Life Time Fitness, Inc. Q2 2009 Earnings Call Transcript

Aug. 5.09 | About: Life Time (LTM)

Life Time Fitness, Inc. (NYSE:LTM)

Q2 2009 Earnings Call Transcript

July 23, 2009 10:00 am ET

Executives

Ken Cooper -- VP, Finance

Bahram Akradi -- Chairman, President and CEO

Mike Robinson -- EVP and CFO

Analysts

Paul Lejuez -- Credit Suisse

Scott Hamann -- KeyBanc Capital

Ed Aaron -- RBC Capital Markets

Michael Lasser -- Barclays Capital

Sharon Zackfia -- William Blair

Jaison Blair -- Rochdale Securities

Operator

Good day, ladies and gentlemen and welcome to the Life Time Fitness second quarter 2009 earnings conference call. My name is Mary 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 conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Ken Cooper, Vice President of Finance. Please proceed.

Ken Cooper

Thanks, Mary. Good morning and thank you for joining us on today's conference call to discuss the second quarter 2009 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 web site which is LifeTimeFitness.com. Concurrent with the issuance of our second quarter results, we have filed a Form 8-K with the SEC.

On today's call Bahram Akradi, our Chairman and CEO will discuss key highlights from our second quarter and our underlying business trends. Following that Mike Robinson, our CFO will review our financial highlights.

Once we have completed our prepared remarks we will take your questions until 11:00 a.m. Eastern time. At that point in the call, Mary will provide instructions on how to ask a question. I will close with a tentative date of our third quarter 2009 earnings call. Finally, a replay of this teleconference will be available at our web site at approximately 1:00 p.m. Eastern time today.

This conference call contains forward-looking statements and future results could differ materially from the forward-looking 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 and free cash flow. 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 non-GAAP data is included in our Form 8-K.

With that, let me turn the call over to our Founder, Chairman and CEO, Bahram Akradi. Bahram?

Bahram Akradi

Thanks, Ken. In our last earning call I started out with some cautionary statements. While we had a high degree of confidence internally that our value proposition would continue to resonate with our membership base, we still had several external economic factors to contend with. These factors continue to challenge our business; however, we have been very proactive in initiating the strategies to improve our business in light of the environment.

As you saw in our news release this morning and reinforced by comments Mike and I will make during the call, we have made good progress on executing our strategies and have seen improvement across several key metrics.

Some high level performance metrics we are particularly proud of include membership growth of 11%, a decrease of our trailing 12-month attrition rate to 41.5% and a diluted EPS of $0.46 in the quarter.

From an operation perspective, revenue per membership and incentive revenue per membership showed improvement from the first quarter. We saw a sequential margin expansion from center operations all the way to net income margins. And we generated dues growth greater than membership growth.

Our quarterly attrition rate of 9.5% was 110 basis points better than second quarter of last year. But we're not satisfied. Our entire team is devoted to seeing our annualized attrition rate lower to 36% or better. We believe that our attrition improvement to-date is related to many factors, including, one, the intense focus of each club delivering an unparalleled experience that you cannot obtain anywhere else.

Two, continual reinforcement of our connectivity initiatives. During the second quarter we introduced a wide range of events that take place each month in each club nationwide. In addition, we introduced a significantly enhanced mylt.com web portal, which continues to allow our members to have a wealth of information in the area they are most interested in at their fingertips, from group fitness classes, to pool schedules, to the ability to manage their accounts. And we're making daily improvements to the site for even more value, such as receiving important news and information regarding the area of their passion.

A more stable membership base is the number three. What I mean by that is with another quarter behind us it's becoming more clear that the second quarter and third quarter of 2008 were the main pressure quarters on inactive memberships choosing to either reengage with their workouts or leave Life Time. We believe we have a steady state of members who are regular users which is shown by our improvement in average usage per membership during the quarter.

We must continue to execute on these strategies, focusing on delivering member value, connectivity and engagement in order to continue to drive the attrition level down.

On last quarter's call I spoke of three costs that were putting pressure on our margins due to the higher churn. I would like to give an update on each.

Number one, enrollment fee must be controlled at a level that is neutral or better when compared to direct cost of each membership sale. We have experienced some enrolment fee price improvement and we have seen net lower membership acquisition costs.

Two, reduced attrition will help. And we did see reduced attrition in the second quarter.

Number three, more efficient marketing programs. We have proven we can obtain membership and additional dues revenue with less marketing dollars.

I would like to make two more comments regarding our operational performance during the quarter. The first is that we are not satisfied with a negative same-store sale metric. However, with some of the metrics improvement in the quarter, particularly attrition, we believe these are precursors to getting our same-store sales moving back towards the positive territory.

I would also like to mention that our company has accepted the challenge of cost control head on and we are winning.

Our center operations EBITDA, operating income, and net income margins all showed sequential improvement from the first quarter. Part of this is simply the maturation of our clubs base as we slow down our growth. However, the biggest impact is from each club and corporate departments looking for ways to become more efficient.

In a moment, Mike will give you plenty of details on our capital structure.

I want to highlight that we generated free cash flow for the second consecutive quarter, paid down approximately $7 million of debt during the quarter and continued to live within our means.

We have opened three large clubs this year and have no plans to open any more facilities in 2009. In 2010 we will expect to open three large clubs.

One of the things I have not given an update for several quarters is where my personal focus is and where my time spent at Life Time.

When we made the decision to slow down our growth my time went from development and construction to operational side. The majority of my time is spent on working with Scott Lutz and the marketing team and Jeff Zwiefel and our membership sales and operation team.

I'm spending considerable time with our in-center business leaders to see how we can continue to enhance our value proposition in our in-center businesses, especially, our cafe and spa and member activities.

Before I turn things to Mike, let me summarize my thoughts for you. We are executing our plan. Our goal is to continue to deliver the best experience the consumer would want from a healthy club. We believe we are best positioned company in the health club industry to do that.

Although we have made good progress, we are not satisfied and we can do better. We can become more efficient. And our pursuit of perfection is relentless. We continue to get better as a company and that is very encouraging. Our speed to recognize the need for change and then to enact change is significant competitive advantage for us.

In a short period of time we have modified our growth plan, delivered free cash flow and significantly enhanced the value propositions to our members. We will continue to win. My focus and that of our entire management team is just on that.

With that, I will turn things to Mike, our Chief Financial Officer. Mike?

Mike Robinson

Thanks, Bahram. Let me start with a discussion of our capital structure, cash, and debt availability. I've often highlighted the cash flow from operations strength of this business plan.

Our second quarter results continue to prove this out. Our second quarter cash flow from operations was $48.6 million. This resulted in the second consecutive quarter of free cash flow generation, which we define as operating cash flow less capital expenditures for property, plant and equipment.

Through the first half of 2009, we generated $6.6 million of free cash flow. We paid down approximately $7 million of debt in the second quarter. We are targeting to be free cash flow positive in 2009 and 2010, paying down debt by reducing our revolver balance.

To that end, as Bahram mentioned, we opened three centers that we planned in 2009 and we currently plan to open three large format centers in 2010. For the centers we plan to open in 2010, we expect one to open in the first quarter, one mid-year, and the last one later in the second half.

Our capital expenditure expectations continue to be $125 million to $150 million for 2009, which will include over $40 million of paydown on construction accounts payable.

Our approach is prudent and we remain flexible with the timing of our capital expenditures. And we are prepared to further adjust our spending should the environment dictate it.

We closed the second quarter with approximately $62 million in cash and revolver availability, up from $56 million at the end of the first quarter 2009. Our net debt to total capital was 50.2% for the quarter, down from 51.8% at the beginning of the year. Our covenant calculations for the quarter continued to show significant growth versus our covenant limits.

Although the credit market remains very tight, we closed another small mortgage on a Minnesota center at attractive terms during the quarter and remain in active discussions with several financial institutions, primarily regarding mortgages.

Please remember, we currently have 32 facilities with an asset cost on our balance sheet well in excess of $500 million with no mortgage financing against them.

I'd like to switch gears and talk about our cost structure and efficiency improvement. We're focused on cost control across the company, including central overhead costs, marketing and membership acquisition costs, and center operating costs.

Central overhead includes our construction or real estate development groups, which we've continued to downsize because of the slower growth profile. We continued to drive efficiency improvements and remove growth infrastructure across the rest of our central overhead structures. Most of these cost reductions to-date have resulted in capital investment cost savings and improved cash flow.

Member acquisition and marketing costs improved in the quarter driven by a number of initiatives, including more surgical enrollment fee pricing and improved commission structures as well as more efficient marketing. Marketing is a percent of revenue was 2.9% for the quarter compared to 3.5% last second quarter.

Finally, we continue to gain labor efficiency improvement in our centers as well as benefit from attacking many other center costs. As I'll talk about later, removing the effects of the additional lease expense from our sale lease backs we did last third quarter, center operating margin improved over last second quarter.

Now, let me provide you with some operating result highlights for the second quarter. Total revenue was $212.5 million, up 10.5% from last second quarter. Our revenue growth in the quarter continues to be driven by two main factors, including membership dues growth of 13.3% for the quarter, which outpaced our membership growth of 11.1%.

As you may recall our dues growth was less than our membership growth for the first time in many years in the first quarter. This change back to dues growth greater than membership growth is driven by our member advisors focus on upgraded membership types, selective price changes on new memberships and our belief we are creating a truly more differentiated product with strong consumer acceptance.

In-center revenue grew by 7.6% in the quarter which was modestly ahead of the 7.3% growth we generated in the first quarter. Our personal training business grew approximately 5% over last second quarter and the rest of our in-center businesses combined registered nearly a 10% quarter-over-quarter growth, with our cafe business continuing to register relatively strong growth. And has been a recent trend our spa business continues to grow at a slower pace.

Let me take a minute to provide some highlights on other revenue metrics. Memberships at June 30, 2009 totaled 608,281, which was an increase of 11.1% from last Q2. As we look to the rest of 2009, we continue to expect this growth rate to moderate to mid-single digits as we have no additional centers planned to open this year.

Our second quarter same-store sales had a 4.4% decline and our 37 month mature same-store sales were down 9%. These two metrics, as expected, were driven by lower membership levels and lower dues mix and in-center sales per membership. Year-to-date we've experienced a 3.6% decline in same-store sales and an 8.4% decline in our 37 month mature same-store sales.

With respect to revenue per membership, we generated $354 per membership, which is down 2%. In-center revenue per membership also decreased in the second quarter to $102 or a 5.1% decline.

We are pleased that both metrics improved from the first quarter. Revenue per membership improved sequentially from a negative 2.9% in the first quarter to the negative 2.0% in the second quarter.

In-center revenue per membership improved from a negative 7% in the first quarter to a negative 5.1% in the second quarter. Although improved, we're not satisfied. We're still working hard to get these both out of negative territory.

Center usage remains strong. Representing the quarter, June's average membership usage was up about 6% from the previous June. In addition, the number of inactive members continues to decline in the quarter.

Moving to our margin analysis, the Company's operating margin in the second quarter was 18%. This is a decrease of 270 basis points from Q2 2008 in line with our expectations.

The main drivers in this margin decrease come from the increase in-center operations occupancy costs from the sale leaseback deals we executed in the third quarter last year, which added approximately $4.3 million of rent expense or 200 basis points of center operating cost.

In addition, depreciation expense increased 170 basis points driven by the second half 2008 completion of remodeled acquired centers, higher investments in centers opened in 2008 and in early 2009, and a deceleration of revenue growth rates.

Our center operating margin for the quarter decreased from 41.1% to 39.4% as a percent of total revenue. Excluding the sale lease back transactions from the third quarter 2008, our center operating margins would have been approximately 41.4%.

Also noteworthy is the fact that we saw a 90 basis point improvement from the first quarter 2009. This was due to several factors, including better efficiency in our center staffing levels, further streamlining our central overhead staffing for our in-center business management, our focus on each center level expense line and improved average dues during the quarter driven by a better mix of higher dues memberships.

One thing I'd like to point out is that we're constantly reviewing what the impact our cost efficiencies have on our membership experience. At no time we provide a diminished member experience in exchange for cost savings.

I'm happy to report that our customer survey scores continued to improve through the quarter and as indicated earlier, usage levels are up. Both are very good signs that our experience is exceptional and that our cost efficiencies are invisible to the member.

Marketing expense declined by $700,000 or 60 basis points due primarily to reduced direct mail advertising and less presale activity in the quarter.

G&A expense increased $1.2 million and was flat as a percent of revenue at 5.5% versus the second quarter 2008. This was also a 20 basis point decline sequentially from the first quarter 2009. The increased costs were primarily the result of unabsorbed construction, real estate and development overhead, the reduction in our new center growth and some employee separation costs.

Our other operating expense was down slightly as a percent of revenue, but increased about $200,000 over last second quarter due to growth in corporate wellness infrastructure and losses on asset disposals partially offset by the gain on the sale of a parcel of land held-for-sale.

As we make our way down the P&L, interest expense, net of interest income, increased to $7.9 million from $6.9 million last second quarter.

Although debt balances are higher and capitalized interest costs continued to reduce during the quarter, we benefited from low variable interest rates on our revolving line of credit.

Our tax rate for the quarter was 40.6%. We continue to expect our 2009 effective tax rate to be approximately 40%.

That brings us to net income for the quarter of $18.3 million, which was down 7.9%. Our net income margin for the quarter was 8.6% as compared to 10.3% last second quarter.

Weighted average fully diluted shares totaled $39.8 million for the second quarter. We expect our 2009 year-end share count to be approximately $41 million and the fully diluted average share count to be approximately $40.5 million per shares for the year.

During the quarter we put a senior management incentive plan in place for 2011 and 2012. Internally, we are referring to the stretch and super stretch EPS goals necessary to earn the incentive as game changing performance requirements.

I mention this here since our expectation of total diluted share count increased by approximately 1 million shares or a 500,000 share average in 2009 due to this incentive plan which is based on EPS targets above our baseline plan.

Based on our 2009 second quarter weighted average share count, our diluted EPS for the quarter was $0.46, down from $0.50 in the second quarter last year.

Moving to our operating data. Our second quarter trailing 12-month attrition rate was 41.5%, down from 42.7% in the first quarter. Our quarterly attrition rate was 9.5% compared to 10.6% for the second quarter 2008. This tells us that our membership base is responding favorably to our value and connectivity initiatives.

As we look forward, we do expect seasonality in the quarterly attrition rate with Q3 historically the highest attrition quarter of the year, as some memberships' transition off the summer pool season. As Bahram stated earlier, attrition is an area of significant focus and we have now seen signs of turning the corner. We are committed to reducing this further.

The number of open centers at June 30, 2009, was 84 compared with 74 at June 30, 2008. Of the 84 centers 51% or 61% are our large current model and 48% or 57% of all the centers have been open three years or more which we classify as mature centers.

As of June 30, 2009, we had approximately 8.4 million square feet, which is 15.7% greater than what we had at June 30, 2008, when we had 7.3 million square feet.

EBITDA totaled $61.2 million in the second quarter, up 6.7% from last second quarter. EBITDA margins decreased to 28.8% from 29.8% last second quarter. If you remove the impact from the sale lease back transactions, the second quarter EBITDA margins would be 30.8%.

Cash flow from operations totaled $48.6 million for the quarter and $98.3 million year-to-date. This is down approximately $7 million from 2008 first half performance where we had a large tax benefit due to some economic stimulus initiatives we realized.

Free cash flow for the first six months of 2009 totaled $6.6 million compared to a negative $129.9 million for the first half 2008.

Turning to other financial highlights. Cash outlays for capital expenditures for the quarter were $42.8 million, including approximately $20 million of further reduction in construction accounts payable.

We incurred approximately $34 million related to growth or construction of our new centers and $9 million for maintenance of our existing club base and corporate initiatives.

During the second quarter, our overall debt balances reduced by $7 million as of June 30 compared to March 31st. This includes $408 million outstanding on our $470 million revolver.

Other balance sheet variances to note include working capital is down by $29.3 million from the end of last year, primarily driven by over a $40 million decrease in construction accounts payable as we reduce our new center growth, partially offset by $9 million of growth in accrued expenses, primarily accrued taxes.

With that, let me discuss our updated guidance for 2009. We've already discussed our CapEx expectations; so, let me move onto financial guidance.

Our revenue guidance remains the same at $830 million to $860 million or 8% to 12% growth. We expect net income of approximately $67 million to $71 million. This is an increase from our previous guidance of $62 million to $68 million. This results in diluted EPS guidance of $1.65 to $1.75 per share. This is also an increase from our previous guidance, which is $1.55 to $1.70.

That concludes our prepared remarks regarding our second quarter 2009 fiscal financial results. We're pleased to take your questions

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Paul Lejuez, Credit Suisse.

Paul Lejuez -- Credit Suisse

Hey, guys.

Mike Robinson

Good morning, Paul.

Paul Lejuez -- Credit Suisse

Couple of questions. The mature center comp looks like got a little bit worse in the second quarter. When can we expect or when do you expect, that that number starts to improve? Not to say that it goes positive, but when does it get less negative?

Mike Robinson

I'll comment first, and then let Bahram expand on it. It did get a little bit worse from the first quarter. And fairly tough comparisons as you look at how we performed overall for the first three quarters of last year. So I think the improvement that where we would see it starting to trend generally is going to be later third quarter into the fourth quarter.

Paul Lejuez -- Credit Suisse

Got you. And then Bahram, just wondering how active you are looking at acquisition opportunities? Have there been more opportunities than usual presented to you in the recent months given the economic conditions?

Bahram Akradi

Well, we have been strictly focused on internal operations, getting the systems more homogenous, making sure that the cost of marketing and acquisition versus the enrolment fees are in place, making sure that dues revenue is growing and the average dues is growing. So I've been very, very focused on internal measures, cost control and we haven't really focused on looking or thinking about acquisitions. I personally, speaking just for myself, don't believe our stock price s at a point, where we would want to use that to do any acquisition and therefore really hasn't been something we have paid any attention to at this time. However, when all the internal measures are in order, the same-store sales, dues sequentially are starting to improve, and then we have to kind of start being prepared for taking advantage of opportunities out there. And there are some to answer your question. But we haven't even focused on it.

Paul Lejuez -- Credit Suisse

Got you. And then last, how has the retention been with the 26 year old and under customers that you've been bringing in? Are these guys sticking around?

Mike Robinson

Yes, the data we have to-date shows that there's no difference in that retention from what we've experienced in the past. Now, it's a relatively short time period since we've introduced that so I don't think that we've got tried and true and tested data. It's really going to be more important to look at that over a two year, three year period. But so far we're not seeing any significant difference.

Paul Lejuez -- Credit Suisse

Got you. Thanks. Good luck guys.

Mike Robinson

Thank you.

Operator

The next question comes from the line of Scott Hamann, KeyBanc Capital.

Scott Hamann -- KeyBanc Capital

Hey, good morning. Can you quantify the impact of the higher membership acquisition costs, lower enrolment fees on P&L for this quarter and then just remind me of what the impact was during the third and fourth quarter last year?

Mike Robinson

Yes, I mean when we look at member acquisition costs we look at two things. The marketing costs or the marketing expenses, and obviously there we took our marketing expenses down 60 basis points from the second quarter last year. When you look at the other member acquisition costs, that was running at roughly about 100 basis points last year and it's down to about 50 basis points. So we picked up 40 basis points or 50 basis points there.

Scott Hamann -- KeyBanc Capital

Okay. And when do you think you can realistically achieve that 36% attrition run rate?

Bahram Akradi

I won't make any commitment that we will do it, but our goal is to get there by the fourth quarter. That is what I and the rest of the operation marketing team is striving for that hopefully we can get to about 9% attrition for the quarter in the fourth quarter. There is a slight, slight chance we might get there this quarter.

Mike Robinson

When Bahram talks about that he's really talking about a run rate.

Bahram Akradi

Run rate, I'm not talking about a 36% trailing 12 months.

Scott Hamann -- KeyBanc Capital

Right, I understand.

Bahram Akradi

Right.

Scott Hamann -- KeyBanc Capital

Okay. And finally, Bahram, as you kind of look forward, what environment would trigger a change in your club opening unit growth plans? Are they achieving a certain debt reduction level? Is it the economic environment, financing? What would that trigger be?

Bahram Akradi

Personally, I am not overly optimistic about the macroeconomic and the consumer change. I think we are pretty much unanimous as a management team and a board. Collectively we feel strong about being prudent. And we will grow and there are other ways and opportunities for growth. I'm not going to get into the details of that. We have talked about it enough in the past. We are active looking for other means of growth. But the one certain thing that I am focused on, Mike is and the rest of our management and board is reduction of our debt structure. We want to be bulletproof in case there is another economic shake down that we won't have any risk of losing the great thing that we have, great company that we have, great brand we have.

Mike Robinson

Well, I think from my perspective sitting in the CFO's chair, it's kind of all of the above that you talked about, Scott. We'll be looking at the macro environment, be looking at our own performance as well. This company, as Bahram talked about, can grow and can grow while still creating free cash flow and grow at good rates. What we've talked about with three centers a year or so, that's 3% to 5% square footage growth. As you turn the corner and you start to drive in center growth again and you start to get a little better mix and dues growth and things like that, we can see what I would call very good growth and focus on delivering free cash flow at the same time.

Bahram Akradi

From here going forward, for time being until we would tell you otherwise, you should expect us to grow and be free cash flow company, period.

Scott Hamann -- KeyBanc Capital

Understood. Thanks.

Operator

Your next question comes from the line of Ed Aaron, RBC Capital Markets.

Ed Aaron -- RBC Capital Markets

Thanks for taking my question. I was hoping you could talk a little bit about any changes you might consider in terms of evolving your format. I mean obviously you have a highly differentiated product, but some of that differentiation comes from offering the full range of amenities and as we look toward a consumer environment that might be difficult for some period of time maybe the returns on some of those amenities aren't what they used to be. Can you scale back in some of those areas without losing your differentiation? And just, Bahram, if you could just maybe talk at a high level about how you're thinking about what the format of new clubs might look like over the next two or three years?

Bahram Akradi

Ed, it's a great question, I think it's an intelligent way of thinking about this thing. We have focused for about 18 years, 19 years plus building a brand that is not confusing the consumer. It's not necessarily about all the different things we offer in one particular club. It's about whatever we do offer we do it first class. I do not intend to enter new markets with a product that is significantly less in amenities and list of the things that we offer. Just from the standpoint of branding I think we would lead into markets with the appropriate size, standard club and formats. But there's opportunity to then enhance the returns in that market with the opportunistic facilities so that then we have the ability to allow the customer reach to all of those things we generally offer maybe by using more than one facility. Does that answer your question?

Ed Aaron -- RBC Capital Markets

It does. Thank you.

Mike Robinson

I think just to expand a little bit, when we go into these markets with these large centers there is opportunity as we see it in taking some cost out of these facilities and we'll continue to drive to that. But Bahram's point is very true, we're going to go in with a tried and proven, very, very great product.

Ed Aaron -- RBC Capital Markets

Mike, one quick follow-up for you. Just as we think about the margin benefits from the aging of your club base now as you've slowed down growth. At that 3% to 5% unit growth rate how much, I guess, embedded margin expansion is there in the business holding all else equal?

Mike Robinson

Well, if you went back to historic performance, if you looked at a club, at our average large club that was delivering 37%, 38% EBITDA margins, and our normal EBITDA margin is around 30%, you would assume that over time if you were not building anything new you could have very substantial EBITDA margin improvement. Now it won't come to all of that. Couple of things. One, there's obviously economic pressure that's putting some pressure on the margins. Number two, we are growing, but at a slower rate. And number three; there are certain corporate businesses that we have that won't deliver all those margins. But, all that said and done, over time you should be seeing at least a couple hundred basis points and maybe more of margin improvement.

Ed Aaron -- RBC Capital Markets

Thank you.

Operator

You have a question from Michael Lasser, Barclays Capital.

Michael Lasser -- Barclays Capital

Good morning. Thanks a lot for taking my question. As you look at your ability to reactivate members that have not only put their memberships on hold, but dropped out for a while back, how are trends there? Are you seeing that those rates continue to slip? I would imagine that would be one of the first indications that or best indications that things are stabilizing, improving when member who had dropped out a while ago for whatever reason, because they didn't enjoy their experience, probably more likely because of financial pressures, start to feel confident enough to reactivate.

Bahram Akradi

Yes, we see that churn all the time. We see it today; we saw it during the absolute toughest level of consumer confidence. When the consumer confidence was absolutely at lowest we still (inaudible) who had dropped out for two months, come back and say, “Hey, I've been unemployed, I'm missing this, I'm going to make money to do this piece.” We feel like the business is going to remain challenged as long as you have double-digit unemployment and consumer concerned about credits and more job losses, et cetera. However, it has stabilized and we are not seeing a panic reaction in any shape or form. It's just a steady state bit of a headwind. And we are planning for that and we are confident we are going to win. And I'll emphasize again, we are going to win in the headwind, long-term headwind condition. We will do everything we can, we have the strategies, we believe we can get to that 36% annualized attrition rate which is a very, very stable position, where we were for 16 years plus. Now we get right back to that.

Michael Lasser -- Barclays Capital

And a quick follow-up. How do you think about your ability to ramp up center growth once either conditions improve or your cash flow position improves? It will take a while to develop sites and to get zoning and build up your internal capacity again. How long might that take?

Bahram Akradi

It's a great question. We have not dismantled our development team. We are looking. We have many, many deals in the pipeline. As you can imagine, many developers have no other option on the land that we have under contract with them, so they're just giving us the opportunity to extend and extend and extend and we expect to see a lot of that. We're also looking at other opportunities, so I do not expect us to have any trouble growing at the rate we want to grow as long as we remain cash flow positive. And our intent is to improve our cash flow significantly. The return on the box has improved. And when all those things are in order then we just use the increased cash flow and increase our expansion rate but in ways that I don't want to put Life Time in a position where people keep thinking we are a negative cash flow company and give us bad marks because of that.

Michael Lasser -- Barclays Capital

Thanks a lot, I appreciate the comments.

Bahram Akradi

Thank you.

Operator

You have a question from Sharon Zackfia from William Blair.

Sharon Zackfia -- William Blair

Hi, good morning and congratulations on some wacky hold music. That was interesting this morning.

Bahram Akradi

Thank you on the congratulation.

Sharon Zackfia -- William Blair

So you may have already kind of touched on this implicit in some of your other answers, but as you are looking at some of the cost saving initiatives that you have underway, how does that change the long-term opportunity for margins either on a club level or on a corporate level? I guess how much of that is structural and sustainable and how much of that cost comes back as members or revenues come back?

Bahram Akradi

I'll give you a more bullish answer and Mike will probably tailor it back.

Sharon Zackfia -- William Blair

That's what CFOs do.

Bahram Akradi

We look at this last six months or eight months, Sharon, in the hindsight, as an amazing opportunity for our company to relook and readjust the opportunities where we can be just much more efficient in the way we do things. Not less, actually make better, faster decisions yet not be as clunky about doing those things. So, my expectation is that many of these cost saving improvements are here to stay even if we ramp growth significantly in the future. We don't have any reason and I think we can run the marketing in the way we have been running it this last four months, five months and improved results. We can maintain the better control on enrolment fee and acquisition cost as far as the commission structure. There is no reason for those things to fall apart whatsoever. And there was no reason for them to fall apart to begin with except we just didn't execute that well. So I feel great about maintaining those cost savings going forward.

Mike Robinson

Sharon, from my perspective, we went into this and when we looked at the entire cost structure of the Company we went into it driving for permanent change. And so my expectation, frankly, is the same as Bahram’s. When you look at our focus on centralized infrastructure, at a point where we grow at a more significant rate we will add some cost there. But most of that will be capitalized costs in support of the unit growth of the business. As we look at central overhead costs, including G&A and center support overhead costs, we expect that efficiency to benefit us in the future. We've always driven ourselves to growing that central overhead cost at half of our revenue growth. We feel we can achieve better than that. When Bahram talked about the member acquisition costs and the marketing costs, and as the economy improves, hopefully, we get even better on that. We get the spread back in our enrollment fees compared to the direct costs associated with selling that membership. And so we would expect some more improvement there actually. And then finally, at a club level I couldn't be more pleased at the efforts that are happening with Jeff Zwiefel and his team in looking at all of the operating efficiencies that we're getting. We're getting great efficiencies on a labor perspective. We're getting them in many other places, in the travel line, in the energy lines, etc., now, we're getting a little bit of benefit because of lower energy costs, but that's not to take away from everything else that's been done at the center level.

Sharon Zackfia -- William Blair

Okay. And then maybe a separately, I think you recently raised enrolment fees the most significantly in a while, right after July 4th. Can you kind of walk through what's your thought process was there and what the member reaction is then?

Bahram Akradi

I'll walk you through that, Sharon. I think that what our strategy is, as I told you, is balance our thought process in terms of if I wind the clock back to 15 years ago, we used to get enough enrolment fee to cover the actual cost of marketing for that membership plus the administrative and commission costs. In the recent years, in 2008, when we felt a position where we were actually collecting enrolment fee less than the cost of commissions and administration alone, forget the marketing. And once I got very close to the marketing end, operations, the last six months, my first goal was to get the acquisition cost in terms of the commissions and admin cost of that in line with the enrolment fee.

There was really no reason for us to fall below that other than our own inadequacies in execution in the last half of last year and the first few months of this year. We're in a great place with it now. I feel comfortable we can play with the enrolment fee within a very, very tight bandwidth, even in this macroeconomic, and be very close in offsetting that commission and admin fees with the enrolment fee. So, if you pay attention to all clubs across the system, club by club, you will see that there is a little bit of a play in different locations. Some may be a little more aggressive in asking for a little more enrolment fee, some a little less. But altogether, we're in a really, really good place.

Sharon Zackfia -- William Blair

Okay, that's helpful. And then lastly, I know it's still a ways off, but when do you start thinking about how you're going to refinance that debt that comes due in 2012, 2013?

Bahram Akradi

We think that we will start thinking about that maybe 24 hours to 36 hours before it comes due. Of course, we're thinking about those, Sharon, all the time. And let me give you a perspective. This is a matter where our entire board, myself, Mike Robinson, our finance committee, we're all over it. We discuss it regularly. We are very, very, very confident that our strategies at this point clearly gives us the comfort that we will have no issues with being able to manage that either paydown to levels that are ridiculously low relative to our overall balance sheet, the amount of assets we have available, and be able to get additional types of debt, some long-term, before those come due, etc., So we're working on all those. We have no concern. I'm going to turn it over back to Mike, but to answer your question; we haven't ever stopped thinking about those. It's a constant matter.

Mike Robinson

As I think many of you know we run a dynamic five-year capital planning model that we continue to look at and use that very effectively to plan the future, etc., When we talked about slowing our growth down and talked about opening three centers this year, three centers next year, as you work through it what we'll end up doing is it will be a combination of fairly significant free cash flow generation that will take those debt balances down significantly. And then obviously all of the alternatives that we will have within the next 36 months or so to either refinance extend what will be a significantly lower amount or place new debt against it. It's a relentless focus and we feel that we are very well positioned with the strategy we have today.

Bahram Akradi

I'm going to add to that. If you look at the change in the revolver in the last six months it does not seem significant. However, since beginning of the year, we have paid down over $40 million of construction payables from facilities that were built late last year. Now, the construction payable is substantially lower and stabilized at a level that going forward you should see the next six months of the year significantly more reduction of our revolver as a result of the cash flow that is coming in and then just basically paying for new capital expenditure that the difference between what we bring in and what we spend is substantially more than the first two quarters.

Sharon Zackfia -- William Blair

Okay great. Thank you.

Bahram Akradi

Thank you, Sharon.

Operator

Our next question comes from the line of Jaison Blair of Rochdale Securities.

Jaison Blair -- Rochdale Securities

Hey guys, thanks for taking my call. One of the things that Bahram talked about was I guess he said thinking about kind of a bulletproof balance sheet, which sounds great. And he also talked about growth as long as your cash flow positive. I've kind of done some math here quickly and matured your stores and kind of done what we think would be a normalized level of cash flow. And I get kind of at max 7% unit growth rate. Am I thinking about that correctly?

Mike Robinson

That's pretty reasonable. What we looked at is if you look at a balancing of free cash flow and reinvestment in that we would see probably high single-digit, mid to high single digit unit growth rate without adding debt.

Bahram Akradi

And that's assuming we will not create additional ways to increase our company's cash flow. So we're not going to discuss every detail of what we are thinking about until we have executed things with results. But ultimately our intent is to improve our cash flow significantly and then use that cash flow for growth after we have reduced debt to some extent.

Mike Robinson

It also assumes that we're not growing square footage other ways that are much less cash flow that are cash flow neutral.

Bahram Akradi

Which basically means we can grow significantly more than 7% without giving up on being free cash flow positive.

Jaison Blair -- Rochdale Securities

And does that require change in the model or are you talking about just doing sale lease backs?

Bahram Akradi

It doesn't necessarily require a change in the overall strategy of large format clubs. We may offer the same exact list of offerings in a different layout or something, but it doesn't change the product as it relates to what customer experience will be.

Jaison Blair -- Rochdale Securities

Alright. I guess I think that it's great to hear you're taking a more conservative financial approach. However, I worry, because it sounds to me like you've got this model. It works. It creates good return on invested capital. And it sounds to me like you're going to move away from financial risk, but you're adding a tweaking with the model risk.

Bahram Akradi

Well, let me give you a perspective. You don't have to worry about tweaking with the model risk because we've gone over this and I really appreciate you bringing up the question. The Wall Street, from the first time we talked about a three story model, they have literally gone crazy thinking that it's about the exact box. If it was that anybody could do it. It's really about delivering the list of products and amenities in the fashion that we deliver. If you look at our 84 boxes today, there are a variety of different layouts and formats delivering amazingly close performances in that regards. We are not abandoning in any shape or form our prototype models. They are substantially successful. You look at what our new stores in the last three, four, five boxes we have opened, they are on fire.

So, we intend to continue to build our current boxes and if we have to make a slight modification to the floor plan a little bit, but offer all the same amenities we will do so. And I emphasize we are a growth company. We intend to grow. We intend to grow and be cash flow positive. We have taken the opportunity of the last nine months and maybe the next six months or so to make sure we tweak all the things that could have been tweaked to give us a much more potent model that would even work if the economy got tougher and then we can continue to grow in any condition. And I want to make sure our balance sheet is not a negative mark on our company. But we're thinking holistically as a growth company.

Jaison Blair -- Rochdale Securities

Okay, I'll ask some more questions offline if you don't mind. And there's one last question. Can you just kind of give me some color on the competitive environment? Is there potential for capacity reductions or if you could just hit that real quick please?

Bahram Akradi

Yes, we have seen from the smaller operators more signs of a stress. We're getting more calls from one shop clubs that they are getting ready to close their clubs, etc.; I think there will be some contraction. And then there are national companies who do a great job with their business model. I think by now after this last nine months, and you guys viewing the performance of some of the other large companies you should be able to see that this is not a luxury business where people will walk away from a tough environment. They still come in. Just like anything else they're a little more frugal about where they spend their money and how much they spend. If they're not using it they probably get out quicker. But it is a lifestyle that I don't think the Americans are giving up even if the economy.

I think our results are demonstrating that and I'm sure the results of some of the other large multi box operators will show that. But yet when things get tough, companies who have 30% and 40% margin may give up a little margin, but survive and make still plenty of money. And those who are operating in a single digit margin level will have no way of maintaining that for long and you see some stresses in that front. So, overall, I believe the square footage will still expand, albeit will expand significantly less than it was expanding in 2007, early 2008.

Jaison Blair -- Rochdale Securities

Thank you.

Operator

Thank you. At this time, I would like to hand the call to Mr. Ken Cooper for closing remarks.

Ken Cooper

Thank you for joining our call today. We look forward to reporting to you our third quarter 2009 results which tentatively has been scheduled for Thursday, October 22, 2009 at 10:00 A.M. Eastern. Until then we appreciate your continued interest in Life Time Fitness. Thank you and good bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!