Life Time Fitness Inc. Q4 2009 Earnings Call Transcript

Feb.18.10 | About: Life Time (LTM)

Life Time Fitness Inc. (NYSE:LTM)

Q4 2009 Earnings Call

February 18, 2010 10:00 am ET

Executives

Ken Cooper - Vice President of Finance

Bahram Akradi - Chairman & Chief Executive Officer

Mike Robinson - Chief Financial Officer

Analysts

Sharon Zackfia - William Blair

Ed Aaron - RBC Capital Markets

Tom Shaw - Stifel Nicolaus

Paul Lejuez - Credit Suisse

Jaison Blair - Rochdale

Brian Nagel - Oppenheimer & Co.

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter and full year 2009 Life Time Fitness earnings conference call. My name is Jasmine and I’ll be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today Mr. Ken Cooper, Vice President of Finance.

Ken Cooper

Thanks Jasmine. Good morning and thank you for joining us on today’s conference call to discuss the fourth quarter and full year 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 website which is www.lifetimefitness.com. Concurrent with the issuance of our fourth quarter results, we have filed the Form 8-K with the SEC, which also includes the press release.

On today’s call Bahram Akradi, our Chairman and CEO will discuss key highlights from our fourth quarter and our underlying business trends. Following that, Mike Robinson, our CFO will review our financial highlights and provide our financial guidance for the 2010-year.

Once we have completed our prepared remarks we will answer your questions until 11:00 am Eastern Time. At that point in the call, Jasmine will provide instructions on how to ask a question. I will close with a tentative date of our first quarter 2010 earnings call. Finally, a replay of this teleconference will be available at our website, at approximately 01:00 pm Eastern Time today.

Today’s conference call contains forward-looking statements and future results could differ materially from those statements made. Actual results maybe 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 reconciliation’s of the differences between GAAP and non-GAAP measures in our earnings release and our Form 8-K. Other required information about our non-GAAP data is included in our Form 8-K.

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

Bahram Akradi

Thanks Ken. In 2009 we are allowing our company win a number of key goals. We met or exceeded many of those goals. Number one, we wanted to immediately become free cash flow positive and pay down debt due to the uncertainty of the financing world. In 2009, we were free cash flow positive every quarter of the year and saw sequential improvement each quarter as well. For the year we generated nearly $40 million of free cash flow.

Number two; we wanted to reduce unnecessary expense wherever possible in 2009. We became a much leaner and more capable organization that made better and faster decisions. We took more than $10 million of cash flow run rate out of our infrastructure without any sacrifice of our member experience.

Number three; we set a goal of delivering $1.70 of diluted EPS as the high end of our range of expectation and in 2009 the tireless efforts of all our team members helped us achieve $1.82 of diluted EPS.

In addition to the above goals, we established two very lofty stretch goals for 2009. These two goals were getting our matured club same-store sales positive and our attrition back to its normalized rate in the mid-30s as a percentage.

While we did not hit our lofty stretch goals, we did see slight progress on both fronts during the year, that has let our lofty stretch goals of last year to be our main goals for 2010; and we plan to win on these key goals just like we did on the key goals in 2009.

Let me clearly establish what the two key goals are for 2010: (1) we absolutely plan to achieve positive same-store sales in our matured clubs in the second half of the year; (2) we expect to see definitive improvement in our attrition rate during the year.

As you may recall, I expressed frustration in our third quarter call about the level of traction we were seeing. I had hoped that some of the initiatives would have begun to trickle into some results by the end of the third quarter and into the fourth quarter.

At that time, I was disappointed when we had not seen adequate response to our enormous efforts. Based on the results thus far in 2010, we are more encouraged with the traction of our initiatives.

We are seeing more trickling of expected outcome from our efforts, as they have become more and more a part of our DNA. We intend to win on these key goals despite our assumption that the macroeconomic and unemployment will remain challenging throughout the year.

One of the key objectives of Life Time for 2010 is to regain our place as a healthy way of life growth company. Life Time Fitness is a growth story. We plan to grow square footage, membership, incentive programs and our corporate businesses, while growing top line revenue, EPS and continued strengthening of our balance sheet.

We feel great about our strategic and technical plans that we have deployed since the end of the 2008. The execution of these plans has put Life Time in a great place, structurally and financially to achieve our growth strategy.

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

Mike Robinson

Thanks Bahram. As Bahram indicated, we had a good year and I would like to provide you some additional details on that performance in our financial results. First let me talk about attrition. During our third quarter call we indicated our goal for the fourth quarter was for attrition to be at 10% or below which would compare favorably to the 10.8% that we experienced in the fourth quarter 2008.

As Bahram indicated, we fell short of this goal. This is due partially to the front end and the number of new members we acquired being slightly lower than expected and partially on the retention of our existing member, not seeing as much traction as we have hoped. Lack of traction should not be confused with not working. We are seeing an evidence of traction just not to the extent that wanted.

For the year our attrition rate fell from 42.3% to 40.6%. Our expectation for 2010 is that we will see attrition fall below 40%. Our lack of improvement in attrition led us to be slightly below our expectations on net membership growth.

We finished the year with 578,937 memberships. This was a 2.1% increase from the fourth quarter of 2008. We are slightly more than 11,000 net memberships added. Sequentially we had a decline of approximately 12,000 memberships as we battled the holiday season and deferrals with a new year for memberships.

Excluding new center openings and ramping centers, it is not unusual to see a slight net loss of memberships during this time. One underlying highlight we saw in the second half of 2009 was an increase in a number of memberships choosing to downgrade to a freeze option that we call flex membership, rather than terminate a member with Life Time Fitness.

This membership costs $10 a month and allowed us to stay connected to members looking for additional flexibility. We started this program a few years ago and through the end of 2008 had over 20,000 flex members. By the end of 2009 it has more than double to approximately 50,000 flex members.

As a remainder, these are not included in our reported memberships, since they do not have access to our centers; however since there is still subscription fee and connection and communication to these members, they are not counted as attrition termination either.

Last year we provided some additional insight about January. We told you that we have an incremental 20,000 memberships added in January 2009 as compared to a net 10,000 memberships add in 2008. For January 2010 we added approximately 18,000 memberships, with over 50% less clubs in the first year of operation, at better average dues we believe this is a good sign.

Our membership activity led the total revenue of $203.7 million for the quarter, which was up 5% from the last fourth quarter. For the year, we generated $837 million of revenue, which was an increase of 8.8% from 2008. Our main revenue drivers included, the number of center openings at December 31, 2009 was 84 compared with 81 at December 31, 2008.

Of the 84 centers, 51% or 61% are our large current model and 60% or 71% of all the centers have been opened three years or more, which we classified as matured center. We operate 8.4 million square feet. Membership dues, growth of 5.8% for the quarter, which outpaced our membership growth of 2.1%, our goal is to continue to have dues growth in excess of the membership growth.

Our in-center revenue grew by 6.6% in the quarter. We continue to see personal training in LifeCafe, lead the charge with LifeSpa continuing to lag. We were pleased that our revenue metrics showed improvement during the quarter, our fourth quarter same-store-sales was a positive 30 basis points. In our 37-month mature, same store sales were down 4.7%. These two metrics as expected showed improvement sequentially.

We are particularly pleased with our 13 months comps getting to positive territory in the quarter. One of the big drivers for this was the addition of our farm part club into our comp base. For the total year, we experienced a 3.1% decline in same store sales and 7.5% decline in our 37-month mature same store sales. For 2010, we expect both comps to improve over the course of the year, with our matured comps turning positive in the second half of the year.

With respect to revenue per membership, we generated $350 per membership, which is up 1.6%. This was our third consecutive quarter of improvement of this metric. For the year we generated $1,414 revenue for membership, which was down 90 basis points.

In-center revenue per membership of $95 was up 2.4% in the quarter. For a perspective in the fourth quarter of 2007 and 2008 we were at $93 of in-center revenue per membership. We believe this improvement over both the last two years is evidence of our connectivity with our members as well as new programs and changes in program pricing.

For the year we experience a 3.4% decline from $414 to $400 per membership. For 2010 we expect our revenue for membership and in-center revenue for membership to continue to show gradual improvement each quarter.

I would like to transition from revenue generation to our cost structure. You’ve heard us talk before that 2009 was a year, becoming a more lean and efficient organization. Throughout the year we are focused on three key areas of cost control across the company, including central overhead cost and G&A, marketing and member acquisition cost and center operating cost.

In late 2008 and 2009 we have decrease the headcount of our corporate office by approximately 20% primarily in development, instruction and training divisions. These cost reductions combined with other efficiency improvements delivered an excess of $10 million in cash flow run rate improvement from before our growth slowly.

Primarily in reduced cost that would ultimately go into construction cost of a new center, we saw our G&A reduce slightly on a book to read basis, but increased about $2 million when you adjust for the charges we took in the fourth quarter of 2008. This total year increase is driven by some severance cost taken in 2009 as well as expense in in-absorb cost primarily in real estate and development, as we have maintained an active pursuit for new sites.

In 2010 we expect small nominal increase to our G&A dollars that would be down slightly on a percentage of revenue. Marketing, as a percentage of revenue was 3% for the quarter compared to 4.1% last fourth quarter. These are driven by less clubs and presale and in their first 12 months of operation which is where a big chuck of our marketing dollars are typically spent, and our decision was to spend less until we become more efficient with our marketing dollars in this environment.

We expect to spend 3% to 3.5% of our revenue in marketing during 2010 including more investment in member retention initiatives. The first quarter is typically the highest quarter is spend and percentage of revenue during the year as we promote more to take advantage of our New Year resolutions.

The total marketing spend in 2009 was approximately $5 million below our 2008 spend. We planned to and did use this savings to help offset the majority of our approximately $7 million of cost in excess of enrollment fees for the years.

This cost grew later in the year as our average enrollment fees fell slightly from midyear levels, and we introduce more sales compensation programs and improved sales compensation to promote higher dues. As you can see from our dues growth relative to membership growth, we were successful in this effort.

Finally we continue to gain labor efficiency improvement in our center and we plan to continue to gain efficiencies that are invisible to them. In fact, through 2009 our center operating labor ran more than 3% better than our internal goals. We saw center operating margin improvement in the fourth quarter. This is the improvement we knew it was there most of the year, but was masked by the incremental lease expense from the sale of leasebacks we did on six centers in late Q3 in 2008.

My next topic will be our capital structure. This has been one of the brightest areas of success for our company in 2009. We set out at the beginning of 2009 to prove the cash flow capability of remodel. Our cash flow from operations totaled $48 million for the quarter, compared to $40 million in the last fourth quarter.

Year-to-date, total year operating cash flow totaled $186.2 million. This was up $3 million from 2008’s performance. We’ve now generated four consecutive quarters of free cash flow with each successive quarter greater than the previous.

For the year, we generated $39.6 million of free cash, of which $17.9 million came in the fourth quarter. This $39.6 million of free cash flow is nearly $1 per share of free cash flow for the New Year. We did this while reducing our construction payable during the year by $53 million.

We continued to focus heavily on our capital structure cash and debt availability. We paid down approximately $52 million of debt in 2009. We are targeting to be free cash flow positive for the free foreseeable future and paying down debt by reducing our revolver balance.

During the fourth quarter, our overall debt balances reduced by $23 million, as of December 31, compared to September 30. As of December 31, we have $368 million outstanding, including letters of credit on our $470 million revolver, which leaves over a $100 million in cash and revolver availability, about twice as much from the $55 million at the beginning of the year.

Our net debt to total capital came down to 47% at the end of the quarter, as compared to 51.8% at the beginning of the year. Our covenant calculations for the quarter continued to show significant room versus our covenant limits, and we remained well positioned for the debt maturities in the near term.

Although the credit market remained very tight, we continued to explore mortgage as well as other debt markets. We closed one small mortgage loan during the quarter at good terms for the company with the local bank. We are finding that there continues to be more favorable rise when working with the smaller local banks; that is where most of our time and effort is applied. We still have 31 facilities with an asset cost on our balance sheet well in excess of $500 million with no mortgage financing against it.

Regarding capital expenditures, we paid for approximately $147 million of CapEx in 2009 to open three large centers and maintain our portfolio. This compromised approximately $65 million for growth, $30 million for maintenance infrastructure support and over $50 million in construction payable reduction. We currently plan to open three large centers and two boutique clubs in 2010.

For the centers we planned to open in 2010, we opened our Beachwood, Ohio, suburb of Cleveland location in January, and our second center will open in March 6th in Kansas, this is our second club in Kansas City, the last center is planed for the fourth quarter. For the two boutique centers, both will be leased sites and 10,000 to 20,000 square feet, so larger boutiques.

The first one opens this months in Scottsdale, Arizona, both will be testes of new concepts of our called Life Power. Life Power will focus on Yoga, Polaris and principle training to complement our presence and existing markets. For 2010 we expect to spend approximately $100 million to $120 million for CapEx to open three large centers, the two boutique centers, and maintain our portfolio quotes. This will comprise of approximately $70 million to $80 million for growth and $30 million to $40 million for maintenance and infrastructure support.

Now I would like to give some other P&L highlights. G&A expenses decreased $100,000 sequentially from the third quarter 2009. As a reminder, fourth quarter last year included approximately $3 million in charges related to the reduction in future center development, including severance etc., For the year G&A was down by approximately $1 million and improve by 60 basis points as a percent of revenue. In 2010 we expect a slight leverage in G&A.

Other operating expenses came back to a typical run rate expectation in the fourth quarter. As a remainder in the third quarter, these expenses included approximately $3 million more than the unusual, primarily related to construction related expenses and our growth slow down.

Depreciation and amortization increased 60 basis points from Q4 2008, driven by the second half 2008 completion of remodel centers and higher investment in-centers opened in 2008 and 2009. Depreciation expenses decrease sequentially in the fourth quarter, primarily driven by the roll off of three and five-year asset lives in the quarter.

For 2010 we expect our depreciation and amortization to decline slightly as a percent of revenue. Interest expenses net of interest income decreased $7.3 million from $8.3 million last fourth quarter and was down sequentially from $7.7 million from the third quarter of 2009. This decrease in interest expenses reflects our continued debt reduction in the quarter and the benefit from lower variable interest rates on the revolving line of credit.

For 2010 we expected to continue to pay down outstanding debt, but see some rate increase and we also expect less capitalized interest on our construction projects. We expect interest expense to be above at 2009 levels. Our tax rate for the quarter was 40.9% up from 39% last fourth quarter. For the year, our effective tax rate was 39.6% for 2009 and 39.7% for 2008. We expect our effective tax rate in 2010 to be approximately 40%.

Moving to our margin analysis, our center operating margin is a percent of total revenue increase from 39.4% in the fourth quarter of 2008 to 39.6% in the fourth quarter of 2009. This improvement was due to better efficiency in our center staffing levels and further streamlining of our centralized overhead staffing for our in-center business management.

We expect center operating margin to stay at or near current level as we fund member connectivity initiatives through further label in-center overhead efficiency improvements next year.

Our EBITDA margin increased 30 basis points from the third quarter of 2009 as we generated 30% in the fourth quarter. Our operating margin in the fourth quarter of 2009 was 18.7%, which matched Q3 and compared favorably to fourth quarter 2008 of 15.1%. As Bahram indicated, we are a linear and more capable organization today. Proof of that is in even when excluding the charges, last fourth quarter operating margins were up about 100 basis points.

That brings us to net income for the quarter of $18.4 million. We’re particularly proud of our increased net income in 2009 from $71.8 million in 2008 to $72.4 million. Weighted average fully diluted shares totaled $40.3 million for the fourth quarter. Our 2009-year end share count was approximately 40.5 million shares and fully diluted average share count was approximately 39.9 million shares for the year. We expect our average diluted shares to increase about 2% in 2010.

Overall, we achieved diluted EPS of $0.46 for the fourth quarter. For the year we achieved $1.82 of diluted EPS, which was slightly below the $1.83 of last year. Our balance sheet variations or variance to note, include working capital is down about $40 million from the end of last year, primarily driven by over a $50 million decrease in construction accounts payable, as we reduce our in-center growth, partially offset by $6 million of growth in current maturities of long term debt.

We also had a tax re-class between other liabilities, which came down about $10 million from the third quarter and deferred taxes. With that, let me discuss our overall financial guidance for 2010.

Reflecting the challenging environment, we expect our revenue will grow at $870 million to $895 million or 4% to 7% growth. We anticipate our net will grow to approximately $75 million to $79 million or 4% to 9% growth.

We expect our diluted EPS will grow to $1.85 to $1.95 per share. For the first quarter of 2010, we expect revenue and net income growth to be consistent with the annual guidance range, and we expect flat membership growth with better average dues mix.

That concludes our prepared remarks regarding our fourth quarter and full year 2009 financial results. We’re pleased to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sharon Zackfia - William Blair.

Sharon Zackfia - William Blair

Mike, I just wanted to make sure I understood the membership growth guidance for the first quarter. Were you seeing flat with the December year-end or flat with the year ago period?

Mike Robinson

Flat with the year ago period, we had fairly big January last year and our focus is as much on the mix improvement in the average than mix to anything else.

Sharon Zackfia - William Blair

So even with the $18,000 and the numbers you saw in the month of January’s attrition, is it actually continuing to take…?

Mike Robinson

No, remember that we had $20,000 new members in the first month of last year, so we are slightly down on that.

Ken Cooper

Yes, but I want to make a clarification. Last year we sold memberships in the first quarter, particularly in January and February that had much lower average dues.

In January 2010 we were able to achieve the same amount of new dues revenue as we did in 2009, so we actually wrote slightly better dues in January of this year than January of last year, despite 2% to 2.5% higher unemployment in the market, which directly impacts this industry. So we’re very, very excited about our year, as we have started it thus far.

Sharon Zackfia - William Blair

Bahram, you mentioned in your commentary that you are encouraged by some other results that you’ve seen so far, and it sounded like you were alluding to attrition when you were talking about that, but it wasn’t quite clear.

Can you give us some insight there and actually also if you could remind us; are the club level managers incented in anyway on the attrition in the clubs?

Bahram Akradi

Yes, let me give you a couple of things and make a clarification for you and the rest of the people on the call. I am going to talk generally about their initiatives, but I’m not going to breakdown the different initiatives, exactly what they are, what we are doing, but I want to give you the results.

So as I mentioned in my remarks, during end of the 3Q and 4Q of last year, I was very disappointed with the impact from all of our combined efforts or maybe a dozen different initiatives, on both the attrition and even getting the new memberships particularly in November and end of October.

But as we have been working relentlessly and trying to get this initiative to take hold as a cultural change holistically across their system, we are seeing really nice trickling of results coming out of that in to 2010 thus far.

Basically attrition is, we have written a very aggressive attrition budget for ourselves for 2010, that basically is an improvement over the attrition rates of 2009 and we are so far doing better than our aggressive goal. So we feel good about it. Now I can also tell you it’s not because of the natural forces of the macroeconomics, it’s truly we’re seeing some traction to a lot of the initiatives that we have put forward and I’m excited.

I think we expect to win on attrition this year and see some decent improvement over the last year. My stretch goal and I’ve said this to you guys, I’m not in any shape or form indicating that it’s going to happen, but we really like to get to a 9% per quarter or 36% annualized run rate of attrition, knowing that probably 3Q will be a blip above that.

Operator

Your next question comes from Ed Aaron - RBC Capital Markets.

Ed Aaron - RBC Capital Markets

As far as just the year-over-year attrition changes, presumably it actually gets a little bit tougher going forward, just because of how lap that period is, 2008 where the inactive members dropped out and presumably the basis become a bit sticky at the base in 2009 concurrent to what it was in 2008. Can we just kind of see your expectations around your ability to see progress given that dynamic?

Bahram Akradi

Our ability to see progress is a wholesale change in the way we’re approaching our membership in-center revenue, and what we are doing to make sure that we offer a completely differentiated product than everybody else out there. As you guys can see with the increase of the clubs, I call them a room full of fitness equipment. They’re charging $10 to $15 or $20 a month for the room full of fitness equipment.

With that said, if you are a company that’s offering just equipment in a room, your expectation of attrition rate should be high in this economy when your average dues are running at about $80. So with that said, I think you guys should understand we have been positioning Life Time as a healthy way of Life Company, and that’s a broad statement, and we think of it broad.

We think about being the best place for the runners, the best place for the cyclists, the best place for people who wanted to do yoga, and truly get the members who are passionate about this specific space, and give them substance, and focus our business on building relationships with people and truly deliver something that is difficult for anybody else to just jump in this space and do.

We’re doing this, it takes a while. I am more impatient than most people, so I expected things to happen much faster. It’s taking more time, but we are not stopping our efforts on that delivery. So it’s not a question of will it happen; it’s a question of when it will happen, and as I’ve said to you guys last year and I’ll say it again this year, we will win that battle.

Ed Aaron - RBC Capital Markets

Just one for you Mike, just on the 2010 guidance, there’s not a whole lot of margin leverage kind of built into the plan that you discussed, and just with the fuller rate of unit growth and the resulting maturation of the club base on a year-over-year basis, it would seem like maybe we would see a little bit more leverage than what you’re guiding to. Are there some offsets to that that I maybe not considering here?

Mike Robinson

Well certainly we’ve got some investment in some of the programs that Bahram is talking about on the member initiatives and things like that. That’s probably the biggest piece of it; is that we are investing back in the business in some areas, predominantly to help drive member connectivity and retention.

Ed Aaron - RBC Capital Markets

Last one real quick if I could, you’ve given some usage metric from time to time over the last year and those have actually been pretty sticky. I’m just wondering if you can give us any update there.

Mike Robinson

I can just give you an overall 2009; usage went up, and a number of visits per membership went up, probably about between 4% and 5%.

Operator

Your next question comes from Tom Shaw - Stifel Nicolaus.

Tom Shaw - Stifel Nicolaus

First one for Bahram; I guess anymore color around your expectations around the LifePower test, and kind of coupled with that, any other tweaking of the core model that you’d expect as we look at the additional clubs in 2010 and beyond?

Bahram Akradi

So let’s talk about LifePower, because I don’t want anybody to make a bigger deal about this than it really is. As far as I’m concerned right now, these are just a couple of spokes to some of our bigger boxes four, five miles, and capturing a little bit further reach for some of the big boxes that we have great success with; and introducing a program besides a high yoga and Pilate functional training program that more or less I have created all on my own.

So I’m very excited about rolling this thing out. It’s a higher end futuristic functional training that more top end personal trainers can deliver. The customer base will be a much more sophisticated long term exercise. An enthusiast is not the person who’s just getting into exercise.

The leases that we have negotiated in these situations are harsh; they are and they have to be in the future, extremely attractive opportunities or else we wouldn’t be doing them. So there is virtually no material negative impact from these things to our P&L.

On the upside, if we can prove out the model to be as exciting as I think it could be, it gives us another opportunity to grow a little bit in a different way, but our main growth for the [bricks-and-mortar] is our large format facilities, which we believe they will be as robust and alive as they’ve ever been with the twick’s we’re making and the way we run the business.So let me answer your second question; twitching of the regular business. As I mentioned earlier, I don’t think there is much too brag about building a box and putting in a bunch of equipment in there for people to come and use it. Life Time has been much more than that from day one.We haven’t capitalized on that, because we have been compared to just a larger box full of equipment more or less, and we are really digging deep and executing with precision on connecting with our members in the area of their passion, and it’s not just a talk, we’re trying to make substance out of this in ever club, and it’s going to take sometimes a year or two or three even before it actually takes hold.

I call it the sleeve set; accretes and then it leaves. When you bring in new initiatives and your 200 employees in a particular club are used to doing certain things in a certain way, it takes a while for them to realize this new change you’re bringing in is here to stay, and they all get their arms around it.

We have to execute in the corporate office, in the field, the trainers, all homogeneously towards an initiative, and before it becomes a DNA, the culture of the business, it takes some time, and that’s the only time it works, when it’s just being done just the way it is everyday.So we’re really, really focusing on delivering absolute substance that matters to each category of their interest, and ultimately there are a lot of fitness centers; clubs in the 30,000 or 40,000 square feet, 20,000, 10,000 that they’re purely just a fitness center and they cannot deliver a lot of the programming that we have with our massive infrastructure facilities, and we’re going to take advantage of our facilities and our branding in 2010 and going forward.Tom Shaw - Stifel NicolausMaybe one quick one for Mike, just expanding off the discussion around the capital structure, what’s your outlook; I think you’ve been a little bit optimistic on the opportunities with the commercial real estate market, but how you’re looking at that, maybe not in 2010, but 2011 as a vehicle to potentially reaccelerate growth?Mike RobinsonLet me talk about it a little bit and then I want Bahram to, because he is very, very involved in this also. Obviously we have our figures in almost every market across the United States. We expect to see and continue to expect to see pressure on the commercial real estate market and on existing facilities, some of those lease rates to comedown.We’ve seen it in smaller centers; we haven’t seen it in the specific locations that we’re looking at and the larger centers that’s leased yet. The one thing that I do want to emphasis is that we will maintained the very, very strict site selection discipline that we have and it has proven so successful for us for the last 15 plus years. So we expect to see some of that, but we haven’t seen it in any significant manner yet.Bahram you want to comment on that or on potential purchase too?Bahram AkradiWhat I’d like to kind of walk you guys through is, our focus is to deliver a kind of differentiated product, and in the absolutely right locations that is appropriate for our product and our brand. We are looking at all sorts of facilities, and there are deals to be made, some of them are just not exactly the right locations that we would pull the trigger on today, but we are very, very actively looking.There’s some stuff we’re working on and I expect to grow this company. This team will grow this company and I like to again get to a point where we are growing double digits in our earnings, and hopefully even revenue as we go forward, but it’s not all going to come from bricks and mortar. It’s going to come as programming initiatives that will bring in additional revenue leveraging our bricks and mortar. So bricks and mortar will speed up from the 3% to 4% that we are doing right now, but also the other aspect of our business will grow.

We see our self purely as a growth company. At the size that we are today, we really want to continue putting our foot down on the gas to make sure we grow during opportunities of growth. At the same time we want to make sure we keep this company very, very strong financially, just in case there are other hits to the market just like we’ve done in the last year or so, and we would not have any risk of under mining our great business that we have.OperatorYour next question comes from Paul Lejuez - Credit Suisse.Paul Lejuez - Credit SuisseTwo questions; one the improvement in center revenue per membership, is that from the same users. Can you give us color on whether that’s coming from the same users or if you’re attracting new people to those in-center services?

Second, just wondering, you mentioned getting deposit of comps in the second half at mature centers. Does that come from membership growth at those centers, higher dues or higher in-center spend, and if you could maybe just tell us, what has been the trend when a new center enters the mature comp base? Has that helped or hurt that mature center comp?Bahram AkradiLet me take the first question and I’ll give it to Robinson for the second half, okay. So the question you asked is, does it come from a new member or you’re getting some of the other members coming in, and it’s combination of those and the fact that our average dues is going up.

What we are doing is, we have been aggressive on our enrollment fees as I’ve said since the first days we went public. That’s when you play with your enrollment fee or marketing dollars to bring in people into the door during your recession time or tough macroeconomic times.

The one thing we have done which I’m very, very proud off, is we have stuck to our guns with our dues pricing, and tried to give the customer the mind blowing value through better delivery of more programs and more in-center activities, rather than lowering our dues. As a result of that, as some of the members who have had lower dues have dropped out and we replaced those members.

We have replaced them with higher dues and we’ve kind of introduced at the beginning of 2009, end of 2008, 26 and under. At a little steep discount we changed that to either not at all or much much lesser of a discount in some of the markets. So we’re writing dues as you can see. The average dues revenue is growing well in excess of the members, so that’s helping that number.The second piece is, we’re doing a better job in our cafes, working harder in our spas to make better connections, and so we’re also growing in those areas. Personal training has maintained a fairly strong performance, which has been really nice to see, so all of those combined are helping the increase in the revenue per member.

Bahram Akradi

Let me try and see if my memory goes back; you asked about whether new centers coming into the comp base help that comp base or not, is that correct?

Paul Lejuez - Credit Suisse

On the mature side, so like 137, are those clubs coming in better than average comp relative to the rest of the mature base?

Bahram Akradi

Usually they are coming in at a little bit better, but it’s not significant. Certainly, the ones coming into the 13 month have a nice effect and then you’ve got well bridge clubs that are come in now, and those have actually had a positive benefit to the matured club comps.

Also one other thing on the revenue per membership that you asked about like part of your first questions is, if you go to one of our centers now you’ll see some new pricing philosophies that we’re using, that we’ve introduced in the last probably 180 days, and the concept to Bahram’s point is, because you’re a member you deserve something that’s some better pricing.

So you’ll go into our cafes and you’ll see some very good pricing on breakfast, sign on, daily shapes and things like that. Those are new concepts that we’ve introduced over the last several months and those things too have helped, both the same center sales, as well as the revenue per membership.

Operator

Your next question comes from Jaison Blair - Rochdale.

Jaison Blair - Rochdale

I was wondering if we could kind of walk through the attrition rates and just kind of run through the numbers. My impression is that Life Time targets a local population of about 150,000 people within a 5 mile radius, and the average club requires, let’s say 10,000 memberships or 15,000 members, so that would be in theory a 10% penetration rate.

So in theory, if we got this let’s say 30% to 40% attrition rate, that means you got something like 5,000 membership per year at a local club that essentially need to be replaced. So over a five year period or over a 10 year period you’re talking about something like 25% to 40% of the local population, and that might be kind of a static way to think about it.

Could you kind of drill into the layers of your attrition rate and try to kind of help me understand how you’ve been able to sustain economics at some of your older locations with these high levels of attrition?

Bahram Akradi

This is a great question, and I think it can help you and everybody else. So I’m going to try and give guys as much color as I possibly can. So let’s get the math corrected from the get-go.

150,000 people in five mile radius, let’s assume we sell 3,000 memberships in a year in a static club, and the club has been there for six years. Let’s assume; these are very round number, so the 3,000 memberships, that’s 5,000 members of the 150,000.

So the first assumption that all of our members come from the five mile radius is a wrong assumption. When we look at the market, we look at that number of people in the five mile as a benchmark. It doesn’t necessarily mean we go in or we don’t go in, if it’s slightly less or more. It all depends on traffic barriers, the draw; a typical fitness center will draw from one to three miles.

Our clubs, more than 25% of our members across the country; it’s not specific to one location, come from outside of the five mile radius. So your assumption that all our members coming from that five mile radius is not a good assumption, and it is contradicting to what we tell you as what we look at, but that’s just the first layer of what we look at then we go beyond.

Now the reason they come a much further distance to one of the Life Time facilities, because there are dozens of other companies offering the little fitness box, room full of fitness products. We are the only place that offers the whole program and comprehensive, so we have a much further draw other than local more regional.Now get past that point and look at the attrition. As we have said clearly over and over, one-third of our membership approximately that drops out because of location moving; they’re changing, they’re moving, they’re from one place to another, that population naturally is being replaced by somebody of generally equal demographic, psychographic moving back in, so we get a large number of those people coming in.The second portion and the third portion of our attrition, when you add those two to the first one, 85% of our total attrition is either because they moved, which is not a problem because somebody is replacing them; two, they have stopped using the club long enough that they think they shouldn’t be paying their due, so they come back, and that’s a large portion of what we have been reselling. A large number of the people we sign-up each year have been before members of last time again.As long as their experience with Life Time was great when they dropped out, because they felt like they’re not using the club anymore, when they want to use the club again they come back to us, and that’s the experience we have and what we see. I don’t see them as a concern.

The next group is the people who drop out, love the club, they think everything is that they wish they could afford it, but they’ve lost their job and now they’re reaching to the last end of their savings or whatever, and so when they have money again they comeback.So if we were not signing up, a large portion of the people who drop out again and again and again I would be concerned, but we have no concern of other attrition rates. In the mid-30s, when I wrote the business plan for this company in 1988, I expected about a 36% attrition rate on a mature club year after year after year, and with that number clubs that they are 15 years old, they’re still performing beautifully, and so there is no concern.Do I like a 40 plus percent attrition? No we don’t, because we have to comprise on the enrollment and some other gymnastics to replace that membership, but it’s not such a large attrition rate that we couldn’t sustain our business; we just don’t like it.

Now if you look at the industry; those companies that have more of fitness center style, I believe their real attrition today is closer to 50% attrition rate, which maybe up from a 40%, 42% normally before the attrition rates peak for all of these types of businesses, a year and a half, two years ago. But I think if you look at those businesses, there are companies who have been around for 20 some year with a 40% plus attrition rate and they are successfully still in business.

So to you and anybody else, myself, when I first started selling memberships 29 years ago, I was like today is the last day anybody could come in, because this club has been here for 10 years and it has been selling membership. Nobody is going to coming to buy membership today. To my dismay, everyday just about as many members showed up to buy new memberships as they were the month before, the year before.

So that’s all I can tell you. I think I’ve given you as much color as I can give you. If we can maintain a 36%, 37%, 35% attrition rate, we are absolutely golden for a long term.Jaison Blair - RochdaleI’ll follow-up afterwards. I had one follow-up question, kind of a related question. You’ve provided revenue guidance of 4% to 7%, and you say it’s going to be driven by membership growth, and you’ve also said that your outlook for 2010 is based upon late 2009 operating trends, but as we’ve discussed your fourth quarter membership and attrition trends continued to be weak.So I guess if you could provide color on how you’re thinking about membership growth, especially memberships per unit, which in my mind, the cost bucket isn’t something if you can just continually keep cutting and cutting. So in my mind the real leverage and kind of potential upsides scenarios come from you, I guess getting the boxes fuller.So given the expectation for flat year-over-year memberships in Q1, which would imply that your average memberships per location drop again, which I think at least the eighth consecutive quarter, I guess I would have expected that turn to come in your seasonally strong first quarter, and my impression would be that it would be harder as you get later in the year, when you don’t have as much seasonal strength and you have higher natural attrition rates, if you could just…?Ken CooperSeasonal strength for Life Time is different than seasonal strength for general fitness centers. We have an increase in enthusiasm towards membership end of January, middle of February time period, due to people wanting to get in shape as a New Year resolution; where lots of other companies really aren’t having a strong quarter, which is the middle of second to middle of 3Q.

Our business is very robust because of our leisure style facilities with the outdoor pools and the families rushing in and signing up. We also lose some of those members in September that adds to the drop in the membership count and revenues in the 4Q versus the middle of the three Q. So our seasons aren’t exactly similar to every other fitness centers. We have some things in common and some things not.

So our expectation of growing membership is in order for us to get to a solid, mature, same-store positive, which is where we want to get to. We have to gain dues revenue in mature clubs. That has not been the case in many of our mature clubs for the last year and half to two years. We have lost dues revenue.

I believe we can turn it around this year, and start going the right direction on the dues revenue. On the membership count it’s a mixed bag. Some clubs, I’m okay still with losing a few more members versus gaining members as long as my dues revenue is growing.In some clubs, I like to gain membership and dues revenue both, and so that’s club by club. I don’t want to get into the details of it now or ever, but as far as our expectation is this year, we’re going to the whole ship around and we are determined to do that regardless of how tough the unemployment or the economy is going to be.Jaison Blair - RochdaleSo the average dues per memberships grows, that really is a function of just new higher ticket clubs opening.Ken CooperYes, absolutely. It’s a function of new higher ticket clubs opening and up-sells on membership.Jaison Blair - RochdaleSo since you slowed growth in theory, and I understand it’s a challenging time to add new members, but you would hope to see that average memberships per center at some point would begin to turn up, and that should be in theory a catalyst for EPS upside you would think?Mike RobinsonYou’re absolutely right and that’s the focus of the business, is to get that capacity level or the members per center cart ramping up. The headwinds are out there, and we are really driving very hard in all of the initiatives and we believe we will see results on that.OperatorYour final question comes from Brian Nagel - Oppenheimer & Co.Brian Nagel - Oppenheimer & Co.The first question I had, I know we folks have been on churn already, but I want to focus further on it. If we just look at this trend, Q3 to Q4, I know there’s a seasonality factor in there, but given some of that, I guess as you look at your customer behavior with a lot of data that we’re not privy to, did anything change from a churn perspective? Whether it would be geography or other subsets of your member population coming in, was there any significant change there?Bahram AkradiI think by the time we had our call and the 4Q for the 3Q, you guys sensed my disappointment and what I was seeing. It wasn’t ready. I mean I didn’t expect our attritions to be as high, and even though we showed improvement in the end from year-on-year in 3Q, and we were flat to the 4Q in the year before, that was just not what we had hoped and worked hard to get to. It wasn’t something that you can sit back and say, “That’s a good number,” or “we like it,” or “it’s acceptable,” none of the above.So if you’re poking around that area, I feel like that was a particularly disappointing area for all of us here, because we worked our cans off frankly to try to reinvent some of the things for our business what we never had to worry about it. I mean our attrition, we never thought about defense. We never thought about ‘what do we do to keep our member?’ At the 33%, 34%, 35% attrition rate, we just knew we can replace that customer with minimal efforts of marketing and sales.

So we have been putting a lot of the stuff forward, and I think proof of the putting will be in 2010 to see if we can turn things around while the macroeconomic remains tough. So I liked for Life Time to demonstrate that we can actually get back to those mid-30s attrition rates, when there is still 9% unemployment. If we can do that, we have shown the real deal.

Mike Robinson

I think Brian, the specific question is, do we see any change in who was attriting or reasons why not really at all. It’s been the same general profile.

Brian Nagel - Oppenheimer & Co.

The second question I had, and recognizing, I understand complete there’s a new boutique form as a very, very small piece of the whole story, and now you might be very complimentary to the overall organization, but I guess the question I have is this. Is format something that you’ve been working on for a while, as in the opening of this center this month is just the final manifestation of that, or the plans been accelerated to open these centers due to either real estate deals now in the market or something that’s happened in the competitive environment?

Bahram Akradi

It hasn’t been accelerated at all. In these I am very selective. It’s very specific markets that we would be interested in deploying these things. The rent factors have to be exactly what we want it or we simply walk away from the deal. We don’t have to have them; if we don’t get our terms, we don’t do the deals. They’re not part of our growth strategy of how we’re going become a $2 billion or $3 billion Healthy Way of Life Company, so they’re opportunistic.

Again I emphasize one more time, I wouldn’t make a big deal about it, that at this point for all of you guys it should be just a wait and see. We need to take a look at this model, develop it, work the bugs out, run statistics, take a look and see the flows of members in and out; and at this point these are non-material. I mean it’s completely immaterial to our revenues and earnings in 2010 or 2011; they’re just a test. So that’s all I want to tell you guys. I think you should just wait.

Operator

Ladies and gentlemen, this concludes our Q-and-A session for today. I would like to turn the call back to Mr. Ken Cooper for closing remarks.

Ken Cooper

Thank you for joining our call today. We look forward to reporting to you our first quarter 2010 results which tentatively has been scheduled for Thursday, April 22 at 10:00 am Eastern. That is also the planned date of our annual shareholders meeting. Until then we appreciate your continued interest in Life Time Fitness. Thank you and have a good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for attending. You may now disconnect. Have a great day.

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