansion while we maintain a strong balance sheet. We do not plan to manage the positive free cash flow, but do intend to maintain a prudent debt leverage ratio.

We continue to focus on our capital structure cash and debt availability. Total debt for the quarter increased $35.7 million since Q3. As of December 31, we have $464 million outstanding, including letters of credit on our $660 million revolver. That leaves over $200 million in cash and revolver availability. Our net debt to total capital was 39.1% at December 31 and our EBITDA leverage was approximately 2.1:1.

Earlier this month, we closed on $75 million loan with a large insurance company. The loan is secured by mortgages on 5 of our centers. The term of this loan is 10 years and bears an interest at a fixed rate of 4.45%. The proceeds went to pay down our outstanding revolver balance. We believe this is a solid addition to our capital structure, allowing us to take advantage of historically low, long-term interest rates and keep a comfortable level of availability on our revolver.

For 2012, we spent approximately $224 million in capital expenditures, excluding acquisitions. This was comprised of approximately $124 million for growth, approximately $80 million for maintenance and corporate infrastructure investment and approximately $20 million for acquisition remodels. For 2013, we are forecasting $300 million to $350 million in capital spend as we position ourselves for doubling our center openings in 2014. This includes $220 million to $250 million for new centers and expansion of existing facilities, as well as $80 million to $100 million for maintenance CapEx and corporate initiatives.

We had no new club openings in the quarter. A few balance sheet variances to note include prepaid expenses for the year were up $3.9 million, driven primarily by prepaid rent and general business growth. For the year, goodwill was up $11.6 million and other assets were up $12 million, driven primarily by acquisition activity.

For the year, accounts payable and accrued expenses together increased $17.1 million due to general business growth, timing of payments and insurance reserves. With that, let me discuss our financial guidance for 2013.

We plan to open 3 large centers. Our first planned in Q2 will be in Vestavia Hills, Alabama, suburb of Birmingham. We plan to open the Reston, Virginia and Montvale, New Jersey later in the second half of the year.

In addition, as Bahram discussed, we have an exciting pipeline for 2014, led by clubs in Harrison New York and Laguna Niguel, California scheduled for Q1 2014.

Our 2013 business outlook is as follows: We expect our revenue will grow 6.5% to 8% to $1.2 billion to $1.22 billion. We anticipate our net income will grow approximately 8% to 11% or $120 million to $124 million. We currently expect our diluted EPS will be $2.85 to $2.95.

For the first quarter, we expect revenue growth and EPS growth more or less in line with the annual guidance.

Before I close, as I reflect on 2012, I'd like to provide you with a couple -- with a few key metrics regarding our core center business and economic model.

First, regarding membership growth in dues, if you look at the 65 greenfield large centers we opened in 2008 or earlier, our membership level stayed consistent and dues grew on average of 3%.

Secondly, in these same centers, average total revenue was $12.7 million per center, up from $12.3 million per center in 2011 and the unit EBITDA margin improved from 43% to 44%. This clearly indicates the business is on solid footing.

That includes our prepared remarks regarding our fourth quarter financial results. We're pleased to take your questions now.

That concludes our prepared remarks regarding our fourth quarter financial results. We're pleased to take your questions now.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Brian Nagel of Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

A couple of questions here, I guess, for both Mike and Bahram. The first one with respect to the new unit growth, so you articulated in your press release that, I think, you we're looking at 6 new units in 2014, and then, Bahram, in your comments you said that we're going to ramp further, I guess, in 2015 and beyond. How should we think about the financing of these new units? I know you'd said recently that you were going to grow within the -- as far as your free cash flow would allow. I mean this rate of growth would suggest to me that maybe you're going to start using your balance sheet more. Just some thoughts there.

Bahram Akradi

You're correct. Let me walk you guys through that. Our goal at this point is to deliver, on average, a large format club in a great market about every other month from fourth quarter of this year going forward. Depending on the locations that we will build these, they probably will come in -- mostly, we're targeting East Coast, West Coast, areas where I think the cost of the land and construction will be a little higher, so we will be utilizing significantly more capital than we have in the last 3 or 4 years, only delivering 3 facilities per year. We set a goal for ourselves to have our debt-to-EBITDA at near 2:1, 4.5, 5 years ago, with the economy being in a major turmoil, and we wanted to prove that we can run this business in the toughest of economic situation with full strength. At this point, we are reevaluating those levers, the levels of our debt, and we think we might be slightly too conservative. So if we have the right opportunities -- and we're not going to force this. If we have the right opportunities, if we find 7 great locations or 8 great locations for 2015, then we will do those. And if we have to ramp up a little bit from 2x debt-to-EBITDA to 2.5x debt-to-EBITDA, so be it. We'll still be very, very strong. Does that answer your question?

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

It does. And so as a follow-up to that, Bahram, having followed your company for a while now, the cost to open a facility has climbed over time, increased over time and then as you push into some of these more expensive markets. So as we look now, particularly on the East and West Coast of the United States, how much should we be thinking you're going to be spending to open each one of these facilities?

Bahram Akradi

The fairly -- look, I'm just giving you some examples. In the East and West Coast, you could think $40 million to $45 million, $50 million depending on the location on average. And to make sure everybody is clear, it's a simple mathematic. It doesn't -- it shouldn't concern or confuse people. When we go to a more expensive market, it's more expensive for everyone. An extra $10 a month for dues on the membership in that market justifies an extra $2 million in price of the land and construction or more, so it's a simple proposition. We have obviously been doing this. Interestingly enough, right now, looking in a rearview mirror, we have better returns in clubs like Long Island, New Jersey, et cetera, than we may have clubs in Ohio, where we spent a lot less on land and construction, so it all takes care of itself. At this point, we're just excited about the pipeline that we have. As you guys know, the gestation time for these things are long. Sometimes deals will take an extra 6 months or 9 months to get through the approval process. We would have liked to have our 3 open clubs in 2013 be in the first quarter and hopefully, have a fourth one or a fifth one in the latter part of the year. It didn't work out. Some of them got pushed back to later in the year. And then, fortunately enough, we have been actually able to work some of the ones where we were thinking they're going to open later in 2014 to earlier in 2014. So things are looking really, really great as our new team in the real estate, expanded team in real estate are doing a great job filling up the pipeline with really solid deals.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Great. And a final follow-up on that is just it sounds to me, just given your comments, there's preferences to continue to own these facilities versus any type of lease structure.

Bahram Akradi

We are going to look at the company's best approach of capital maximizing shareholder value at all times. We have always determined that when we look at the total cost allocated to a club, when we can get a 4.5% mortgage, is significantly lower than a sale leaseback. But that does not suggest that we would not do leased facilities at all. We find the right opportunity, we will do those as well.


Your next question comes from the line of Sean Naughton of Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Maybe just first for you, Mike, on the center operations. It continues to come down nicely. Is there more room to go on that line item as we move forward and we think about 2013 and 2014? Or is there anything, I guess, that has structurally changed in the mix of revenue that would prevent you from returning to a 57% level, let's just say, like you were a few years ago?

Michael R. Robinson

So we've certainly seen very good movement, down 250 basis points this year. I expect, and as we've worked through our planning horizon for 2013, that we'll see continued margin improvement. I don't think we'll see it at those rates, but we will see it, and it will be driven by -- really by the leverage in the dues that we have been achieving in the past and expect to achieve in the future. Structurally, I think there's a couple of things that have changed. In 2013, we saw a lowering of our lease expense when -- on a net basis of maybe $3 million, $4 million, $5 million when we purchased 6 centers in late 2011. We added some leased facilities with the LFF acquisition. But on a net basis, we structurally lowered that cost by $3 million or $4 million, $5 million. In essence, that more or less offset what we were seeing in cost in excess of enrollment fees, which increased in -- during the year. Our own view of that is that we'll continue to see that some of that lease savings -- or that lease savings, we'll also continue to see some higher cost in excess of enrollment fees.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. So maybe just another question on the acquisition front. Can you talk about maybe just your appetite for acquisitions? And then maybe just give us -- are you happy with where you are in terms of the progress of LFF at this point? Is it similar to where you guys were modeling when you bought these businesses about 12, 13 months ago?

Michael R. Robinson

Yes, from an appetite perspective, I'll continue to say just what we've been saying all along that as we analyze our business and we know areas of the country that makes some sense or businesses that make some sense, we will look at and we'll continue to look at many different acquisitions, clubs and events businesses and the like, but they need to make sense strategically, and they clearly need to make sense on an economic perspective. So we are going to be opportunistic in that. We don't have acquisitions built into our expectation, but we continue to look at them, and we'll continue to evaluate them as we see fit. Regarding LFF, we did some major overhaul on the pricing structure and things like that. I think it's fair to say that we're -- that the progression we've seen, given the pricing structure that we have, is good, albeit probably a little bit behind where we expected it to be at this point.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Fair enough. Just one last quick question. On the recent price hike that you guys took at the end of December, are kind of the first 45 days out seem relatively similar or as expected, type of attrition rates that you would have expect as that you saw last year, just as we get started in 2013?

Michael R. Robinson

Yes. The effect of that has been just what we -- it has been very similar to last year. We're very pleased with the outcome.


Your next question comes from the line of Brent Rystrom of Feltl.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Just a real quick one. Bahram, you mentioned the 4 initiatives going -- 2 of them in 2013, 2 of them in 2014, going from negative EBITDA to at least breakeven EBITDA. Can you characterize for us how big that negative EBITDA was, say, in 2012 and 2011?

Bahram Akradi

Even the negative impact from those in the past couple of years have been miniscule relative to the overall size of the company. They we have invested several million dollars of technology, et cetera to the platform that will cede, not only myHealthCheck, our non-access weight-loss program, as well as Life Time health. The cost, my guess is right now, because I don't have numbers in front of me, is maybe about a $3 million negative EBITDA in myHealthCheck in 2011, probably $1 million negative in 2012 rough and tough. And then, we expect that to be at neutral or slightly EBITDA positive, basically a nonevent from contribution from myHealthCheck. The other 2, Solera [ph] and Life Time health, we are going to roll those out extremely slowly, but virtually not a huge impact. We're just going to work all the bugs out of them, make sure we get some customers and feel them out. I don't think the impact is going to be an issue. The biggest impact for our 2013, Brent, is the fact that we are opening the 2 clubs late in the year, and they will have significant losses with no real contribution before they get to the point where they can have cash flow positive or EBITDA positive, and then we start the negative impact big -- I mean those are much more meaningful, the negative impact of the presales for the Harrison and Laguna Niguel in 2013 for the clubs opening in 2014. Those numbers are much more significant than the pluses and minuses at this point on these new incubation businesses.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

The one final twist that I would ask then, you didn't mention events. EBITDA -- I think you've said EBITDA breakeven on the events business in 2013. Can you refresh us where that was in '12?

Bahram Akradi

About $2.5 million negative, not counting Commitment Day. So -- and then we expect that by 2014 -- so 2013 will still have some impact from Commitment Day, albeit not near what we took charge in 2012. But in 2014, we expect that to be EBITDA neutral or better, as well as all the other events. We've been buying some events, consolidating, rebranding to create solid brands like Life Time Tri, Swedish E [ph], Leadman Tri, Torchlight, et cetera. And then, we're working through those -- each of those brands to make sure they become what we expect them to become. These events substantially improve our connection to our memberships who are interested in running, in cycling, in triathlons, et cetera. So they have tremendous impact from media impressions, which we'll really never include in the numbers. So as a whole strategy, they're an absolute winner. Now what we want to get to is to have this company athletic event business to be a solid for-profit entity of its own. And we feel like we will absolutely accomplish that, making $2 million, $3 million, $4 million hopefully in profit in 2000 -- now that's just a guess and that's a hope, but in 2014 and then build on top of that every year going forward.


Your next question comes from the line of Michael Lasser of UBS.

Michael Lasser - UBS Investment Bank, Research Division

So the discussion around the change in attrition rate and non-access members was very interesting. Can you -- a couple of things on that. Can you tell us how access membership trend, x LFF, have been going over the last couple of quarters?

Bahram Akradi

Okay. Ask me the question one more time.

Michael Lasser - UBS Investment Bank, Research Division

It was confusing. So access members x LFF the last couple of quarters.

Bahram Akradi

Access membership, not counting LFF in the last couple of quarters, have they been going up?

Michael Lasser - UBS Investment Bank, Research Division

Growing at a consistent rate.

Bahram Akradi

Okay. They're growing at a consistent rate. Let me walk you through this because you're asking a timing question now rather than absolute question. The way our memberships work, in the typical Life Time center facilities, we build memberships in the first quarter, second quarter. We have a bunch of memberships that come in during the -- for the summer, and then we'll see a strong attrition from the ones -- they are focused. They know exactly what they're buying. They're buying a membership for 3, 4 months during the summer, and then they plan to drop out regardless of what we do with them in the fourth -- in the early fourth quarter or late 3Q. So we'll see an -- membership as a whole throughout the year see its best jump per club in the first half. And then if we hold that membership count, not -- and this is for mature clubs, that's pretty good because then we have raised -- we have gained a bit of membership count for the year, now we'll go up. We come down a little bit and we hope to be slightly ahead January to January of the next year. Does that makes sense to you?

Michael Lasser - UBS Investment Bank, Research Division

I think so. Are you seeing...

Bahram Akradi

So then -- so really what -- and then the next thing that I want to emphasize to you guys and we don't know how else to do this for you but to repeat, repeat, repeat. This company, while it's under my direction, focuses in growing dues. It's -- we don't put membership units in the bank. We put dollars in the bank, and we have been focused on growing our dues. When I started this company 20 years ago, we created a great value proposition. We were selling memberships at $29 a month when maybe we should have sold them for $50 a month. Eventually, we changed the strategy and we decided specifically to serve the top end of the market. We provide more quality, more services. We go through extensive programming certification of employees. We think about every last bit of a customer experience, and we want the customer that is top end of the market and appreciates that higher service. We are not for everyone. As we are executing our positioning, we have some people who should -- they like to be in a lower-end club offering, and that's okay. We are hitting our strategy. And with 9% dues revenue increase, I think we're accomplishing what we're doing.

Michael Lasser - UBS Investment Bank, Research Division

Understood. Are you seeing a trend where there is movement from access to non-access such that the non-access membership, especially as you roll out more forms of that, could cannibalize some of your core memberships?

Bahram Akradi

That's a very, very good question, and the short answer is no. We don't see cannibalization from offering those programs and services. All we can see is that we might be able to offer programs and services outside of the access of the club, with the investments we have made in health and technology, to people that they may want to work out at home because they live 35 or 40 minutes away from our club or they are at a different club that they pay $20 a month, so the club is a no-frill club, doesn't offer any of those other services, they can add on. Do we think that's a game changer at this point? No. Do we think it will have a negative impact? Absolutely not. It might have a slight positive impact.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And on the attrition rate, it was up, I think, in the access to access about 100 basis points was that -- from 2011 to 2012. Was that all due to LFF?

Bahram Akradi

No. The attrition rate altogether, access membership from 2012 to 2011. Non-access attrition is up quite a bit. Access membership is up slightly, about 1%. The total, as Mike mentioned, as we counted, it was a couple -- 2%, 2. 5%, and that is not a desired outcome. We're not looking for attrition rates to go up. We are doing everything we can to improve connectivity to the access members. But where we feel like we might have, might have some significant opportunity is in our non-access membership because the value proposition isn't clear. And so our members go to the non-access membership and then after a while, they drop out. So what we're trying to do is try to enhance that experience for non-access membership. We have numerous strategies in work right now. Any improvement, any improvement on that front would be positive.

Michael Lasser - UBS Investment Bank, Research Division

Okay. I know I'm going long but you gave a lot of information, so a lot of questions have risen.

Michael R. Robinson

We have to keep rolling here. Next question please.


The next question comes from the line of Paul Swinand of Morningstar Investment.

Paul Swinand - Morningstar Inc., Research Division

Just again Mike's comment about the Onyx club's performing caught my attention. And obviously, you guys have mentioned statistics like that in the past. How much of the lower clubs or the less performing clubs is structural, size, not having a café and how much in your estimation is it something that you can get up? Is it staff training? Is it just a matter of time to add programs that are appropriate to that club that maybe are not in an Onyx club, but would work better in a small club? How much can you -- what are you doing to work on that to bring it up to the level of the Onyx and the timing?

Bahram Akradi

Yes. Let me address your point different, but the way -- there's a different way you should be thinking about it or it's at least the way we think about it. When we look at the market, we look at the demographics of the market, the income levels and the competition, we determine if we want to compete at $50 a month, $70 a month, $80 a month, $100 a month or $150 a month. As how we determine where we want to position the club, we have decided over the course of the history of the company to put clubs in places where we think we want to put at $140 like Syosset or places where we've decided to put the club in at $50 a month like Gilbert, Arizona. So whether -- if the market allow us, if we feel like we can go to a market and go from $50 to $70, we will. Sometimes the demographics of the market, it works only for a $50 a month market. So we are always, always analyzing, and when we think we can move a club up, it's not a function of what we offer or the certification or training of our staff. That we can change in a day. We have everything we need to know. We have all the training staff to make that move. The question is: Can the market support it? We study that every single month. We review it every single month, and we make these moves or move a club up and test it all the time. So directionally, what we have done is we have moved more clubs from a gold to a platinum, from a $60 to an $80 a month. We have moved clubs from $60 to $70 a month for new members, and we've tested those. And as you can see, that's the reason we have higher higher average dues that we are getting from every new membership sold versus every membership that drops off.

Paul Swinand - Morningstar Inc., Research Division

Got it. So some of the attrition in the lower-end clubs is then just the movement in the pricing as they trade up?

Bahram Akradi

Some is that. But frankly, some clubs -- I mean this is where I really want to make sure -- we want to make sure you guys understand how sophisticated we are in looking at this. This is something we measure daily. We have meetings 2x, 3x a week. We are on top of this every day. I have clubs where I have 48% attrition rate, and they have 9% dues revenue improvement. From last year to the -- from the year before to last 2 years, they have gone up from $550,000 to $600,000, from $600,000 to $650,000 a month of dues in 2 years and going. And they are -- so this is a quadrant where I have high attrition and high dues growth. So we haven't changed the membership. We have kept it right at that $50-some dollar a month base entry program. So -- and then I have clubs where I have high attrition and I haven't been able to grow the dues. That's the clubs where I see as a problem, and we have to figure out how we can -- we have very few clubs that way. We have more clubs where they have high attrition, but they turn over. The customer, they get a lot of new customers. And it's just the nature of the demographic, who lives there or whatever, and it just works with a high turn. And then we have clubs where they have really low attrition, extremely low, but they're not really growing dues that much. It's just, again, the nature of the market. And the important thing is that the management of this company, between myself and other folks in here, they are -- with 30 years of experience, 20 years of experience, 15 years of experience, we are looking at these things and we're trying to position every club for the best position. And we then look at the clubs that aren't growing dues as troubled clubs. That's what -- how we -- if I can't grow dues, that's a troubled club to me, and then we have the strategies of what can we do for that.


Your next question comes from the line of Steven Wieczynski.

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division

This is actually Brad in for Steve. Just a quick question for you. Bahram you touched on this a little bit, but just wanted to see if we can get a better sense of what you're seeing out there on the competitive front. I know at the higher end you've said that you generally take -- make as much share as you take. Just kind of curious what you're seeing kind of more in your lower level center offerings.

Bahram Akradi

Yes. So let's talk about this. When we bought -- to make a little bit more clarification of what Mike said. When we bought LFF, some of the memberships were -- they were being sold at less than half of what we are selling them now, and those are the lowest priced membership in our system. So they are the lowest end of our membership. They're -- and what we're selling them now for, they're less than half or roughly about half of our average dues in our total system -- maybe slightly over half. So when you have clubs in the lower-end demographic, you're competing with clubs where they're selling memberships for $20 a month, $19 a month. They're not providing any quality, any service. Even in that space, we want -- even in that demographic, we want to get the customer who wants and appreciates the towel service, the certified employees and clean clubs, et cetera. So we are very, very consistent in our strategy. We have decided to continue to compete in that space with a high level of quality and service all right. And so frankly, in a length of time that goes when we see some of these lower-end operators coming in, they are absolutely never mentioned into our team members as a competition. The customers, after a while, they figure out one company is driving, delivering Lexus, the other one is driving something much lower end, and then they choose. And if they want a lower-end product, they go to them, and if they want a higher end, they come to us. We are all okay with that. We're just fine. This country is built on having variety of different competitors at different prices offering different products for different people. We do not see national competitors at this point for our category.

Brad J. Boyer - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then just one last one, as a follow-on to that. Could you just talk a little bit at the higher end? I mean, are you seeing anyone out there that's trying to provide a model that's more comparable to your higher-end centers? Or does the comment you just made hold true for that as well?

Bahram Akradi

That's the part that we see a lot of competition. Again, if you call it -- we see a lot of players expanding in that low-end market. We -- in our space, as you can appreciate, they would have to spend $40 million, $50 million to build a facility. They would have to have the infrastructure to go get the approvals and the gestation and doing all that. They would have to have 300 certified employees. They would have to have 20 branded programs that accompanies inside, and this is a daunting business proposition. If you spend $40 million, $50 million and you don't have all those details worked out, you're going to have a big, huge white elephant. You're going to have $50 million cost and not enough people in it to make the numbers work. So it's a very, very difficult business model to execute, and we've done this deliberately to build a "high barrier to entry" model in a "low barrier to entry" industry.


This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Heller for any closing remarks.

John Heller

Thank you for joining our call today. We look forward to reporting to you our first quarter 2013 results, which tentatively has been scheduled for Thursday, April 25, 2013, at 10:00 a.m. Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you, and have a good day.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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