Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Robert Giardina - Chief Executive Officer

Daniel Gallagher - Chief Financial Officer

Analysts

Sean Naughton - Piper Jaffray

George Kelly - Craig-Hallum Capital Group

Kurt Frederick - Wedbush Securities

Scott Hamman - KeyBanc Capital Markets

Town Sports International Holdings Inc. (CLUB) Q3 2013 Earnings Conference Call October 23, 2013 4:30 PM ET

Operator

Greetings and welcome to the Town Sports International Holdings, Inc. Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dan Gallagher, Chief Financial Officer. Thank you, Mr. Gallagher. You may begin.

Daniel Gallagher

Thank you for joining us today. This is the Town Sports International Holdings earnings conference call discussing results for the third quarter of 2013. I am Dan Gallagher, Chief Financial Officer of the Company. I caution listeners that to the extent any remarks we make in this conference call relating to matters that are not historical facts constitute forward-looking statements which are made pursuant to the Safe Harbor provisions 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 the 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, including those discussed in the Risk Factors, MD&A, and other sections of our annual report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on February 25, 2013, and on forms 10-Q filed subsequently. We have issued a press release discussing our results for the quarter which has been filed with the SEC under Form 8-K. We disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise.

In addition, for those of you who do not have access to this release and filing, we’ve 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 transcripts of the call will be made available on our website following the call.

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

Robert Giardina

Thanks, Dan. Good afternoon, everyone. Thanks for joining us for our third quarter conference call. Our third quarter EBITDA and bottom-line results were in line but we fell short of revenue expectations. The shortfalls to our revenue plan was in our ancillary revenue streams including Sports Club for Kids and summer kids camps as well as personal training and Small Group Training. However, after experiencing decrease in personal training revenue in the first quarter and ending the second quarter flat, we are pleased with the 5% increase in the third quarter and the direction we are heading.

We do have an easier comparable coming ahead in Q4 given our temporary club closures related to Hurricane Sandy last year. But even considering this, we expect to build on the momentum we have begun to generate and we expect to realize an increase in personal training of approximately 10% in Q4. Our personal training revenues continue to be supported by the rollout of our UXF zones and we just passed the milestone with our 100th zone installed.

Also as discussed on our last call, we increased the pricing of our personal training products on September 1, and so far more than a month and a half into the rollout of the new pricing, the demand for our personal training products has tracked to our expectations, and we continue to believe this price increase, the UXF zones, and our personal training products shift to a membership based offering, will all support revenue growth going forward.

In regards to other ancillary revenue streams, we believe these are execution and management issues that will be resolved and we'll expect to experience less of a decline in these categories in Q4 and then return to gains in these categories in 2014.

As planned, our attrition was flat to last year and we continue to expect attrition to be flat to the prior year in this upcoming fourth quarter. On the membership front, we experienced a little less than 1% decrease in our membership base in the third quarter, a slight improvement over the decrease in the third quarter of 2012.

In regards to the membership dues, we realized an increase in the average monthly dues collected during the quarter of approximately 1.5% and we will look to build on that further with the increase in Passport membership pricing that went into effect just a few weeks ago. The increase in Passport pricing will take time to build its way to the overall membership base, but we believe we are moving this in the right direction and we will have benefit from the increase in pricing in 2014 and beyond as more new Passport memberships are added to our fold.

Turning to unit growth, this is now becoming a more exciting part of our business. We currently have four completed leases for 2014 new club openings, and we expect to add another club or two, putting our new unit count at four to six in 2014. After four years of very little unit growth, we are now picking up the pace and we are very excited about the club locations and the opportunities they will bring.

In the New York Sports Club region, we have a club under construction in Greenpoint, Brooklyn with a planned opening for Q1 of 2014. We also have a lease for a new club location on Avenue A on the Lower East Side of Manhattan. We believe our NYSC fitness model will be very well received in these rapidly developing markets. Also, while not a new club, we are also excited that our club in Long Beach, Long Island, which has been closed due to Hurricane Sandy, is on track to reopen stores before the end of the year, just in time for January.

In our Boston Sports Club market, we are pleased that our Fitcorp acquisition continues to perform well and the renovations and improvements to the operations are resulting in those store increases and memberships, certainly when compared to the prior year when they were not under our management. These clubs will benefit from our cluster, but at the same time, our clubs in Boston has benefited from the addition of these terrific locations to our club base.

As you may recall, the Fitcorp clubs were generating a slightly negative EBITDA when we acquired them in Q2 and now they are tracking to be slightly positive in Q4, and we will build on that going forward as we intended. Looking to 2014, we have two new leases for club openings in our BSC market, one in Dorchester and one in Wayland. I'm excited about these new locations and the opportunities they will bring and we will continue to build on this pipeline.

Over the past two years, we extended our ancillary club offerings with personal training membership signature classes such as VBarre and Pilates Tower as well as our new UXF cross-training classes and the installation of the UXF zones. These offerings were all put in place to satisfy the demand of the consumer and in some ways transform our clubs as the industry and member preference change. I have said this many times before, but the industry is changing at a more rapid pace now than any time I can remember in my career. The consumer is changing and the industry is adapting to their needs.

The number of fitness offerings available to the consumer continues to expand and equally compelling is the amount of discretionary income consumers are willing to put forward towards fitness offerings. The consumer is now more educated about the benefits of fitness than ever before and they are looking for more engaging ways to meet their fitness needs and goals.

With all this in mind, I am very excited we have established a distinctive new brand centered around a boutique fitness experience. Our brand is BFX Studio. Our management team and I have worked very hard to get to this point and have used our extensive industry knowledge and experience to create this totally new platform that will give clients an unmatched private studio experience.

Our multidimensional studios will provide an innovative luxury by appointment, fitness experience that is unlike others that typically have a single offering. Our studios will appeal to both sexes, all ages and experience levels of metropolitan active healthy lifestylers and will include three unique offerings; Ride Republic, which is indoor cycling; Private Sessions for personal training; and Master Class for group exercise classes.

BFX Studio will be dedicated to attracting the highest caliber of instructors to service our clients and we are focused on creating a culture that attracts the best of the best by offering them career opportunities as well as training and support. We have been building our BFX team by hiring Josh Taylor, a world-renowned master spin instructor, as well as [Marci Spalling] (ph), a studio veteran, who will oversee the programs and experience our clients will receive.

Our BFX development team is active in the Manhattan and Boston markets and we already have a number of sites at the term sheet stage of the lease process. We plan to open between two and four studios in 2014 with the expectation that initially these studios will be in Manhattan and Boston. This will bring our total unit growth for 2014 to six to ten units when including BFX.

In summary, we are pleased that we are growing our core business while at the same time we have added a new dimension to Town Sports International, our BFX Studio brand. We were able to add this new brand because our core brands continue to perform well and generate significant cash flows, allowing us to explore this diversity. We will continue to work towards driving cash flow from our existing business and expanding on our ancillary revenue streams while we increase pricing. We will also strengthen our position in our markets with continued new unit growth in the markets we have targeted.

I will now turn it over to Dan and he will discuss our third quarter results and touch on our BFX model. He will also talk about the refinancing efforts we just launched. Dan?

Daniel Gallagher

Thanks Bob. I'll go through the income statement and then highlights for the quarter, discuss our outlook for the fourth quarter, and also discuss our BFX Studio model, as well as highlights of the possible refinancing we recently launched. First let me start with our third quarter results.

Our consolidated revenue was $117 million, a decrease of $2.6 million or 2.1% from the third quarter of 2012. As a reminder, in Q3 last year, we had a benefit from an acceleration of in-club advertising revenue which added approximately $1.2 million to Q3 2012 revenues. We ended the quarter with 507,000 members, down 5,000 members from the second quarter. The number of Restricted memberships totaled 42,000 as of September 30, 2013.

Monthly attrition for the second quarter averaged 3.7%, flat with Q3 last year and in line with our expectations. We expect monthly average attrition for the fourth quarter to approximate 3.5% and again to be flat with the same period last year. Our average dues charged increased in the prior year to $58.40 in Q3 2013 versus $57.50 in Q3 2012. Average joining fees collected were down slightly to $59.20 per member in the third quarter versus $60.50 the same period a year ago.

Total ancillary club revenue was down 4% to $22.8 million from $23.7 million a year ago due to the decline in other ancillary club revenues that Bob explained. Within ancillary revenue, personal training revenue was up 5% to $16.4 million. This improvement in personal training revenue is being supported by the continued growth in our PT membership product which is on track to represent over two thirds of our PT revenue mix by the fourth quarter. The price increases in our personal training and the UXF zone rollout also provides support to our personal training revenue growth.

Comparable club revenue at the clubs opened over 12 months decreased by 1.7% for the quarter. Comparable club revenue was affected by a decrease in membership of 3%, partially offset by a price increase of 1.1% and an increase in the combined effect of ancillary club revenue initiation fees and other revenue of 0.2%. While we expect the ancillary club revenue component of our comp to improve next quarter, it will likely bring us up to a flat Q4 revenue comp versus the slight increase we were previously expecting.

Turning to our expenses, total operating expenses were up 0.3% to $108.3 million for the third quarter of 2013. Operating income for the third quarter was $8.8 million as compared to $11.7 million in Q3 2012. These Q3 2013 operating results included the benefit of $0.7 million of insurance proceeds related to the property damage claims, primarily in connection with Hurricane Sandy. Q3 2013 depreciation increased slightly over Q2 2013.

Driven by an increase in insurance expense and the continued rollout of our new registration and booking system, MoSo, for which the licensing cost is reflected in our G&A expense line, we saw our G&A expense increase to $7.2 million and we expect to see year-on-year increases in G&A in Q4 driven in part by the addition of licensing costs that come along with the continued rollout. In regards to the insurance expense increase, in Q3 of the prior year, our expense was favorably impacted by loss reserves adjustments.

Net income for the quarter was $2.6 million or $0.10 per diluted share compared to $3.2 million or $0.13 per share in the third quarter of 2012. Adjusted for the nonrecurring items in each period, EPS was $0.09 in Q3 2013 as compared to $0.15 in Q3 of 2012. Adjusted EBITDA of $21.7 million was in line with our expectations and was down 12.2% compared to the $24.7 million of adjusted EBITDA in Q3 2012.

We are very pleased with the cash flow we continue to generate with cash flow from operating activities for the nine months ended September 30, 2013 totaling $50.5 million, an increase of 14.9% over the corresponding period of 2012. Capital expenditures including acquisitions were $23.6 million in the first nine months of 2013 compared to $13.3 million in the first nine months of 2012. We expect capital expenditures to be between $34 million and $37 million for the year.

Turning to our balance sheet, total gross debt outstanding as of September 30, 2013 was $315.7 million with our cash position at $68 million resulting in a net debt level of $247.8 million compared to net debt of $278 million as of December 31, 2012, a net debt reduction of $30.2 million over the first nine months of 2013.

Now turning to our outlook, based on the current business environment, recent performance and current trends in the marketplace, and subject to the risks and uncertainties inherent in forward-looking statements, our outlook for the fourth quarter of 2013 includes the following. Revenue for Q4 2013 is expected to be between $115 million and $116 million compared with $114.2 million in Q4 2012. As percentages of revenue, we expect Q4 2013 payroll and related expenses to be approximately 37% and club operating expenses to be approximately 39%. We expect general and administrative expenses to approximate $7 million, depreciation and amortization to approximate $12.5 million, and net interest expense to approximate $5.5 million.

We expect net income for Q4 2013 to be between $2 million and $2.5 million and diluted earnings per share to be in the range of $0.08 to $0.10 per share assuming a 39% effective tax rate and a weighted average of approximately 24.7 million fully diluted shares outstanding. We estimate EBITDA to approximate $21.5 million in Q4 2013.

Now let me switch subject and give some highlights on expectations regarding a new BFX Studio model that Bob referred to earlier. Each unit will require 7,500 to 9,000 square feet. Total capital expenditure requirements will approximate $1.5 million to $2 million and our first two studios will likely be on the higher end of this range. We expect yearly revenues of approximately $3.5 million and EBITDA margins of 25% to 30% on a unit basis. We expect the unit to be cash flow positive in month six and an investment payback period of approximately 3.5 years.

As you can see, the BFX Studio model requires less in the way of space and capital versus that of a full service health club but still generating payback and returns that are very compelling. We expect to incur approximately $500,000 of cost in Q4 2013 related to the launch of this brand.

Now let me turn to the possible refinancing we just announced. We are approaching November 14, 2013 expiration of the 1% call protection that is within our existing credit agreement. The success of this refinancing effort is contingent on many factors including market conditions, but we are planning to close the transaction very shortly after the call protection expiration.

With this refinancing, we are seeking to reduce our borrowing cost, extend our term by entering into a new credit facility, increase our flexibility with the removal of financial covenants, and increase our flexibility in regards to our ability to return value to shareholders including a contemplated regular dividend. As is our practice, we continue to consider opportunities to maximize shareholder value including the best uses of our cash.

Assuming this refinancing is accomplished as planned, we believe we will have afforded ourselves the flexibility to initiate an ongoing dividend that would provide for a quarterly dividend of approximately $0.14 to $0.16 per share. This possible regular dividend is currently subject to the success of our refinancing efforts and is subject to, among other things, final Board approval.

And lastly, I should touch on the possible development opportunity we have in regards to the building we own at our East 86th & Lexington club location in Manhattan. We will likely be discussing this possible opportunity at our meetings with our lenders in the next few days, so I thought it would be appropriate to provide some update in this regard in this call.

We've owned our East 86th Street club in Manhattan for approximately 35 years and have been very pleased with the success of this location. As mentioned on our previous earnings call, during the course of 2013, we have been approached by several real estate developers enquiring about the possible sale of this property.

While we do not have the need to monetize this property and we have not marketed the building for sale, we are continuing to receive indications of interest from real estate developers. We believe that the current value of this property is in excess of $80 million. If the purchase price were high enough and we are able to among other things successfully relocate our existing club to another nearby location on acceptable lease terms, we would likely pursue such a sale.

With that, I'll conclude our formal remarks and open it up to any questions our listeners may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Sean Naughton with Piper Jaffray. Please proceed with your question.

Sean Naughton - Piper Jaffray

When you look at the comp in the quarter, I think you guys were looking for a flat comp, is it fair to say that the shortfall was really from the ancillary revenue portion, was that the biggest shortfall or was it – were you also a little bit disappointed on the membership gains as well?

Daniel Gallagher

I think from our position it's really on the ancillary side, Sean. I think from last quarter we discussed probably the biggest portion of it which was the Sports Club for Kids and our summer camps on our last call. We recently replaced a lot of the management team in that group and the biggest part of the ancillary runs summer camps, so it runs through the end of the summer. Also, there are [some licenses] (ph) and other things like that. So that was the major part of it.

A small part of it was the Small Group Training and Small Group Training for us is a less expensive way for consumers to get involved with personal training. I think our focus on driving personal training and the importance of the personal training memberships probably surpassed our expectations by putting a little bit of pressure on the Small Group Training side. But membership, our net members were in line with what we thought.

Robert Giardina

To add to that, to a lesser degree, personal training although it was up 5% but we were expecting just a hint higher than that. So we were happy with the 5%, that it's moving away from the 0% from Q2 and the negative we experienced in Q1, but we were forecasting slightly higher.

Sean Naughton - Piper Jaffray

Okay. And then just maybe a comment on the higher fees that you were talking about putting through on the Passport membership, maybe just give us an idea of where you guys are from a competitive standpoint at the market, do you feel like you were a little bit below and you're kind of able to raise the price here and have you done any testing in any of your clubs to see how that might – how the member may react to this particular point on the increase?

Robert Giardina

Yes, Sean, let me just answer that. I think there were two pricing increase that we put in place in September. We put in a pricing increase on personal training sessions and personal training memberships, and across the board it was basically a $10 increase, off approximately a $70 per session base. We didn't see any impact at all and we saw the same volume that we expected to see after the increase. So that was supported very well through the clubs.

In October, we increased our Passport pricing from $89 to $99. We looked at our competitors and the markets that we're in and the membership that we increased was with the Passport which was the all-inclusive. So it's primarily going to impact the Manhattan, New York City market as well as the Boston market. In those two markets, our competitors are substantially higher in probably every level. Even the mid-priced clubs are running slightly higher than our $99 price right now.

So we felt very comfortable with increasing the price, and in addition, because we sell Passport memberships to our corporations and we discount only Passport memberships to corporations, it gives us a little bit more leeway to offer them a better pricing program and yet still increase the pricing to them.

Sean Naughton - Piper Jaffray

Okay. And then maybe when do you think – and I know it's only on the new members that are coming in on those two particular markets, but when could we see a potential benefit from a favorability standpoint that could really potentially move the needle from a mix perspective on some of these newer members coming into the clubs?

Robert Giardina

I think it would be a very modest benefit on a quarter-by-quarter basis as we continue to replenish our membership base with some of these new Passport memberships. So I don't think this is a game changer for us but it is certainly something that we are pushing because it moves things in the right direction for sure. And order of magnitude, it will take a while for it to push its way through.

Sean Naughton - Piper Jaffray

Okay, that's fair. And then I guess just lastly on – I think on the prior call, you had mentioned that you were closing one of the Fitcorp clubs and you were looking to retain I think about 75% of the people. Can you just talk about how that went, just the adoption rate that you got with the new clubs from those members that were no longer had the access to clubs they did before?

Robert Giardina

Actually that worked out better than we thought. We closed the club on July 31 and I watched it very closely, probably through the middle of September, and the attrition that we had related to those members was almost as if the club was a normal club as opposed to a relocated club. And I think the proximity of our two clubs that are very near to the club we closed as well as to the fact that we gave all those members the upgraded Passport option at the time of closure, I think both contributed to that. So we actually saw less attrition. We'll continue to monitor it but one would expect the first six weeks would be when we would have seen something and we actually did not.

Sean Naughton - Piper Jaffray

Okay, great. Thank you and good luck on the fourth quarter.

Operator

Thank you. Our next question comes from the line of George Kelly with Craig-Hallum Capital Group. Please proceed with your question.

George Kelly - Craig-Hallum Capital Group

Couple of questions for you. First, could you talk a little bit about – you just mentioned the new BFX gyms you're launching next year, how big is the ultimate opportunity there do you? And then could you talk about how that's going to be priced? Is that a normal subscription model or is it more of a pay per session kind of thing?

Robert Giardina

It will be both. So in terms of the opportunity, we see this as a large opportunity, it's a metropolitan product. So it could go into any metropolitan community across the United States. It competes very well against high-end clubs as well as the low-end clubs. It's built really based on the services and programs as I mentioned on the call. There are three distinct products there. There is the spinning product, there's the group exercise product, and there is the personal training product. All three of those products are now well received and consumers are willing to pay a premium to have an exclusive or an excellent experience in those products.

Pricing will be per use based on some of the other studios that we see opening in our markets as well as a monthly fee for unlimited services. So we are still at the early stage and we are testing a number of things right now but we have learned a lot. A lot of the confidence that we have comes from not only our experience that we had over the last many years in this industry and the markets that we operate in, but a number of things that we have been doing with the current TSI clubs, have really given us the confidence that consumers are looking for another level of experience that we can now provide to them in a smaller intimate atmosphere.

George Kelly - Craig-Hallum Capital Group

That's great. You mentioned, I just was – I think I missed it on the call, but the two people that are leading that up, can you talk about who they are again?

Robert Giardina

Josh Taylor is going to head up our spin program, a master spin teacher that trains many of the spin teachers around the world. He comes with a wealth of knowledge and really focuses his programs on both technique experience as well as the entertainment experience of people having a great workout. So we are looking forward to having him develop the programs. And [Marci Spalling] (ph) who is currently working with us in our group exercise program will be heading up the entire facility and overseeing all three units, and she has 15 years of experience in the traditional gym as well as private studios.

George Kelly - Craig-Hallum Capital Group

Okay. And then is cross-selling this with your existing base a big part of it or will this be a completely separate brand and people won't even know that it's the same company?

Robert Giardina

It will be a completely separate brand.

George Kelly - Craig-Hallum Capital Group

Okay. And then a couple of other questions. Dan, one for you. Rate lock coming up in January in my math, tells me that it will do more than $10 million, close to $11 million this year. Is that fair?

Daniel Gallagher

I do not have that number at my fingertips, but I know last year it was around $7 million. So you're probably not far off but I really can't say one way or the other. In fact I'm not prepared to answer that precisely.

George Kelly - Craig-Hallum Capital Group

Okay, fair enough. And then with the building sale, just wanted to make sure I heard you right, you said $80 million?

Daniel Gallagher

Yes, and I want to be clear on that. So it's not a building sale, it's an opportunity that is possibly there because we are getting I guess I'll call it higher and higher levels of interest from developers, and what we are saying is, we believe it's worth in excess of $80 million and that if we are able to relocate our club at a lease that's acceptable to us, then amongst other things, we would certainly consider selling that property if it worked out.

George Kelly - Craig-Hallum Capital Group

Okay. And then let's just say hypothetically, even without a building sale, you guys will have a lot of excess cash towards the end of the year, and maybe I'm getting too far ahead of it here, but you'll renegotiate, if the renegotiation is successful, is the priority still paying down debt or could we hypothetically have another special dividend or where do you see that excess cash, what are the priorities for it?

Daniel Gallagher

I mean I guess I could revisit some of our statements from just before. If we are successful with the refinancing, I think a lot of good things will come with that. I think we'll have a savings of interest, could be in excess of $3 million a year of savings in interest, we would have a longer term because we would have a refreshed credit facility, and we'd have less covenants. But we also mentioned that if it works out as we plan, we would have afforded ourselves with the ability to initiate an ongoing dividend and that ongoing quarterly dividend would be of the magnitude, right now what we're estimating is between $0.14 and $0.16 per share per quarter and that has to be obviously based on a successful refinancing that we're looking at and then coupled with a robust Board approval process that would come after the refinancing is done. So it's a little bit of a chicken or the egg but we are contemplating very much so a $0.14 to $0.16 quarterly dividend and we filed an 8-K in that regard yesterday and I just discussed a little bit on the call here.

Robert Giardina

And the exciting thing is that it will allow us to continue to grow both brands.

George Kelly - Craig-Hallum Capital Group

Okay. And then last question, acquisition pipeline, is there still mom-and-pops out there in New York and Boston?

Robert Giardina

Yes, there are a few here and there and it will just take a while because we're going to be very selective in terms of locations and price we're willing to pay for them.

George Kelly - Craig-Hallum Capital Group

Okay, alright. Thank you.

Operator

Thank you. Our next question comes from the line of Kurt Frederick with Wedbush Securities. Please proceed with your question.

Kurt Frederick - Wedbush Securities

First question was just on timing of center openings for 2014. I think you said that one was in Q1. What about the other three?

Robert Giardina

So the first one would be Greenpoint, Brooklyn, that would be the first quarter. The other three would be probably second half of the year for sure, maybe two in Q3 and one in Q4 depending upon how they unwind.

Kurt Frederick - Wedbush Securities

And then did you break out for Q3 what the impact was from Fitcorp, how much that contributed?

Robert Giardina

No, I did not but it was a slightly negative acquisition. I don't have exactly what it made, it didn't make in Q3, but I am on record saying, in Q4 we expect it to be slightly positive on an EBITDA basis. So it will have moved from a negative EBITDA proposition to a positive EBITDA proposition in Q4. It might have actually done that in Q3 but I don't have that on my fingertips. If it was, it was very modest.

Kurt Frederick - Wedbush Securities

What's the like capacity of those clubs?

Robert Giardina

Capacity?

Kurt Frederick - Wedbush Securities

Yes, how many members? Where is it sitting now versus where it can go to?

Robert Giardina

All I can tell you is we have a lot of capacity. I don't think we measure it that way. We measure our capacity based on different factors. So, a club like the Prudential, it's a corporate club. Their capacity is determined by the number of hours that the employees work. So you're very busy before work, lunchtime, and right after work, and they are very quiet after hours. So every club in every market has different capacity levels but we have a lot of upside in terms of capacity in that market.

Daniel Gallagher

I guess another way of answering it is, we expect those clubs to operate like our own clubs after we've had them run for a little while.

Kurt Frederick - Wedbush Securities

Okay. And then on the studios, do you already have any space leased for those or is that something you're going to go now and try to find?

Robert Giardina

We actually have a development team working on this and we have been and we have multiple sites, I guess I'll call it, at the term sheet stage but we do not have an actual effective lease at this point, but we do have multiple sites that we have drawings for and things of that nature that we have specific sites but no leases exactly as of yet.

Kurt Frederick - Wedbush Securities

Okay, [and does] (ph) these take less time to set up than your traditional club?

Robert Giardina

They actually do. They are taking less time to find because the space requirements are smaller and I think the complexity of these spaces is the same if not less I would suggest.

Kurt Frederick - Wedbush Securities

Okay, sounds good. Thank you.

Operator

Thank you. Our next question comes from the line of Scott Hamman with KeyBanc Capital Markets. Please proceed with your question.

Scott Hamman - KeyBanc Capital Markets

Just a quick question on expenses. The fourth quarter looks a little bit heavier on some of these line items than we were anticipating. Is there anything with MoSo? I know you mentioned 500,000 on BFX but is there anything we should be thinking about, any license fees, that are running a little bit higher than you initially anticipated?

Daniel Gallagher

No, I think the G&A line whatever I've put in my guidance contemplates that. Could it be higher? Yes, but I think the licensing fees and MoSo are actually ones that are pretty predictable because they are indeed fees per club that we have operating and we pretty much know what that is. So it's not related to MoSo.

We do – I mean depending on how you're looking at it, we are expecting some increases in utilities. Utility rates have been going up and we do expect some increases there on a rate basis. And on the year-on-year basis, because we were down sometimes weeks but many days at many of our clubs because of Hurricane Sandy, we had no utilities at those clubs last year. So I'm expecting a modest increase in utilities in Q4, and it might not be the case but that's what I'm expecting. That's one of the areas.

Scott Hamman - KeyBanc Capital Markets

Okay. And then just on the joining fees, I think you said that they were down year-over-year and I notice they've been up for a while. Is there – are you playing around with some of the joining fees now or were you just kind of getting up against the comps that makes it harder for the Company to move higher?

Daniel Gallagher

Yes, we are definitely at a point where we don't expect it to go up much from here. We've been that way for probably most of 2013 we are not expecting to go up too much. And I think what happened in Q3, I think we were down – I don't want to say down, I don't have it on my fingertips, but it was more about the cadence of when we sold certain memberships.

So over the course of the quarter, we will have promotions sometimes, which would be a lower initiation fee, and that lower initiation fee, if the number of members that have joined this year in that week are higher than what happened last year, on an average basis, we would have a slightly lower joining fee and that's what ended up happening this year. But we are not expecting to see a dollar decrease in Q4. I'd probably be more inclined to expect it to be flat. And we are not really changing any of the promotions [moving forward] (ph).

At this time, we have no plans to have any differences that we did in the past. So I think things are going well and we are able to maintain that pricing, we are pushing our dues up on certain memberships, our personal training memberships are going up. So I think we're feeling pretty good about the pricing where it is at this time.

Scott Hamman - KeyBanc Capital Markets

Okay. I guess just finally on the personal training memberships, have you seen that penetration rate having increased similar to what you had characterized last quarter? I think you said 50%, going to two thirds or something at the end of the year. Is that still trending the right direction?

Daniel Gallagher

Absolutely. We are expecting it to be two thirds of our revenue by the fourth quarter which will give us much more visibility and predictability over personal training revenue and it will help us. And I think Bob mentioned, the other thing we are very happy about is the September 1st price increase. We are seeing the volume in September and the first half of October, that we expected to see, which is basically no movement on sales volume of the product in a good way.

Scott Hamman - KeyBanc Capital Markets

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of George Kelly with Craig-Hallum Capital Group. Please proceed with your question.

George Kelly - Craig-Hallum Capital Group

Just a couple of follow-ups. One on the BFX Studio's new sites, do you think for the next year or two, you will primarily be in Boston and New York or could you – do you see other metros outside of where your existing clubs are now that look really attractive?

Daniel Gallagher

We are initially looking in New York and Boston. That's where our development team has been looking currently and that's where we have some specific sites identified for possible BFX studios, but as Bob mentioned, soon after we can easily go into other cities across the United States. This concept is less reliant on the cost per se and I think we would see ourselves in other cities sooner, not next year but somewhat sooner than our core brand.

George Kelly - Craig-Hallum Capital Group

Okay. And then last one, it sounds like the membership trends have held in pretty well since you raised the Passport pricing. Do you expect to raise this core single club membership plans, do you think that could happen in the next couple of quarters?

Daniel Gallagher

No, we don't have any plans for that right now. We do that constantly, we look at clubs, we look at how the market is changing, what is affecting that market, and we were very sort of surgical in the way we look at our clubs. So if we see an opportunity and the clubs are performing well and we see volume improving, we will raise prices, but there is nothing planned in terms of a broad-based plan [indiscernible].

George Kelly - Craig-Hallum Capital Group

Right. Okay, thanks.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over for closing comments.

Daniel Gallagher

Okay, thank you everyone. We look forward to releasing our fourth quarter earnings in 2014. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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!

Source: Town Sports International Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts