Town Sports International Holdings, Inc. Q4 2008 Earnings Call Transcript

Mar. 3.09 | About: Town Sports (CLUB)

Town Sports International Holdings, Inc. (NASDAQ:CLUB)

Q4 2008 Earnings Call Transcript

March 03, 2009 at 4:30 pm ET

Executives

Daniel Gallagher - Chief Financial Officer and Senior Vice President

Alexander Alimanestianu - President and Chief Executive Officer

Analysts

Sharon Zackfia - William Blair & Co.

Paul Lejuez - Credit Suisse

Cassandra Stevenson - KeyBanc Capital Markets

David Cohen - Midwood Capital Partners

Jack Shelton - Wells Fargo

Scott Collins - RT Investment Management Holdings

Operator

Good day ladies and gentlemen and welcome to the Town Sports International Holdings Incorporated earnings conference call. My name is Eric, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn your presentation over to your host for today’s conference Mr. Daniel Gallagher, CFO for Town Sports.

Daniel Gallagher

Thank you for joining us today. This is the Town Sports International Holdings earnings conference call, discussing fourth quarter and year end 2008 results.

I am Daniel Gallagher, Chief Financial Officer of the Company.

I caution listeners that to the extent we make any forward-looking statements in this conference call, they are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside of our control, which may cause actual results to be materially different from any forecasts we have made.

These risks and uncertainties are described in our reports filed with the SEC. We have issued a press release discussing our results for the quarter, which will also be filed with the SEC under a Form 8-K. In addition, to those of you who do not have access to this release and filing, we have also made them available at our website, www.mysportsclubs.com.

This conference call is also being webcast and may be accessed via the Investor Relations section of our website. Also a replay and transcript of the call will be available via the Company's website following this call.

I will now turn this call over to Alex Alimanestianu, the President and Chief Executive Officer of Town Sports International for discussion on the operations of the Company, and then I will give further detailed financial discussion later in the call. Alex?

Alexander Alimanestianu

Thank you, Dan and good afternoon everyone. We are pleased to be with you to provide our fourth quarter and 2008 results and update you on our plans and initiatives for 2009. To state the obvious, the economy weighed on our business in 2008 and will continue to be a negative factor in 2009, but many consumer oriented companies are focusing 2009 is on maintaining our strong liquidity position but reducing capital expenditures until we see evidence of recovery in consumer sediment and spending and by managing operating expenses with extreme prudence, while continuing to execute against our key strategy of enhancing the members experience in our clubs.

Although today we will talk about the bottom line earnings results and a various associated metrics on which we are measured every quarter, our management must also measured itself on the progress we are making toward our longer term goals.

Year 2008 started out fairly well but did not see as we have initially expected. We grew membership by 5.3% in the first quarter, by the second half of the year the economic crisis has escalated and ended with a lost of members in the fourth quarter.

For the full year, our membership grew respectable 4.9% and we are pleased to have at least achieved our revise earnings goals for the fourth quarter and the year, excluding the goodwill and fixed asset impairment charges as Dan will elaborate on in his presentation.

So, in looking at the fourth quarter, total revenue increased 3.4% but our operating margins declined as a result of increases in payroll and club operating expenses particularly ramp in excess of revenue. Although same club revenue declined by a modest 1.4% for the quarter, this is our first negative quarterly comparison since 2004. Naturally, this decline negatively impacted our results of cash flows from operations for the quarter totaled $18.7 million versus $20.1 million a year ago.

Our attrition rate of 3.5% per month was 10 basis points better than the third quarter and essentially on plan but 50 basis points worst than the 3% we reported for the fourth quarter of 2007.

Personal training revenue was up 4.3% in the quarter and while we increase the number of members using our personal training service that business too is being impacted by the economy, as members use the service or using it less often.

Overall club usage increased by more than 15% in the fourth quarter and that plan continues in the first quarter, while this does not directly help our earnings results and this is an indicator of the continuing strong demand for our clubs and have a positive experience for our members which should payoff down the road and manifest itself in a reduce attrition rate in positive word of mouth advertising for our clubs.

Corporate memberships which our key and growing sales channel performed well in the fourth quarter and we are targeting on market outside of the New York metro area for further success. We opened three new clubs in the fourth quarter including our first club in Providence, Rhode Island. The two other clubs were in Woodmere, Massachusetts and in Hicksville New York on Long Island. These are the 26th and 112th clubs respectively in the Boston, New York metro markets.

In December, we launched our online sales program and we achieved approximately 7% of total sales through this channel in December and January. We expect that this investment will pay for itself in less than three to four months through expense savings alone. With the successful launch of this online sales channel, we have put in place the third pillar of our overall sales structure, the three being in-club sales, corporate group sales and online sales. This organizational structure offers our potential members a range of options that maximizes the ease of joining our clubs.

Looking back at the full year, we opened nine new clubs and finished the year with 166 clubs. This represents a March slowdown on the 15 new clubs added in 2007. Our original plan at the beginning of the year was to add 11 clubs but as we said on our third quarter earnings call we decided to move two of the openings to Q1 2009.

We ended the year with 510,000 members up 4.9% and 487,000 members at the end of 2007. Capital expenditures for the year ended $96.2 million of which $57.8 million was spent on new clubs, $23.6 million on facility and equipment upgrade at older clubs, $9.1 million to enhance our IT systems and $5.7 million for the construction of our new longer facility.

Our capital expenditure plan for 2009 is to spend between $50 million and $53 million. This amount includes approximately $23 million for maintenance and upgrades of these existing clubs, $8.4 million to support and enhance our IT systems, $4 million for the completion of a new longer facility and a replacement corporate office in the New York region. In the remainder of our capital expenditures principally relates to 2008 and 2009 club openings.

During the fourth quarter, we purchased $1.8 million club shares and thus far in 2009 we have purchased another $2.1 million shares for a total spend on the buyback of $9.9 million. Our Board and our management team have a high degree of confidence in the prospects of Town Sports and its common stock. So, we expect our long term shareholders to be rewarded with a high return on this investment.

As we look at 2009, we are now planning to open just four new clubs, all in the first quarter in order to keep capital expenditures down and to avoid excessive risk in this challenging consumers spending environment.

As real estate lease terms improved and construction costs come down however returns on new club projects may become more compelling, particularly if there are any signs of an economic recovery. We are pleased with the overall performance of our new club portfolio and are confident that there are still many opportunities for growth in our current markets, so when it makes sense to return to a faster rate of growth, we will do so aggressively.

In the first quarter of 2009, we have opened or will open clubs in downtown Providence, Rhode Island; Butler, New Jersey; Deer Park, New York on Long Island and East Brunswick, New Jersey. We also plan to close four clubs in 2009 and we expect to retain many of the members of these closed clubs by moving them to nearby Town Sports locations.

We continue to review our clubs in this portfolio and are working with our landlords to find ways to achieve savings and occupancy expenses. These reviews could result an additional club closures over time as well as rent reductions and lease extensions, amendments, and terminations.

In January 2009, we completed a round of layoffs which impacted approximately 47 non-club positions around 11% of our non-club workforce. Layoffs are among the most difficult decisions we face as a management team. We will always approach them with extreme care and deliberation, but the current environment clearly necessitated these reductions. These cuts will save approximately $2.5 million excluding severance costs. We have also frozen non-club salaries for 2008 levels including of course executive salaries.

In 2009, we will expect certain nonrecurring expenses and charges including for the implementation of our new IT systems and our laundry warehouse conversion, which will put some additional pressure on our 2009 earnings. However, these added 2009 expenses position us for greater efficiencies going forward. For example, we expect our new laundry facility to reduce expenses by more than $1.5 million per year beginning in 2010.

Overall and primarily because of the decline in net membership in the fourth quarter of 2008 and our expectation of continuing declines for the full year 2009 versus 2008, we expect earnings to be down for the first quarter and the year. Although we are relatively pleased with the net members we gained to the end of February of this, 2009, there still a high degree of uncertainty regarding the impact of the weak economy on all consumer facing businesses like ours.

Given this uncertainty, we are choosing only to offer guidance for the first quarter at this time, as Dan will detail in his comments. However and very importantly, we expect to stay safely above our debt covenants again this year.

Our senior management team is resolute about the direction we are leading our Company and the initiatives we have put in motion. As has been the case since the beginning of 2008, a key focus is on heightening a member experience in our clubs in order to create the experiences and emotional connections but inspire our members to exercise on a regular basis. Our team has just begun the role out of our operational excellence program that provides our people with the standards, training and tools required to deliver consistent high quality experiences to every member.

The first two areas covered by the operational excellence rollout will be our front desk and housekeeping functions, which will allow us to assure a better performance on to two basic commitments to our members, namely, the friendliness and cleanliness of our clubs. Ultimately over the next few years we are striving to create a stronger brand position in each of our markets and improve levels of retention and member referrals among other things.

On certain key performance indicators, the early indications are that our club teams are already succeeding and improving the overall members’ experience. Our independent software scores have increased steadily from April 2008 when we begin the program. In addition, our member web feedback and our satisfaction surveys are showing improvements in key areas, such as staff friendliness and club friendliness. I have no doubts that these improvements will lead to stronger financial results, although this economic environment may well make it difficult to gauge full impact.

After significant changes in senior management 2007 and 2008, our team has coalesced over the past year and provide the foundational strength of the Company that will make us extremely resilient in tough times, and to repeat what I said on the last call the success of our Company over 35-year history has been driven by our strategy to offer an affordable and convenient way for our members to achieve their fitness and lifestyle goals and by our mission to improve lives through exercise. Nothing has changed in that regard. We will emerge from these challenging times a better and stronger company.

Now, I would like to turn the call back over to Dan Gallagher to provide more details regarding our financial performance to date. Dan?

Daniel Gallagher

Thank you, Alex. I will run through the income statements for the quarter and then discuss our balance sheets and our outlook for 2009.

For the fourth quarter, our consolidated revenue was $122.9 million, an increase of 3.4% over the prior year. Membership revenue was $102.5 million, ancillary revenue of $18.9 million, and fee in other revenue of $1.5 million all contributed fairly equally to the rate of growth. These increases in revenue were driven by our newer clubs, while revenue at our comparable clubs, those clubs opened over 12 months declined by 1.4% for the quarter, a 1% decrease in price and a 0.4% decrease in ancillary revenue were the two factors that contributed to this comparable club revenue decline.

Within ancillary revenue, personal training revenue grew by 4.3%, sequentially this 4.3% increase we found from the 12.3% increase realized in the third quarter of 2008, as of January 1st, 2009, there are 4.3 million square feet of club facilities under our management and 166 clubs to 34.1 million at the beginning of 2007, the 4.8% increase.

As Alex mentioned, at the end of fourth quarter the 510,000 members, the 4.9% increase over last year. However, this is 9,000 below the 519,000 members we had at the end of the third quarter and we ended the year with approximately 2.5% less members that our clubs opened over 24 months. This will put pressure on our comparable club revenue and operating margins in 2009.

In the fourth quarter, we performed an interim goodwill impairment test and as a result of the test it was determined that goodwill in our Boston Sports Club region totaling $15.8 million and goodwill at two of our outlier clubs totaling $1.8 million were impaired and written off.

In the fourth quarter, we also recorded 6,000 impairment charges totaling $1.9 million. This represents the write-offs of fixed assets at six underperforming clubs. As a group, as of December 31st, 2008, these six clubs have just under $1 million of fixed assets remaining. Excluding these goodwill and fixed asset impairment charges, our total operating expenses for the quarter were $112.7 million, an increase of 8.6% from last year’s fourth quarter.

In the fourth quarter payroll and club operating expenses increased at a faster rate than our revenue. Payroll and related expenses increased by 5.9% to $47.4 million in the quarter. Increases in payroll expenses were in large part due to a 6.8% increase in total months of club operations, which is driven by a net increase in five clubs over the past year. Also payroll expense increased $1.4 million in the quarter due to our continued discounting of initiation fees. The payroll of course we can defer or limit it to the amount of initiation fees we collect.

In the fourth quarter of 2008, initiation fees collected averaged $38.10 per new member, while in the fourth quarter of 2007 initiation fees collected averaged $74.19 per member.

Club operating expenses increased 17.9% to $43.6 million in large part due to the increases in utility and occupancy costs. The clubs we open subsequent to the third quarter of 2007 are driving these increases in utility and occupancy costs. Also within club operating expenses are advertising and marketing clubs which totaled $1.7 million in the fourth quarter of 2008 compared to $1.5 million in 2007.

General and administrative costs totaled $8.1 million for the quarter, a decrease of $1.8 million as the prior year. We are actively trying to reduce expenses wherever practical and there are many small pieces to this G&A drop, including the discontinuing of our holiday party in 2008 which generally cost a little over $100,000. G&A costs related to accounting, consulting, legal, and tax expenses decreased and we attribute this in large part to having our first year of Sarbanes-Oxley testing behind this in 2007. We also added $400,000 decrease in liability insurance expense due to more favorable claim loss experience.

Depreciation and amortization expenses were $13.5 million with 11% of revenue versus $12.2 million or 10.3% of revenue in the fourth quarter of 2007. The increase as a percentage of revenue was primarily associated with the 1.4% comparable club revenue decrease recorded in the quarter. Excluding the effect of the aforementioned goodwill and fixed asset impairment charges, operating income for the quarter was $10.2 million compared to $15.1 million in the prior year’s quarter or 8.3% of sales versus 12.7% of sales for the prior year. Increases in operating expenses at a faster rate than sales growth were the reason for the decline.

Interest expense was $5.9 million for the quarter compared to $6.5 million the prior year’s quarter. We continue to benefit from the decrease in short term interest rates. Interest charge in our term loan averaged 4.2% this fourth quarter compared to a 7.5% of rate on a term loan in 2007.

The term loan borrowings were under the euro/dollar based options for December 31st, which is set at LIBOR plus 125 basis points. Fully diluted loss per share for the quarter was $0.51 compared to earnings per share of $0.23 last year.

The aforementioned goodwill and fixed asset impairment charges impacted this quarter’s loss by approximately $0.66 per share. The significant portion of the goodwill impairment charges did not have the associated tax benefits. Also in the fourth quarter, we realized favorable provision to return adjustments that approximate $0.02 per share recorded at the tax provision line.

Our average share count for the fourth quarter was $25.8 million shares down from $26.5 million shares at the end of 2007. At the end of the quarter, we have $24.6 million shares outstanding and as of today, we have approximately $22.6 million shares outstanding.

As you know, we previously announced a 19-month stock repurchase program to repurchase an aggregate of $25 million for the Company’s common stock which continues to December 2009.

During the fourth quarter, we purchased $1.8 million shares at the cost of $4.6 million and subsequent to the fourth quarter of February 26 we purchased approximately $2.1 million shares at the cost of $5.3 million.

In the aggregate, this represents a total of 3.9 million shares repurchased at a total cost of $9.9 million, and as we previously stated when we announced the program, repurchases maybe made from time-by-time at our discretion and depending upon a variety of factors including prevailing market conditions.

Cash flows from operation for 2008 totaled $95.6 million compared to $82.7 million in 2007 or increase of 15.6%. Total cash paid for interest decreased $7.1 million to $10 million. Cash paid for income taxes decreased $4.8 million to $15.9 million for the year ended December 31st, 2008.

Now turning to our balance sheet, total debt at year end was $338 million and our cash position was $10.4 million for a net debt figure of $327.6 million. In addition, we have a $75 million credit facility in place of which $42.8 million was unutilized as of December 31st, 2008. We continue to have adequate room on the primary financial covenant within our senior credit facility which expires on February 27th, 2012.

Our gross leverage ratio as defined is 2.35 to 1 as of December 31st, 2008 while our covenant requires a ratio of 4.25 to 1 or below. Until we see evidence of the stabilization of the consumer environment, we are limiting our guidance for the first quarter of 2009. Based on the current business environment, our recent performance in the current trends on our marketplace and subject to the risks and uncertainties on our forward-looking statements, our outlooks for the first quarter includes the following.

Revenue for the first quarter of 2009 is expected to be between $123 million and $125 million versus $126.3 million in the first quarter of 2008, while we expect general and administrative expenses to remain flat as a percentage of sales on a year-over-year basis. Payroll, club occupancy and depreciation and amortization expenses are expected to increase as a percentage of sales. We expect a decrease in revenue, coupled with the 7.6% expected increase in square footage under operation from $4.1 million as of January 1st, 2008 to $4.4 million by March 31st, 2009 is contributing to these increases.

In the fourth quarter of 2008 and January 2009, we reduced our non-club staff by 47 positions or 11% including 27 positions in the reduction of force in January of 2009. In connection with the reduction in force, we incurred severance unrelated costs totaling approximately $0.5 million in the first quarter of 2009.

On an annualized basis, these eliminations will reduce our corporate payroll and related expenses by approximately $2.5 million excluding severance expense. Excluding severance unrelated costs; we expect net income for the first quarter of 2009 to be between $500,000 and $1 million and earnings per share to be in a range of $0.02 per share to $0.04 per share assuming $23.5 million weighted average fully diluted shares outstanding.

We would now like to turn the call over to any questions anyone may have.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Co.

Alex, I think you mentioned that you are relatively pleased with member growth so far in the first quarter. Does that imply that you are expecting members to be up now on the comp store level?

Alexander Alimanestianu

I am sorry Sharon I lost the last part of that question.

Sharon Zackfia - William Blair & Co.

Sorry I am calling remotely. I am wondering if you are expecting since your comment on the first quarter member growth was that you are relatively pleased with it so far. Do you expect that member growth component of comp to go back in the positive territory? I think it was flat in the fourth quarter.

Alexander Alimanestianu

We were relatively pleased with the net member growth in the past through February, but that being said the growth was not as significant as it was last year. So, in January we netted about 12,000 members overall versus about 21,000 in ’08 January. As Dan said in his comments, we were down about 2.5% over the course of ’08 in mature clubs, a 24-month club.

Daniel Gallagher

Yes, and I guess to get to Sharon, her one component of the comp sales, I think we are going to dip a little bit on the negative side Sharon in Q1, as far as the membership component of the comp sales, but this is slightly.

Sharon Zackfia - William Blair & Co.

And in the fourth quarter, I do not think you mentioned those but it looks like the price component of comp went negative and I was just curious as to what is driving that.

Alexander Alimanestianu

Yes. There are two things driving that. One is the members that are leaving us in the fourth quarter are leaving at higher place points than the ones that we are replacing them with by the tune of 47% actually from October to December and also we had price reductions at about 30 of our clubs is for gold memberships back at the end of August and what we found is that members at those clubs are trading down from their other memberships to these places and that is also have an impact on our price. So, overall the quota is down a little bit on the overall basis.

Sharon Zackfia - William Blair & Co.

So, you are seeing trade down from passport to gold in those clubs?

Daniel Gallagher

Actually, when we looked at it in August we had about 30 clubs particularly in the suburbs that we thought we are overpriced and we brought those prices down and what happens is those members at those clubs to the extent their an existing member, they can trade down to the same membership within that club providing that they either paid the initiation fee or that they commit to a one year membership and members are doing that. It is a really a gold for gold membership that we are seeing but is that the same club. So, not only do you get the new member joining at a lower price, it is the existing members that are hurting us a little bit at those same clubs.

Sharon Zackfia - William Blair & Co.

Okay, and then last question, on the online enrollment part of the equation, can you remind us how much you spent to implement that flow through the P&L and then I think you said 7% of members in the fourth quarter joined online, are you paying any kind of commission on that? Is that a kind of like a half commission or how is that work?

Alexander Alimanestianu

It was about 7% combined December and January, Sharon, and the commission is a reduced commission. It is a touring commission that is…

Daniel Gallagher

It is $30.

Alexander Alimanestianu

It is $30 less than the normal commission.

Daniel Gallagher

And it is also about $30, yes.

Alexander Alimanestianu

Alright, so that is the saving on per membership and has been very well received. We were, I would say, very pleasantly surprised with the amount of velocity we saw really from day one. Now, our new gym, new IT system we will have a much more robust website and online capabilities. So, this is just an interim system, but we are very happy about it. Dan, do you want to say how much…

Daniel Gallagher

I know it was less than $200,000 maybe $150,000 to $200,000 we spent on it.

Sharon Zackfia - William Blair & Co.

Yes, and that flowed through the P&L, right?

Daniel Gallagher

No. We actually have it as an asset for about 18 months, up until when we are going to roll out gyms. It is an asset on the books, as a quick amortization.

Operator

Your next question comes from the line of Paul Lejuez - Credit Suisse.

Paul Lejuez - Credit Suisse

Can you tell us what percent of your members were locked in at year end versus to one year contract versus...?

Daniel Gallagher

Yes. We are around 42%.

Alexander Alimanestianu

Forty two percent.

Daniel Gallagher

It is a little over 40%.

Paul Lejuez - Credit Suisse

What was that last year?

Daniel Gallagher

It was over half.

Paul Lejuez - Credit Suisse

Is that right, over half?

Alexander Alimanestianu

It was right around half. We have been promoting the month-to-month membership in this difficult environment, economic environment in this context. So, we do have more month-to-month memberships that we put on over the past three or four months. I think we are running about 15% on the month-to-month in the past few months and that is intentional we do not expect it to go much higher than that but there is certainly demand for that and we intend to meet the demand to a degree that makes sense for us. So what we did was we brought down the price a little bit, the premium on the month-to-month membership. It is still a $10 dues gap, and a $20 to $40 joining fee gap, or premium on the month-to-month. So, it makes more sense in terms of dues and joining fee in our view.

Paul Lejuez - Credit Suisse

Right, I guess yes I just wonder, is there kind of an embedded attrition in that from members that are locked up with you currently, so I guess maybe one way to think about that is the members that have rolled off the commitment programs in the fourth quarter for example what was their cancel rate like versus fourth quarter of last year?

Alexander Alimanestianu

Yes. I do not have that data at my fingertips but maybe we can discuss that with you offline.

Paul Lejuez - Credit Suisse

Okay. And then you guys said that club usage was up, did you say 15%?

Daniel Gallagher

Yes, 15%.

Paul Lejuez - Credit Suisse

Is that from people that would normally use the club and they are just using it more or is usage up from members that were not using the club?

Alexander Alimanestianu

I think it is a combination, but clearly, people have more time on their hands and they are spending and visiting the clubs more often. I think that is an industry wide trend as they speak to other club owners they are seeing the same phenomenon.

Paul Lejuez - Credit Suisse

Then, can you tell us the timing of club closings for the four that you mentioned and also I am wondering what D&A looks like for 2009.

Daniel Gallagher

We are not giving 2009 annual guidance; even though that D&A is pretty much a calculable number.

Paul Lejuez - Credit Suisse

You guys just took a bit write off. So, it is less calculable.

Daniel Gallagher

I know it is not because goodwill is not really amortized. We do not have amortized goodwill. That is where most of the write offs came. That is a permanent asset.

Paul Lejuez - Credit Suisse

Okay, so there were not any like fixed asset that are written off here?

Daniel Gallagher

They were not, no materials to goodwill. This is about $1.8 million of our $350 somewhat million.

Paul Lejuez - Credit Suisse

So, that is helpful. How about the timing of the closings?

Daniel Gallagher

I think three in the first half, one in the second half, but we have not fairly announced them publicly so we are not... I do not want to say anything more than that.

Operator

Your next question comes from the line of Scott Hamman with KeyBanc Capital Markets.

Cassandra Stevenson – KeyBanc Capital Markets

Hi. This is Cassandra Stevenson calling in for Scott. Even at a reduced level on the CapEx, could you give us an idea as to how much flexibility you have with that and also considering the maintenance CapEx?

Alex Alimanestianu

Yes, as I said in our prepared remarks, the four new clubs are opening in the first quarter. So, those are either open or about to open. So, the construction investment is already made. The IT system is underway and we are in the back half of that. So, that is committed and the maintenance CapEx, we feel very resolute, I would say, that we have to make that investment in order to maintain the cash flow of the business, keep the members happy, keep the equipment running, and facilities running at a high level. There is little flexibility there always is, but we trended it back from 60 to 70 million to a little over 50 and we feel that is the right level to run this business up.

Daniel Gallagher

Yes. I would agree with all that. The new CapEx those clubs are…we will have them opened in the first quarter of 2009 and as Alex said we spent 95 plus million in 2008 that we announced in October or third quarter, we were estimating between 60 million and 70 million for 2009 and we already did spend a lot of time sharpening our pencil and cutting it down to the 50 million to 53 million that we have right now. So, the short answer is we do not think there is much more to cut at this point.

Alex Alimanestianu

Yes. We also already moved any other clubs, new clubs into a future period. So, we have three other leases that are signed for future clubs and we postponed those already at no cost but in order to trim the CapEx to the right level for this year.

Cassandra Stevenson – KeyBanc Capital Markets

Okay. Then, I think last quarter you spoke briefly about segmenting your membership base into different groups. Could you give a little bit more details on that process and maybe what are the results you are seeing from that?

Alex Alimanestianu

I think it is premature to talk about that on this call but we can certainly do it on the next one. I think you are referring to the attrition, retention initiatives, and the analysis is ongoing. We have some programs that we are already implementing and some that were piloting. So, I have prefer to keep an update too much about that now and wait to see more results before we talk in greater detail, but we think the initial results are promising. One thing we are doing that is fairly on the retention side, they were piloting. It is just a more structured, safe program when people call in to cancel whether at the call center or the clubs and that we are already starting to see pretty good results from that but it is a little early to talk about specifics on it. So, we will fill you in a greater detail on the next call.

Operator

Your next question comes from the line of David Cohen with Midwood Capital.

David Cohen – Midwood Capital Partners

Thank you for taking my call. I truly appreciate you guys sharpening your pencil versus third quarter on your overall CapEx. I was just looking for a little bit OF clarity on the numbers. Of the three clubs already open in 2009, how much of that capital had already been hit the casual statement in 2008?

Daniel Gallagher

I do not have those details at my fingertips, but it is a safe to say a decent amount because those clubs…a couple of them opened pretty early in Q1. Yes, I would say more than half shooting from the hip a little bit. I do not have the exact numbers David.

David Cohen – Midwood Capital Partners

You said that to balance the investment, the outlined couple of items particularly maintenance, IT, laundry [cleaning] 14.5 roughly to 17.5 that covers and that is principally and that is in 2008 and 2009 new club openings?

Daniel Gallagher

Yes.

David Cohen – Midwood Capital Partners

Okay. I got the press release of 2007 for some reason, what investment would you be making relative to 2008 year openings?

Daniel Gallagher

Just fourth quarter our club openings that is where the construction cost in part were paid in 2009 on a cash basis.

Alex Alimanestianu

When we opened a club, for instance, in December of 2008, I would not have paid for that whole club at that point in time. So, the CapEx was on a cash basis and usually lingers between a month and two months after the club has actually opened that we have paid for CapEx.

David Cohen – Midwood Capital Partners

Okay. Is there any club expansions budgeted for 2009.

Daniel Gallagher

We do have one that is small. That is a new club that got the capacity very, very quickly and that is bursting at the seams.

David Cohen – Midwood Capital Partners

It is a good problem to have.

Daniel Gallagher

Yes.

David Cohen – Midwood Capital

Thanks and I appreciate your messaging the investors about the addressing your cost-structure and it was tough to let anyone know. Have there been any actions at the club level along the lines of the headcount reduction that you mentioned in the ‘09.

Alex Alimanestianu

Yes. What we did in the clubs and bear in mind that we are trying to enhance the member experience but being in this environment we know that we have to try to pay for those enhancement with some saving and what we did was we reviewed the operating hours in all 166 clubs and we trimmed the operating hours at over 100 clubs, not significantly but enough to save, in an effort not to disrupt workout routine across a large segment of the population but at the same time, achieving reasonable saving.

David Cohen – Midwood Capital Partners

Did you trim the hours the club is open or just the [Cross talking].

Alex Alimanestianu

Yes. We trimmed the open hours, usually late in the day, to the extent that we got resistance from the members. We obviously listen to that and we took it into account and were sensitive to it. The other thing we did was we did trim the group exercise schedule to the extent that we have under retention classes. We took them off of the schedules and those are things that are significant to the members impacted but we felt that to achieve the right balance of increasing management coverage in the clubs, which is the critical part of what Marty is trying to do. We have to pay for that out from our other savings. I am not suggesting that the trimming we did on the exercise classes in the open hours will necessarily benefit the expense structure but they are certainly paying for some of the enhancements that we are trying to deliver to the member and I expect to flow through the retention and referrals that we will get.

David Cohen – Midwood Capital Partners

Yes I have been visiting some clubs and quite frankly I am quite impressed by the talents you have at club levels. You guys are doing great job there and talked about with some folks there is 40 hours at the front des that has been trimmed and maybe 40 hours in the [cleaning step]. Is that a company wide thing where “X” number of hours in the aggregate that you are fighting 30 or 40 hours at fitness and it is [Cross talking].

Alex Alimanestianu

We are reviewing the labor model across all the clubs but we are not doing it with the [hardship]. So, to the degree that we found that housekeeping or front desk hours could be trimmed and we did it. Marty did it with his team from the GMs to the DMs to the VPs. We took some steps but again the effort is to redirect those dollars into areas where the member experience can be enhanced at the club level. We did not make cut headcount reduction at the club.

David Cohen – Midwood Capital Partners

Thanks. I know you guys have bought back stocks which I think is a great investment. It is pretty hard in this environment to actually lend any support for one stock given the selling pressures out there but have you guys had an opportunity to, instead of looking at buying back sticks look at buying any of your high yield debts in the market.

Alex Alimanestianu

I looked at that a long time ago and our credit facility that we have in place has quite a bit of restrictions against that. So, we basically cannot do that.

David Cohen – Midwood Capital Partners

You can buy stocks but not your debts?

Alex Alimanestianu

Yes. Not our subordinate debt

David Cohen – Midwood Capital Partners

Okay. That doesn’t make a whole lot of sense but in terms of your Q1 outlook, I know you are not providing guidance for the full year, but implicitly in getting from the top line to the bottom line. Can you give us essential level of depreciation and interest expense you are anticipating?

Alex Alimanestianu

The interest rate on our discount note is pretty much fixed at 11% and we have a $137 million as of December. That is top accreting early February. The term loans or the other big pieces of debts, we basically locked into that on a monthly basis and that is at LIBOR plus 125 basis points. So, this is pretty easy to recalculate what that is and I am not really going on the record but that is what our interest guidance is but it is fairly calculable based on those two numbers

David Cohen – Midwood Capital Partners

A few off of one month LIBOR?

Alex Alimanestianu

Yes. We have the option to do 30, 60, or 90 days but we have been consistently selecting one month.

David Cohen – Midwood Capital Partners

Apart from the peripheral training, the other ancillary revenue was a pretty decent sized sequential decline, what do you think is driving that downward?

Alex Alimanestianu

That is typical because in that category includes some of our summer pools and summer camps that we experienced high revenue in the second to third quarter than we do on the fourth quarter.

Operator

Your next question comes from the line of Jack Shelton with Wells Fargo.

Jack Shelton - Wells Fargo

I just have a follow up on your CapEx number. If you needed to have quickly, can you reduce CapEx to your 22 million maintenance number and how long you can stay at that level without impacting [50.03] i.e., is that a true maintenance CapEx number.

Daniel Gallagher

I am not sure what a true maintenance CapEx number you mean.

Daniel Gallagher

It is a number that is reflective of what we believe or current club base needs to get new equipment or minor facelifts to keep the current memberships happy. It is very similar on what we spend last year, last year being ‘08 and if you look back for the last five years we spent between 3.5% and 4% of our revenue on these items that we are pretty consistent with how much we spend on this as opposed to letting a problem build up and that is why Alex says we are pretty resolute about keeping that same level this year.

Alex Alimanestianu

I mean if you are asking is the money committed contractually or legally, the answer is no.

Jack Shelton - Wells Fargo

No. I was just curious if that is a good number that will keep the members happy and sounds like that is the case and how quickly can you ramp down to that level if you needed to? [Cross talking]

Daniel Gallagher

No. I cannot anticipate. It is not contractual obligation so, if we said okay we are only going to spent money on emergency repairs. We can ramp down to it very quickly but that would be shooting yourself in the foot because you would not be running the club the way they need to be run and you will just been losing members and that would be a recipe for disaster. So, we are not, not the direction we are going to.

Jack Shelton - Wells Fargo

Okay. You have 50 to 53 million budgeted, am I correct, for 2009?

Daniel Gallagher

Yes.

Jack Shelton - Wells Fargo

CapEx, of that 22 million is maintenance.

Daniel Gallagher

Twenty three

Alex Alimanestianu

Twenty three

Jack Shelton - Wells Fargo

How quickly can you get to $23 million, which is your maintenance CapEx number?

Daniel Gallagher

How quickly can we get to that number? We spend it all throughout the year.

Jack Shelton - Wells Fargo

Okay but if you needed to run at a $23 million CapEx number, can you shut off all the growth CapEx overnight?

Daniel Gallagher

As I said, the four clubs that comprised most of the growth CapEx, three of them had been already opened and one is almost open. So, the money spent on the growth CapEx.

Jack Shelton - Wells Fargo

I got it and what does the competitive environment looked like out there for you guys?

Are you seeing anyone else growing clubs and do we have to keep up with the Joneses at all?

Daniel Gallagher

I think most of the club operators, major competitors are slowing down. That does not mean they do not have some clubs opening in 2009, they do, but if you pool the leaders in the industry, Lifetime, 24 hour, and others, most or almost all will tell you that they are cutting back on CapEx.

Operator

Your next question comes from the line of Scott Collins with RT Investment.

Scott Collins - RT Investment Management Holdings

Yes. Good morning. Good afternoon. Can you tell me were there any insider sales or purchases by executives in Q4.

Alex Alimanestianu

To the extent we have those they will be filed with the SEC.

Scott Collins - RT Investment Management Holdings

How many…?

Daniel Gallagher

As we said the Company brought back significant amount of shares and that was disclosed.

Scott Collins - RT Investment Management Holdings

That was the Company but the executive themselves, was there a Board Member that changed?

Alex Alimanestianu

No. Our long time Chairman, Paul Arnold is still on the board and remaining on the board but he stepped down and was replaced by another long time Director, Jason Fish. There was no change in the board composition. The Chairman position changed.

Scott Collins - RT Investment Management Holdings

How many members were there in the Q4? Did you say 12,000?

Alex Alimanestianu

No. I said that there were in January we added 12,000 members on top of the 510,000 that we had at the end of December.

Scott Collins - RT Investment Management Holdings

What is the ratio for cancellation for months [with your chairman]?

Daniel Gallagher

In Q4, the monthly rate was 3.5%.

Scott Collins - RT Investment Management Holdings

How did that compare to prior quarter?

Daniel Gallagher

Prior year was 3.0% and Q3 of 2008 was 3.6. So it is down sequentially but up from the prior year.

Scott Collins - RT Investment Management Holdings

There was a posting of [fraud] from Q4 sale of members who bought on Craigslist and EBay?

Daniel Gallagher

I do not know about that.

Scott Collins - RT Investment Management Holdings

You are not aware of any memberships that were sold…?

Daniel Gallagher

I mean our Internal Audit Department or our Legal Department will work on that but it must not be a material amount of membership. It must be one off person doing this. We have 510,000 members and 9,000 employees but I am not really sure if there are instances. I am not sure what you are talking about.

Alex Alimanestianu

If you know of instances like that we will be happy to look at it.

Scott Collins - RT Investment Management Holdings

But I heard it was over 100 members at the New York area alone.

Alex Alimanestianu

Okay. So, it is 100 members and we have 510,000 members. That is probably why it did not get to me yet.

Scott Collins - RT Investment Management Holdings

The current stock price down at the new low today?

Daniel Gallagher

Yes. We have been preparing for this call so we were not watching the ticker but...

Alex Alimanestianu

We just brought back $3.9 million shares. So, we are low. I am not sure how many new lows they were today. It has been a lot recently as well.

Daniel Gallagher

Thanks for your question.

Operator

Ladies and gentleman this concludes our Q&A session at this time. I would like to turn the call over to Mr. Gallagher for closing remarks.

Daniel Gallagher

Thank you everybody. That concludes our call for the fourth quarter of 2008 and we look forward to updating you when we are ready to release our first quarter 2009.

Operator

Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a good day.

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