Life Time Fitness Q1 2010 Earnings Call Transcript

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 |  About: Life Time Fitness, Inc. (LTM)
by: SA Transcripts

Life Time Fitness [LTM]

Q1 2010 Earnings Call

April 22, 2010 9:00 am ET

Executives

Ken Cooper - Vice President of Finance

Bahram Arkadi - Chairman of the Board, President, Chief Executive Officer

Mike Robinson - Chief Financial Officer

Analysts

Paul Luis- Credit Line

Anthony Gikas – RJ Hottovy

Edward Aaron – RBC Capital

Bakley Smith

Michael Lasser – Barclays Capital

Jason Blair – Rochdale Securities

Sharon Zackfia – William Blaire

Brent Rystorm - Feltl

Operator

Good day Ladies and Gentleman and welcome to the Quarter 1 2010 Life Time Fitness Earnings Call. My name is [Modasta] and I will be your operator for today. At this time, all participants are on list only mode. Later, we will conduct a Question and Answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Ken Cooper, Vice President of Finance. Please proceed.

Ken Cooper

Thanks, [Modesta]. Good morning and thank you for joining us in today's conference call to discuss the first quarter of 2010 financial result for Life Time Fitness. We assure our earnest press release this morning. If you did not obtain a copy, you may access that in our website which is Lifetimefitness.com. On current insurance of our first quarter result. We have filed a form with [AK] with the [ACC] which also includes the press release. On today's call Bahram Akradi, our Chairman and CEO will discuss key highlights from our first quarter in our operation. Following that Mike Robinson in seeing CEO's over view our financial high lights and detail. Once we completed our prepared of marks, we will answer your question until 11 a.m Eastern Time. At that point of the call the [Modesta] will provide instructions on how to ask a question. I will close with the tentative date of our second quarter 2010 earnings call. Finally, replay of this teleconference will be available on our website at approximately 1 p.m Eastern Time today. Today is conference call is contain four looking statement in feature results could differ materially in those statement made. Actual results may be affected by many factors, including the risk non [certainties] identified in our [SCC's] filings. Certain information in our earning is release and any information disclose on this call [include] non gap financial measures including [Ivida] and Free Cash Flow. We included reconciliation of the differences between gap and non gap measures in our earnings to release and our form [AK]. Other information about our non gap data is included in our form [AK]. Also, I would like to take a moment to remind you our annual share holder meeting takes place at 2 p.m Eastern Time today at our Corporate Office in [Chansen], Minnesota. Accordingly, we will be preparing for in conducting that meeting and will not be again responding the e-mails or phone inquiries until afterward or approximately 3 p.m Eastern. Your patience and flexibility are greatly appreciated. With that, let me turn the call over [Bahram Arkadi]. Bahram?

Bahram Arkadi

Thanks, Ken. I'm excited to be with you here and to provide my thoughts on our first quarter of 2010. This is the first quarter in the last year and a half that I feel we are really seeing results from all the hardwork of the Life Time Fitness Team. While over the last five quarters, we have strategically and tactically executed as needed . We were impatiently looking for fraction of at least some of our initiatives towards better member retention and the change of the same store same story to a positive one. The first quarter of 2010 allowed us to see the result of this hard work. As you have probably all ready seen with the membership growth of 2.3%. Our 13th month same store sales improve from a negative 2.7 last year first quarter to 2.6% this year. Our mature comes improving by over 300 basis points in set the revenue for membership matching all time high at $111. Net income growth of 18% and finally our quarterly efficient grade decreasing to 8.5%. We feel that this accomplishment are do last to market conditions which we are still challenging.

But, much more so to do the adjustment we had made to our approach and our own executions. This is important because while we do not have control of the over all market conditions. We do have control of our strategy and executions. As I mentioned in our last call, the 2010 focus in order priority is bringing and maintaining retention to satisfactory levels and beyond. Positive comes for all stores. We hope to achieve positive comes on the mature stores in the second half of the year and three delivering signs of an accelerated comprehensive healthy way of life growth plan later this year. As the relays of retention a rate of better than 64% annually is the main area of focus for our company. While we achieve good improvement in the first quarter.

We need to continue our hard efforts and extreme focus so, this trend continues. We hope to achieve an intuition grade of less than 9% for the second quarter as well. I hope, I would hope that this would then set us up nicely to keep the momentum going and see substantial improvement in this intuition numbers as compares to the 2009 second half of the year. Re intensifying our connectivity and engagement measures over the next couple of quarters to put us in the right place to achieve the member retention we want in the third and fourth quarters. As it relays to the same store sales metric. We fully expect to improve outcomes. However, we will not be satisfied until we turn the mature stores positive. Ambitiously, our goal is to make that happen in the second quarter otherwise, we believe it will occur in the third quarter.

To accomplish this, we simply have to win the retention game. I would like to close with some thoughts on our growth story. We have not forgotten of our Healthy Way of Life Growth Company and our plan has been hand still is to resume faster growth than strategically and tactically appropriate. A tactical and strategically plan since the end of 2008 has been to manage our debt, our covenants and put ourselves in a position of control for future financing. We also wanted to demonstrate the cash flow power of our business. Show how quickly the quick turn of the company to a free cash to a full positive and make them a necessarily adjustment to member retention strategies and to achieve desirable intuition grades despite the headlines. With all that executed we gradually resume faster growth. We are executing on track against this plans and we are looking forward of showing you of signs and comprehensive and accelerated growth with that I will turn it to Mike Robinson our Chief Financial officer. Mike?

Mike Robinson

Thanks Bahram. As Bahram indicated, we've had a good start to the year and I'd like to provide you with some additional details on that performance and our financial results. Let me start with the intuition and retention. Barham focus retention in his remarks and I will focus on the [apprehension] statistic store we provided. Retention is simply re inverse intuition we're 64% retention rate equates to a 36% of [intretion] rate. As Bahram indicated we experience good [crash] on to this [intresion] on the first quarter. For the quarter, our [intersion] rate was 8.5% as compare the 9.8% last year.

Our baseline expectations on what we build on the updated guidance which we'll talk about shortly for the second quarter 2010 I received 30 to 40 basis points improvement over the second quarter 2009 nutrition rate of 9.5%. Bahram has said an internal goal less than 9% in order to continue to drive the momentum. We established in Q1. It is important to note, that this would be far more challenging to match the same levels of nutrition in the second quarter as we hit in the first quarter, since we are moving away from our busiest member growth quarter of the year. That set our operations and marketing teams that are living and breathing member connectivity, are dialed in for the challenge. On proven on nutrition led us to be slightly ahead of our net membership growth expectations in the quarter. We finished the quarter with 613,882 memberships. This was a 2.3% increase from our first quarter 2009. Sequentially, we had an increase of approximately 35,000 memberships, which is slightly more that the 33,000 net ad from the first quarter 2009.

For the first quarter, we drove a net balance of fix memberships by approximately 2000 units to approximately 52,000 units. One administrative item to highlight for you is in regards to our [intrusion] formula. We've always offer the money back guaranteed trial period to perspective members. This trial period enables the potential new member to try out the club for 14 days and to choose not to join. We refund all of their enrollment fees and dues. We've collared these as both new membership addition and [intrusion] in our members statistics.

However, since we do not recognize revenue with the folks. We've chosen to cancel membership during this trial period. We believed that it is not appropriate to count them in our members statistics. In a typical quarter end, we have approximately 500 units who cancel within the next 14 days. Also during a typical quarter, this 14 day cancellations had added about 30 basis points to our [intrusion] members . Effective April 1, we do not plan to count people to cancel within 14 days of joining as members. So, we expect to see about 30 basis points as an improvement in our [intrusion] rate going forward. Therefore, if you add our baseline expectation of 30 to 40 basis points of improvement with this approximately 30 basis points due to this change. We expect 60 to 70 basis points of nutrition reduction in the second quarter over second quarter 2009.

Our membership activity led to total revenue of $219.8 million for the quarter which was up 6.5% from last first quarter. Our main revenue drivers included, we opened two large centers and one small test boutique in the quarter. We also had three large centers opened in 2009, still on run. A total number of opened centers at March 31, 2010 were 87 compared with 83 at March 31, 2009. Of  87 centers, 53 or 61% on our of large current model in 60 or 69% percent of all centers have been opened 3 years or more which classify as mature centers. We now operate, 8.7 million square feet of health centers. Membership dues grow to 5.7% for the quarter which out paste the growth of 2.3%. Our goal is to continue to have dues growth in excessive membership growth. We accomplish this by improving our average dues. We are selling more memberships at higher priced centers providing more valued upgrade opportunities and upgrading more memberships to couples and families. We have very little pricing increase in Q1 . In center revenues grew by 10.5% in the quarter which is particularly pleasing. The growth was across the board including our small business but the leaders were personal training in our life campaign.

Our new because you are member value pricing strategy has generated in positive results. We are pleased that our revenue metric shows the improvement during the quarter. First quarter same stores sales is 2.6% in our 7 month same stores sales over down 1.2% continues to improve. This two metric as expected showed sub sequentially. In fact mature same stores pays improved from a negative 4.7% to a negative 1.2% from fourth quarter to first quarter and administrator free pricing to stimulate new demand new member demand and the in center revenue for membership growth at lower gross margins.

Marketing advertising cost were down about 90 basis points due to our controlled promotions more effective marketing and to balance or someone up set our lower enrollment fees which result in higher net member acquisition cost. As I discussed last year we really look at center offering expense and especially the member acquisition cost center marketing cost together and tried balance them. Our goal is to balance our user when enrollment fee in marketing levels were already impacting our ability to increase our over all amenity [stream].

We believe there are revenue performance in the quarter coupled with the flat, with the about flat year over year center offs and market, marketing expense ratio is evidence of this. So, for over all cost in GNA are down about 80 basis points reflecting our continued focus on the over head control and reduce several cost over Q1 2009. We also sells late [leparge] in our other operating and appreciation and amortization during the quarter. Our over all operating margin in Q1 improve a 140 basis points to 17.1% from 15.7% Q1 2009. My next topic will be the our Capital Structure. We've continue to deal over our balance sheet in the first quarter 2010. The key driver look to this was a continued power of our casual from operations which totaled $53.9 million for the quarter and was up just over 8% above the 49.7%, 49.7 million dollars last Q1.

We also generated our fifth consecutive quarter of free casual. For the quarter we generated 30.8 million dollars of free casual. These 30.8 million dollars of free casual nearly matches our entire 2009 amount of 39.6 million. We paid down approximately $25,000,000 of debt in the first quarter including three mortgage notes, three paid in Q1 at far to TIA craft. As of December 31, excuse me, as of March 31 we have $377,000,000 outstanding including letters of credit on our $470,000,000 revolver. At least, over $100,000,000 in cash and revolver availability. Our net debt control capital came down to 45.1% at the end of the quarter as compared to 47% at the end, at the beginning of the year. Our company calculations for the quarter continued to show significant room versus our covenant limits and we remained well positioned for the debt maturity New Year’s term. Are we continued to explore the mortgage as well in other debts market.

Our current focus remains [dealing] the balance sheet. A baseline assumption is we do not enter in any significant new financing in 2010. By the way, we now have 36 own facilities with assets cost in the balance sheet in excess of $750,000,000 with no mortgage financing. Regarding capital expenditures, we paid for approximately $23,000,000 of Cap X in the first quarter. This was comprised of approximately $20,000,000 for growth and $3,000,000 for maintenance in infrastructure support. We currently planned to open three large centers in to [boaty] clubs in 2010. We open our beach with Ohio which is [somewhere in] Cleveland location in January and our [Lexecansus] Center in March. The last large center is plan for the fourth quarter and will be in Centennial Colorado [somewhere] in Denver. For the two boutiques, both will be lease sites in about 10 to 20, 000 square feet so larger boutiques. The first one opened and [stocks] dealers on in February.

The second one is plan for Mini Apple is opening in 3Q. Both are test in our new concepts called Life Power which focuses in Yoga Polaris and personal training to complement our presence in existing markers. For 2010 we maintain our expectations to spend approximately $120,000,000 in capital expenditures. This will be comprise of approximately 75 to 85 million for grow and 25 to 35 million for maintenance in infrastructure support. Now, I'd like to give you some other key PNA highlights. The [infra] expense not in interest income increase sequentially to $8.1 million from $7.3 million in the fourth quarter. This increase has driven by a cause associated with the partial repayment of the TIA mortgage dept and reduce capitalize the interest. I had, actually for the first quarter was 40.2% which was roughly in line with the 40.4% in Q1 2009.

We expect our effective [titrating] in 2010 to be approximately 40%. Are you [be darn] large increase 100 basis points from Q1 2009 and as we generated 27.6% in Q1 2010. I have been in Cincinnati income for the quarter, $17.8 million which is 18% growth over Q1 2009. Our net income margin increases 80 basis points to 8.1%. When an average fully diluted shares total 48,000,000 for the first quarter. We expect our average doing to share will increase about 2.50% in 2010. Over all we achieved diluted APS in 44 [cents] for the first quarter compared the 38%, 38 [cents] Q1 2009. One balance sheet variants to know was an increase approximately $9,000,000 in a crew expenses since your in 2009. Primarily, as a result when increase and improve the income taxes. Well that I need to discuss with the finance, our updated financial guidance for 2010.

We had a good start to the year. It is important to know that we had three quarters of hard work ahead of us. We raised the bottom ends of each metric and slightly increase the high end of our net income APS expectations. In particular we expect revenue grow to a $880,000,000 to $895,000,000 or 5% to 7% growth. We brought the bottom end of the guidelines $10,000,000 based on Q1 result. We anticipate our net income will grow to approximately 76.50 to 79.50 million dollars or 6% to 0% growth. And we expect our diluted APS that will grow to a $88 to a $96 per share.

We brought the bottom into the guidance of $10 million dollars based on Q1 results. We anticipate our net income will grow to approximately $76.5 to $79.5 million dollars or 6-10% [growth]. And we expect our diluted [EPS] will grow to $1.88 to $1.96 per share. For the second quarter of 2010, we expect revenue netting from growth consistent with the annual guidance range. That includes our [proffered] remarks regarding our first quarter, 2010 financial results. We are pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Paul [Luis] with Credit Suisse. Please proceed.

Paul Luis - Credit Suisse

Hey, guys. It's Paul [here].

Mike Robinson

Good morning, Paul.

Paul Luis - Credit Suisse

Good morning. Two questions. When you look back at all the different reasons, or should I say, when you look at all the different reasons that people leave the club. Do you have a sense of what drove the improvement year over year on the [attrition line]? That's question number one. And two is, on a membership growth, haven't that look by month? I'm just wondering if, you know, when you guided the flat where you're seeing flat at the time and things got better? Or did you have a strong start, and you were expecting a fall off?

Bahram Arkadi

I'll take the first one for you , and I'll have Robinson handle the second one, OK? Your first question is, which one of the measures we're taking is helping the attrition rate? So, I can go through this strategically and tactically. We have - I have created a team of people who are focused entirely on membership retention which we never had before in the organization. That's what we really need to. And we are doing the approximately about 20 different strategic measures, which I'm not willing to get into the details above. We, Mike have mentioned some of those and I'll mentioned a few. We are much more focused on delivering the existing members a better value proposition against the areas of their passion, or the things they want to do with us in the club. And we are much more surgical about achieving that than just a random shotgun approach. I have told you guys before, I'll tell you. And I'm sure everybody else is listening. I have no intention of breaking down the details of all the things I'm doing. As a competitive reason, we like to keep it to ourselves and just execute. And I hope ...

Paul Luis - Credit Suisse

Yes. I was actually been thinking more along the lines of, you know, sometimes, you have, you know, you always say there are certain percentage of your members leave because they move out of the area. You know, has offers in exchange this year versus last year. Or, you know, people leaving for economic reasons last year versus this year. You know, when you do your exit interviews with people. The scent of shift in any one of those buckets of people that leave?

Bahram Arkadi

No, I think that, you know, the percentage of people moving has been usually about a third of our attrition. That hasn't changed the percentage of people were [dropping out], lose the non-utilization was about 29-30 % of our attrition. And we have [attacked] that in trying to get people to use the club more often, so we have less people leaving for that reason. And so, that's improved a little bit. And then finally, we had, you know, [been] to attrition rates bumped from 35% to 40+%. A lot of it was due to financial issues. And that hasn't changed. People are financially, you know, stressed with 10% on employment there. All be it, we're not getting a [barrage] of people rushing in because they just happened to lose their jobs. Things have stabilized in that area from the, you know, just the market condition. However, what we are doing is we're just adding more values, so the people who come in and join us, they can see that they're getting something for the money they spent with us.

Mike Robinson

Paul, let me talk a bit about your second question. It was really was, you know, as we hit that 2.3% membership growth and originally thought that would be flat. If you ask me to go back and you look at the beginning of the year. We actually started the year on January 1 in a whole behind our own internal expectations where we wanted to be at. We had a good Q1, or we had a good January. And we talked about that at a call. And that was driven, certainly new memberships have been studied. But it's the wrong part about that, it was still a tough environment out there. And we are - that's evidenced by some of the enrollment [fee] strategies that we continue to have. But what happened is we saw a good attrition improvement in January that hailed in February and in March. And so, that was probably the difference, really. You know, we met our new membership goals in a tough environment. But we exceeded the attrition goals and we exceeded those attrition goals in all three months of the quarter.

Bahram Arkadi

And if I can add to what Mike just said, if you look at what happened in fourth [queue], we were unable to make the [tractions] we wanted on attrition. And that was, you know, disappointed, and Mike was disappointed in that number. But we saw lots of [traction] to those efforts in the first queue. And as a result to that, if you look at the difference between the 9.8% and the 8.5% of this year, that makes a big difference in the membership total net numbers.

Paul Luis - Credit Suisse

Hey, thanks guys. Nice quarter, let me spent a little time on the tension, petition pretension side. Maybe this is a little more detail on the membership accusation side in term of just how effect this of some promotion of them, maybe how this trended most recently and how that also plus do to Mike’s comments on higher member accusation cost seems like I assume you had a little less pressure this year, sort of the net cost for a new member seems to be higher year with the maybe the enrollment fees remain flat at the admin side coming up a bit, down fall as well.

Bahram Arkadi

[Sherlund] Let me talk specific on view that the real driver on the higher net member accusation cost is actually enrollments fees are down al little bit issue when you compare it to first quarter last year. So, that’s the technical side in all that belong talk about the…

Mike Robinson

No. The way of what we are managing and I’m personally driving and involve in this initiatives, pretty much on a weekly bases. We are viewing our advertising dollars towards the membership accusation and the membership sale cost, commissions of the memberships and the enrollment fee that we generate from those pretty much all in one combined numbers. If we spent more money on marketing, we expect bringing more money and enrollment fee and offsetting the… offsetting our commission cost and then if we don’t bring again or we offer promotion on the enrollment fee or administrative fee then we will back the marketing so that the total sum is the same. So, as Mike mentioned if you look at our operating margins one is 1% high and marketing is almost 1% down. So, the total is almost right in line budget and our system so, as this our leverage we pull internally from time to time we switch our marketing and promotion tactics to keep things rush it the market and we expect to continue to do this type of change of lavers throughout the year and I hope that the end that what we come away with better membership growth contain marketing cost meeting are center margin of… center margin as a whole within our budgets. And, then hopefully better [retention] will help us have a high number of membership and that result in better performance than the budgets we have.

Bahram Arkadi

OK, and yes. I guise for either of view but, yes I know Mike return the [carry] talked about kind of how you would raise the growth or reaccelerate the growth starting at for 5% footage currently in ability to bring that up sort of the operating cash [cost] level, taking advantage of [this is] etcetera, and then also with the additional add on a generate positive counts and with the new bounce that with the desire to remain prior to free cash flow, the depth that do hire me and [Campix] and start lapping to the prior frame of some this club have open. I’m just curious if you have some sort of an update view on base on what you are seeing being in the market now and some of the… made the limitation or opportunities even the real state side for 2011 and beyond.

Mike Robinson

Let me start with something about the lapping of the late the newer crops the five year, if you look at what we did rolling back about 5 or 6 years back. We spent lessen our boxes in our 2004-2005, but when we came back 4-5 years later to remodel them, we substantial amount money not just on regular ware and tare but maybe up grading them to the higher standard that we are building the qualities to the last couple of years. So, my expectation of our maintenance [Campix] when we have that lapping of the 12 clubs a year of 2006-2007-2008, when those come about I don’t have an expectation spending 2 million, 3 million dollar to a club as we get some the earlier version when that came in. So, we have much better system and much better product now and we spent a lot of money in our clubs all ready and they don’t required where they build, they don’t require a lot more money for remodeling they require normal restoration so that they looked like new in the equipments. And, that’s not going to be a major issue; secondly I wanted to guide everybody the right way. We are absolutely step fast in our strategy,

Bahram Arkadi

We feel that at this point, we have made substantial improvement in our financial structure. Mike and I have no concern about being able to getting our financing put together the way we like to, not the way we're force to, and that means we're going to be sticking to our strategy. He mentioned in 2010, we're going to grow a very much in line with what we have guided you, and then towards the three queue, end of the three queue, early fourth queue, we will layout for you guys a vision around an accelerated growth, healthy way of life company and you guys will see how are we're going to take the company. Hopefully, to double digits growth and an annual basis and all fronts, not just revenue but also earning [even that] et cetera. That's the way we want to do it. We want to be steady. We want to be solid. And we're not going to do any today that would jeopardize our financing capabilities in the next twelve months.

Paul Luis - Credit Suisse

Right, very helpful and God bless.

Unidentified Company Representative

Thanks.

Operator

Your next question comes on the line of Anthony Gikas with R.J. Hottovy please proceed.

Anthony Gikas – RJ Hottovy

Thanks. Good morning guys. I just want to kind of go back to the last question because it appears that you're clearly hinting that you know, there's more new centers opening coming in the future. How do you, you know, balance that with the, you know, with the balance sheet, you know, you'd been the making of good strikes and reducing you know, the debt positions their wipe such potentially, what such a quick potential turn around in that thesis, and then maybe just a little bit on you know, would it be potentially more of the smaller [boutique] that you're talking about? And last, what is the pricing model on the [boutique] that you are mentioning?

Mike Robinson

First of all, not get carried away, [Tony] don't get carried away with the [boutique] model, that’s not really the growth driver of our business. The main business that we are in driving the large boxes. By the way there are 60, 000 square feet and there are a 120,000 square feet and we're going to stay in the business we have been. We like our space. We're uniquely capable of executing these large boxes and we're going to maintain controlling that space. We're not walking away from it, number one. Number two, we're not suggesting anything to you. We're not [hinting] more large house clubs. We're not [hinting]. We're not going to do of. We're just not talking about it this point. We're focusing on delivering, deposited cash flow. You make to sound like you're so heavily in debt, and we have a debt issue. We have $ 750 million of that's the market, it's not the market value of these boxes it's actually then, I assume more the box, book value, cost value, that Mike has on the books. That's over a billion dollars of real estate and has no mortgage against it and what so ever.

We are not uncomfortable with our financing structure at all. However, our approach for the future is much more conservative in financing. We like to be in the two and a half range or below as an avid that multiple for our debt structure. So, we're just, we have this hugely strong company from the cash flow position and we're going to keep a of high level of a credit rating as we go forward and we just going to manage that as time goes on and we had about $50 million of construction payables last year that came and we pay in 2009 from 2008. We obviously don't have that this year, so you guys going to have to see much more substantial improvement in our cash flow of free cash after growth versus last year each quarter. So, we're in good position.

And we will grow the business and grow this year, and hopefully grow it a little more next year and then we grow it faster than that the year after. But, it's all going to be in line with our strategies in internally.

Anthony Gikas – RJ Hottovy

OK, one last question just out of curiosity. You guys have a terrific quarter. Do have favorable weather patterns around the US hurt the upside? I mean, could you have done better but what you just had such terrific spring from cost to cost. I was just kind of curious of the impact of the weather patterns.

Mike Robinson

It did lose a numbers of days of sales in the East Cost, we had a very rough, we lost some days of sales in the first quarter in the mid west. And so, you know, you can sit there and say we could have done better but Tony you know, there's always some stuff that happens in the latter. So, I think that's just part of a life or not going to take excuses for that.

Anthony Gikas – RJ Hottovy

Sure. OK. Thanks guys, good luck.

Operator

Your next question comes in the line of  Ed Aaron with RBC Capital please proceed.

Edward Aaron – RBC Capital

Good morning guys and nice job in the quarter.

Mike Robinson

Thank you sir.

Edward Aaron – RBC Capital

So, in a certain an ICC business coming back in a positive direction, from when you know kind to contemplate a consumer that seems to be loosening up a bit but also with the along with the term perspective. I'm just a little bit curious,your high level perspective on you from you in terms of how the industry is like to of all from here. you know form all the changes and capacity competitive dynamics and support.

Mike Robinson

Yes, so good. Great question, Ed. We view the industry that there is likely to have more pressure in terms of number of boxes offering really good comprise low service low level fitness like of room of fitness improve adjustment models. And our strategy is to continue to improve what we offer so that we truly put ourselves in the whole different categories from anybody else and we believe we have the comfort level that we can attract and maintain a different group of costumer with our new focus in all different ways offer real value to customers in the area of interest.

Ken Cooper

It's a lot more work, you know I have to honestly tell you the last year and a half, it seems that we all here, me and the rest of my executives and the rest of the team members of Lifetime. We have probably worked harder than ever before to achieve the modesty by there you know, numbers that we are you know, implement our getting here today. But we believe we can continue to do this and we wanted to prove we can get these members and maintaining them when the unemployment still persisting there on the 10%. And so, I don't want to get trade the way and thinking that we can do this all the time. But right now, we're feeling bullish and we are going to continue to do more of the things we have done so that we can go all this through. For a cut to the structure, if I roll back to 2008 and before.

We took approximately our - you know, with cash flow regenerated each year and use them as 1/3 down and we thought about 2/3 financing. That would be like buying a house with 30% down, 23% down and financing in a 67, 70%. And that didn't seem too aggressive at that time relative to what the development company is with do at 90% financing, 10% acuity. Our brief concern strategy going forward is to reverse that. To be maybe a third financing then 2/3 acuity that puts us clearly in an investment grade kind of a mind's stats. Now, I'll be that big enough for that, we're not too very in terrible in better company yet, but we hope to get there. And then, that's kind of a strategy of a more solid kind of a positioning in terms of how much debt we'll put on this company. So, really we will never be at the risk of, you know, damaging the great organization that we have here.

Edward Aaron – RBC Capital

Thanks, and then Mike, just a quick one for you on the Center of Operating Expenses. I know that the increase there came from the Customer Acquisition Prospect. When you look at this on the effective baseline leverage in the business. Did you see the positive leverage there on the quarter or was it about flat? Can you give a real call over there?

Mike Cooper

That's quick. Yes, let me talk about three things there. Our increase in membership by acquisition tells the two drivers for the increase in know in that expense salary deduction on that margin. Number one was increase in member acquisition cause. The second one is something that I have talked to everybody about over the last four, five years. And that is if you are in center revenue grows at a faster clip. There's going to be some degradation or some pressure down on your gross margin, on your sell operating margin. Because those on average are list in our delivery of margin from the dual school. So, and it's both of those things that rolled back. And the second part of that is in center of rear in piece was extend with a little bit more because we changed our pricing strategies like I have talked about in the call. We have actually brought some of our pricing down to drive this value proposition in taking. We took some over selling lesson pricing down. We took more often a lot more specials because you’re a member. And so, we did see reduce gross margin on that . So, that's really the combination underneath that to your point, we continue to see leverage in places like the central over had pass that go into the centers. We continue to see some improvement in our labor efficiency ratios. We roll at up at a positive labor efficiency ratio last year. And we ran a positive labor efficiency ratio on the first quarter. So, there is wholly good news, there's clearly some leverage coming in underneath to that truth.

Edward Aaron – RBC Capital

Thank you.

Operator

The next question comes from Bakley Smith [inaudible]. Please proceed.

Bakley Smith

Hey, guys. It's Bakley Smith. Most persistent covered but you know. Just looking and, kind of back in the bucket, I mean, it sounds like the bucket of the person you, you know, you don't leave you don't want to talk about that the facts was about to get that. I give a call on the last quarter you know, just I just want to get and have a little bit more. So, it sounds like people that are leaving or actually residing. If I'm going to, actually go out of the club some more among in business or that, about the first time in it.

Mike Robinson

We'll we've always talked about what we want your organization to go. If you look at it, it's basically over you look at the past six months or for the last couple of quarters. It’s platform at rates like we're like. We saw about a 10% increase last year at the fourth quarter. And that's how relative we steady at a last couple of quarters. And so, the entire driver for getting people involve is working. And by the way, with those people that aren't using the clubs, we had a lot of that at live last year. And so, we think that's another that at another line basis that does help us in our [Inaudible].

Bakley Smith

I will hang you through that people that are not really using it, are - cleared out. So you got [Inaudible] is a little bit more active just by loosing that they weren't using it, kind a sense.

Mike Robinson

At people? That's correct, that's correct. I don't think you ever fully move those people out, but certainly there's been a big move of that, a big happen in the last year or so, that the membership base we have today is a more active membership base, and that fits very, very well and right in to the strategies that we or implementing.

Bakley Smith

And again, [Inaudible] yes I do. And the next one for me is just, have you given far to a maybe, maybe these someone this formats are away to explore this.  Have you given thought to - and I know, this is not traditional life time. But, have you given thought to change in a ---- you do more of the upfront cost and then, the penalty on the way out, trying to, just rearrange the mask for the customer, which in your case sis and relative [Inaudible] coming and going. So, you got people that live to a farmer, people that live - I now can recognize the benefit to [Bread and loyalty] and those entire [center] thing.  But, have you given thought to make able harder to get out?

Mike Robinson

[At least], we look at things all the time. We're continually evaluating all these things.  But, if the end of the day, it goes back to the one of the over arching course of lifetime fitness.  And that is, that we are something that focuses on the member, and their member experience, and we do not believe that, longer term [counter X] with the hooks and ties that --- come with followed back at all.

Bakley Smith

Hi, [Inaudible]. Thanks so much.

Operator

The next question comes from the line of Michael Lasser with Barclays Capital. Please proceed.

Michael Lasser – Barclays Capital

Thanks a lot, Good morning. If you look at the...

Bahram Arkadi

Good morning, [Inaudible].

Michael Lasser – Barclays Capital

Morning. If you look at the advertising marketing expenses, general administrator expenses, and other are operating expenses. You know, a few years ago, that was about 14 percent of revenue this year [Inaudible] about 10 percent of revenue. Is that a good number to think about that margin moving forward, or is that going to change as [growth] accelerates over time?

Bahram Arkadi

I think, you have to step back and you have to look at it, you have to break it down a little bit more than combining the 3 of those. But, I would say on average we of continue to show leverage in the business, we've always focus on showing leverage in the GNA line, you see that.  And, we expect that we'll continue to see some leverage in the GNA piece, that the marketing piece is [broom pack] about it, really is going to depend on a number of things. We clearly have step back and we've changed the marketing approach, and have cut our marketing spend mainly, because we just can see the efficiency and the effectiveness, and we're looking at it in a more holistic way with our pricing our enrollment fees and things like that. So, that could move up and down, depending on different circumstances on things like that. And the other operating expense over all, I would expect to see leverage there. But, keep in mind what that is. It's really a number of things that come into that, including some of the -- associates with our corporate business and some things like that. So, if you saw those things grow a little bit potentially number goes up, if those don't grow, then I would expect to see some leverage in that.

Michael Lasser – Barclays Capital

Okay. In going back, you prepared in March, you mentioned you're believe that, that there's nutritionally order with you to internal factors that the company has executed rather than the external operator environment. Can you explain on that a little bit more what's striving that belief, they have a control proof that you’re comparing and or maybe, I just brought details there?

Bahram Arkadi

From what I've heard, from some of the other house club operators, you know, I think that I had heard from some of the other people I expect, they had seen some improvement and nutrition break in the first quarter for them as well. So, I want to make sure, I go on record and saying that. So that could be part of it, could be coming from the market conditions internally however. We felt like, we worked our cans off in order to an extreme focus on each in every member in terms of connecting them into areas interested in and focusing on them getting results. And we basically, have quite a bit of data that we study in terms of what happens to the members when they use this product. What happens to the members who are getting involved and such you know activity, and when we looked at difference at the [intuition] of the people who have involvement in certain activities versus those who don't have any involvement in any particular activity and so we are becoming more surgical around working with each group appropriately and trying to offer the right type of value to them of kind of activity to them. I do believe in order for us to win on a long term basis it is to continue and intensify as I mention in my remarks intensify your efforts. Are the company’s offers each and every costumer to make sure they achieve whatever this goal they had when came in. And so, I believe most of our success in the dramatic change on a quarter, in the first quarter, on the last and the first quarter this year, most of it is because of what we did internally and maybe some of it was just because of the market.

Michael Lasser – Barclays Capital

OK. Great. Thanks. Good to look it forward. Thank you.

Operator

The next question come from Jason Blair with Rochdale Securities, please proceed.

Jason Blair – Rochdale Securities

Hey, good morning. Thank you for taking my call and congratulations on bringing down the official rate.

Ken Cooper

Thanks.

Jason Blair – Rochdale Securities

You bet. So, you mentioned on the call that company in theory should generate double the digit growth on normalize basis. If you're not going to generate that growth with or in the major driver that growth is in going to be the yoga ---. You know, I think you need to build more large scales centers than you are today. I guess, has your added to. The course of the question is, has your added to the bath owning versus let say leasing clubs changed? Is that 2.5 you know that you done metric that -- lease is. And can you provide some thoughts on you know, about building from scratch versus converting another location that someone else’s might on?

Ken Cooper

Yeah. Let me start and then will boom about talk on other things from a . At lease versus by goes into our mind to what's the lowest all in caustic capital we can deliver. So, if we saw opportunities on a lease versus all at lease. We would certainly take advantage on them; we certainly don't see that today the cost of lease. Our sell respects are remains much higher than in our abilities to obtain other financing at lower rates. But it all goes back to what's the right thing to do from it all cost capital perspective. Your second point was on a [Bom] mentioned a two and half time another --EBIT, that's an EBITDA number. An EBITDA, we typically would ran probably 30 to 50 basis points higher on that , so that would say we that would be running somewhere North of 250. But probably south of 3 times leverage on an EBITDA basis.

And now, let me walked it through double digit growth. First of all, I appreciate you guys doing what you trying to do and get more insight. We're going to rule out as I mention to you a better vision for all of you. And then the next couple of quarters around a more comprehensive healthy way of life growth plan. Number two, we don't need to get a double digit of growth for 2011 versus 2010. We don't necessarily need to have a lot more boxes build. There is tremendous amount of opportunity in the existing 80 some boxes we have today, that we can leverage. If we can contain the attrition rate to our desired labels, gained a membership growth in our existing product and build some new --- of our plans right now. Here is a potential of double digit in that year, then the following year we have plenty of runway that AT to our, to AT to our number of our boxes that we would open up a list or purchase that doesn't really much matter. And, so we see a pathway to do this as we go forward. Just add maintain the financing covenants that we want to maintain going forward, you know whether or not, some the market comes back. And say, oh you going to have 5 times, your EBIT did that. That is not a position we're we want to put life time in regardless of the, regardless of what's available of the market.

Jason Blair – Rochdale Securities

You clearly have enough of earning powers, in theory you seem to have a lot of earnings power built up in the existing assets. So, just a few. One sum up, if you could. I guess how is your --about the potential for central count as you grow. I mean, where do you see this, center count going? And how long you going to take to get to there?

Ken Cooper

Well, it's not a static answer if the clubbers are, if the current asset respond to our initiatives. And we get the desired result out of the majority of our boxes that we have today. That by itself improves the earnings EBITDAR cash flow all about. So as the EBITDAR grows there and the cash grows there, we want to use the third financing and 2/3's of acuity just tell a loan, allow this to build a boxes without a lot of stuff and or a lot less occupancies with a lot more of editor. So, we feel really strong about the way this business remembers? We have o lots of dry powder right now. We and we keep warning to keep things extremely well-balance. A dimension before we believe lifetime fitness are the high  $800 million to call it 900-- to $900 million company publicly have. We view our selves that we have to be a growth company not a static company. So, we are working with planning, we are strategizing our work. Yet, we want to keep that in a balance of that and of our -- structure , other in our relative . And a lot of, a lot of you guys generally discount the rents that somebody has to pay and frankly I we look at a long term list no different than the dept.

So, when Mike is thinking about provenance spoke in terms of the [Avatar] on as well as the [Ebada] folks as we looking at all of those measures and incorporate in all of that in our decision making process.

Jason Blair – Rochdale Securities

Well thank you so much.

Ken Cooper

Yes.

Operator

The next question comes in line of Sharon Zackfia with William Blaire. Please proceed.

Sharon Zackfia – William Blaire

Hi, good morning. I'm glad I got this question.

Mike Robinson

Hello, [manager] were glad you guide in this [bowl].

Sharon Zackfia – William Blaire

Apparently you concern. Most of my questions we're answers. So I guess this one final question maybe. Did you do anything new in terms of high end the sales people or the manager level compensation? She was reasonably tension more recently in that of an impact order.

Mike Robinson

You know, it's a great question [Sharon]. In a dimension, we literally have done at least 20 different things pointing the same direction. Our different, the earliest employees of our club are inserted differently. The GM's are maybe inserted more on the [Ebada], the club and the membership engagement. Managers maybe in inserted on some more with the [trenchant] the membership advisers will change the name into membership engagement advisers and they inserted with their personal [retraction].

So we have basically focused on number of different things and there is no one, one thing we have done that considers here and tell yet that one thing made it. It's just the combination of probably 15, 20 different things.

Sharon Zackfia – William Blaire

Okay. And then just to clarify on this personality [retraction]. We would normally free of [refusing] of go up and second half of a year is that all can it is?

Mike Robinson

Oh yeah. I think we are planning and plugging on how we can have. What we need to do is not necessarily, and I think it's realistic to have a 9% of tuition rate in the three queue. However we need to have the second, first and second queue to give us a little bit of question. And now we can maintain the kind of the improvement we made, if we could maintain and percent improvement on quarter an quarter. Then I think we are going to achieve our overall 36% goal or better. And so, we're there is going to seasonality but were going to, our goal is to bit each quarter a tuition rate versus the year before.

Sharon Zackfia – William Blaire

Okay, great thanks a lot.

Mike Robinson

Thank you.

Operator

The final question for today comes from Brent Rystorm with Feltl. Please proceed.

Brent Rystorm – Feltl

By the way guys, congratulations.

Mike Robinson

Thanks, Brent.

Brent Rystorm – Feltl

Just role quick, I have a couple of questions. Any regional Trans that you talk about? As far as you know, it's the right [stall] that you need everything?

Mike Robinson

Yeah, I would say nothing over our team; we still see the [Detroit] is a topper market. But again because we’re starting the [laps] somewhere that, it's kind a, it's kind of, it's a little bit. As we look across the rest of the country, you know, it's still up and down. I think it more ask to do still with democratic of a specific location than it does the entire region.

Hello? Brent.

Operator

He must got lost - got lost in the connection.

Mike Robinson

Okay, I think that's.  Brent, well thank you for joining our call today. It's a dimension for a service call. We'll be holding annual sales this afternoon 2:00 Eastern. This meeting will be web cast so please be these investors sections must just have come to participate, if you are not to attend this person. We look forward to the second quarter 2010 results tentatively scheduled July 27, 2010 at 10 a.m. Eastern. Until then, we see if you’re interested the Life Time Fitness. Thank you and good bye.

Operator

Thank you for your participation for today's conference. That's includes today.  Please now disconnect.

Thank you.

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