Life Time Fitness Management Discusses Q4 2013 Results - Earnings Call Transcript

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Life Time Fitness (NYSE:LTM)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET


John Heller

Bahram Akradi - Founder, Chairman, Chief Executive Officer and President

Michael R. Robinson - Chief Financial Officer and Executive Vice President

Eric J. Buss - Executive Vice President, Secretary and General Counsel


Sean P. Naughton - Piper Jaffray Companies, Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division


Good day, ladies and gentlemen, and welcome to the Q4 2013 Life Time Fitness Earnings Conference Call. My name is Derek, and I will be your operator for today. [Operator Instructions]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. John Heller, Vice President of Finance and Investor Relations. Please proceed.

John Heller

Thanks, Derek. Good morning and thank you for joining us on today's conference call to discuss the fourth quarter and full year 2013 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 Concurrent with the issuance of our fourth quarter results, we have filed a Form 8-K with the SEC, which also includes the press release.

On today's call, Bahram Akradi, our Chairman, President and CEO will discuss key highlights from our fourth quarter and our operations. Following that, we will review our financial highlights and provide financial guidance for 2014.

Once we have completed our prepared remarks, we will answer your questions until 11:00 a.m. Eastern Time. At that point, Derek will provide instructions on how to ask a question. [Operator Instructions] I will close with a tentative date of our first quarter 2014 earnings release and call. Finally, a replay of this teleconference will be available on our website at approximately 1:00 p.m. Eastern Time today.

Today's conference call contains forward-looking statements, and future results could differ materially from those statements made. Actual results may be affected by many factors, including the risks and uncertainties identified in our SEC filings. Certain information in our earnings release and information disclosed in this call constitute non-GAAP financial measures, including EBITDA and free cash flow. We have included reconciliations of the differences between GAAP and non-GAAP measures in our earnings release and our Form 8-K. Other required information about our non-GAAP data is included in our Form 8-K.

With that, let me now turn the call over to Bahram Akradi. Bahram?

Bahram Akradi

Thanks, John. I'm pleased to be here to reflect on our accomplishments in 2013 and share our plans for 2014.

Last year, we began setting the table for accelerated growth in 2014 and beyond. While 2013 was the last year of 3 center per year expansion, we commenced construction on 6 new centers opening in 2014. We are very excited about the growth that we expect to come -- that we have that we expect to come from these new destinations. All of these are in high demographic markets, led by iconic facilities in Westchester, New York that opened 2 weeks ago and Laguna Niguel in Orange County, California, coming in the second quarter. We believe these non-duplicable facilities will be a steady source of long-term growth for many years to come.

We continue to build our Healthy Way of Life Company and brand. In 2013, we maintained our focus on delivering best-in-class programs and services to our customers and saw continuous growth in membership dues and incident revenues, along with corresponding increases in same-store sales and average revenue per membership.

I would like to walk you through a few of our key financial metrics for the full year ended 2013.

Total revenue grew 7%. Dues revenue grew 5.8%. In-center revenue was up 7.8%. Our operating margin for the year was 18.6% versus 18.5% in 2012. EBITDA for the year grew 6.2%. Net income was up 9.1%, and our EPS grew 10.2%

And most importantly, mature same-center, same-store sales for the year was 3.2% and 13-month same-store sales was up 4% over last year.

Our attrition rate in the fourth quarter was 9.8% versus 9.1% last Q4. Our trailing 12-month attrition was 35.8% versus 33.5% last year.

Total membership grew 0.3% over the last fourth quarter. Access memberships at the end of fourth quarter were down 0.6% versus last Q4. Non-Access membership grew 6.2% from last Q4.

We opened a new -- we opened one new center in Montvale, New Jersey, in mid-November. In the last 2 years, we have grown our square footage approximately 7%. But in the same time, we have grown our total dues revenue, nearly 16% and our total in-center revenue by nearly 22%.

While we prefer that membership growth were higher, it is a byproduct of the aggressive and strategic pricing actions we have undertaken in the last 2 years, as we migrate our business to a higher demographic customer that spends more on the programming and services in-center. We are pleased with the results we have and are excited for the impact on growth of the increased number of new centers should bring in the years to come.

2014 is off to a good start with our strategy around growing dues. We're also seeing good performance from our new centers. Our core strategies for this year involved 3 components. First, accelerating our growth, in addition to Westchester, which is off to a strong start, and Laguna Niguel, which is off to a strong presell. We have 4 other new centers opening this year in high demographic geographic -- geographies, enabling us to offer our top-tier membership levels, which we expect to provide lift to our average monthly dues and in-center revenues per membership. We are very excited about the growth for the prospect in our destinations.

Second, operate highly synergistic businesses that provide new revenue growth opportunities that leverage our comprehensive destination centers, programming and services infrastructure, and further the expansion of The Healthy Way of Life Company and brand. We have 2 additional growth pillars that both complement our synergistic -- and it will complement and are synergistic to the core pillar, our healthy way of life destinations. These 2 pillars are: athletic events and media; and two, total health. Through our media business, we provide our partners with a tremendous reach to highly sought-after customers through a range of print and digital media, including our award-winning Experience Life magazine and events sponsorship. Additionally, we produce and host large and growing portfolio of more than 100 athletic events, ranging from 5k, half and full marathons, cycling events and triathlons. We also provide event registration and timing services for some of the largest athletic events in the country.

Together these events and services serve as a powerful branding and new customer acquisition opportunities for our destinations programs and services.

Our total health business is an emerging health and weight-loss company is expanding into a very large market opportunity, as we seek to serve businesses and individuals alike, with a comprehensive array of differentiated, measurable and actionable health, wellness, fitness, weight loss and nutrition solutions. As we do so, we also are creating powerful new opportunities to expand the reach of our destinations, programs and services, to new members, while also growing our subscription-based model to include new types of memberships which limit or no -- with limited or no regular center access. Both of these businesses are well-positioned and we expect meaningful contribution relative to their size.

And third, we -- with the collective strength and synergies of our 3 growth pillars: Destinations, athletic events and media, and total health, we can increase our impact and deliver comprehensive healthy way of life solutions to communities, organizations and individuals. We are excited to get to the point where we can demonstrate the power and synergies of these interconnected pillars, making our high barrier-to-entry business incredibly appealing to our customers.

Finally, as I'm sure you've all heard our CFO, Mike Robinson, is retiring. At the end of this month, March 1, will be his last official day. I would like to announce that yesterday, our Board of Directors approved Eric Buss as Executive Vice President and Interim CFO beginning March 2.

I want to provide a better background about Eric. Prior to joining the company, Eric practiced as an auditor for one of the major accounting firms and then practiced law at one of the largest law firms in the Twin Cities. In September of 1999, Eric joined the company as Vice President of Finance and General Counsel. Eric has reported to me for 13 of his 14 years here and he has been involved in majority of all significant undertaking and complex matters that the company has faced, including the initial public offering of our stock. Eric has been an Executive Vice President since 2005. I have tremendous confidence in Eric's ability and integrity. Eric will serve as our Interim CFO. I will work closely with him and evaluate his effectiveness in this new role.

At the same time, I am continuing to meet with other qualified candidates to ensure that we ultimately place the best candidate in this essential position. We expect to make that decision in the near future. In the meantime, I am extremely confident that our accounting, finance and capital -- I'm extremely confident in our accounting, finance and capital market functions will continue to perform and operate at the highest level, just as they have done since the day we went public in 2004.

For the next 12 months, I will be more involved in all aspects of this role, including spending more time with all of you to explain the company's forward strategy.

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

Michael R. Robinson

Thanks, Bahram. Let's start with some updates. You've heard us emphasize dues and dues growth over and over. Dues represent approximately 63% of total revenue and are the key profit driver and an essential growth element of Life Time Fitness.

In Q4, we delivered nearly $190 million in dues and our dues growth rate increased from 4.3% in Q3 to 5.8% in Q4. We grow dues by continually working to optimize a price mix, membership level on attrition, as well as expand our center base.

As we have discussed, price and mix have been strategic focus areas for us. We took various price increases across most of our base in Q4 2013 of around 2%, more or less the same as last year.

In addition, we have driven a higher membership mix by increasing our number of high-end Onyx and Diamond centers from 20 to 27 in 2013, including one new Onyx and one new Diamond center opened in 2013.

As Bahram pointed out, total membership growth slowed to 0.3% for the year and Access memberships at 678,619 was down 0.6%. However, even though mature center memberships were down, grews -- dues grew approximately 3% in these centers.

Attrition has increased in the past year, primarily driven by our higher pricing strategy, higher terminations from our faster growing, Non-Access subscription base, and the low number of immature centers, since we see a natural growth in attrition as our centers age from year 1 through year 3.

In 2014, we anticipate membership growth of around 2%. Membership growth should be weighted to the second half of the year as the benefits from the ramp of recently opened centers and the increased number of new center openings throughout the year began to compile.

The estimated average life of a membership is 33 months, unchanged from last quarter. The number of open centers at December 31, 2013 was 108 compared with 105 at December 31, 2012. 63 are our current -- are our large current model, and 89 have been opened more than 3 years, which we classify as mature centers.

We operate approximately 10.2 million square feet of fitness facilities including our acquired centers.

Our total revenue was $291 million for the quarter, which was up 5.7% from last fourth quarter. In addition to dues, our main -- our other main revenue driver was in-center revenue, which grew by 7.3% in the quarter and 7.8% for the year, led by kids’ activities, personal training, and our smaller, but fast-growing tennis business. We are strategically driving this in-center growth by increasing our products and services in our portfolio, in-center, incenting our members to begin using these services through our LT BUCK$ affinity program and continuously enhancing our connectivity initiatives.

Our focus is to drive more member engagement, which we expect will improve member retention and customer satisfaction.

Other revenue was down 4.9% for the quarter, driven by lower media and advertising sales. As you'll remember, a significant part of other revenue is seasonal in nature, driven by events revenue, predominantly in the second and third quarter.

Other revenue was up nearly 39% for the full year, driven by these events businesses and the race timing and registration businesses, including 2 major races we acquired in the third quarter: The New York City Triathlon and the Chicago Half Marathon, as well as strong growth in our health businesses.

Our revenue productivity metrics are strong and consistent across the board. Our fourth quarter same-store sales were up 3.6% for the quarter and 4% for the full year, while our 37-month mature same-store sales were up 2.7% for the quarter and 3.2% for the year.

Revenue per Access membership in the fourth quarter was $412 per membership which was up 6.4% and $1,656 for the full year, up 5.7%. To put that in some perspective, 10 years ago, revenue per membership was under $1,000.

In-center revenue per Access membership of $132 was up 7.6% in the quarter and $545 for the year, up 7.5%. These results are solid evidence our existing center base is performing and that our dues growth and in-center strategies are working well.

Now I'd like to discuss our operating costs as well as company profitability. Operating margin for the full year 2013 grew from 18.5% to 18.6%. Operating margin in Q4 was 16.7%, up from 16% in Q4 2012. If you recall, Q4 of 2012 included over $4 million of unusual or nonrecurring costs associated with, among other things, our inaugural Commitment Day event and Superstorm Sandy. The benefit from lapping these costs in the current quarter was partially offset by incremental preopening expenses of over $2.5 million in the quarter versus last fourth quarter.

In addition to preopening expenses in Montvale, New Jersey, we had preopening expenses for Westchester, New York; Laguna Niguel, California, and some early expenses from Tampa, Florida, and Bloomfield Hills, Michigan. Please keep in mind, in 2013, we opened 3 centers and in 2014 we plan to open 6 centers. We expect these preopening costs, as well as the lower margins for new centers to continue through to 2014, holding operating margin relatively flat to 2013.

For the quarter, center operating costs increased 30 basis points over 2012 4Q to 58.1%. Leverage from the increased dues revenue and mix changes was offset by the incremental preopening expenses just discussed as well as cost in excess of enrollment fees. For the year, cost in excess of enrollment fees approximated $26 million versus $21 million in 2012.

In 2014, we expect center operating costs to increase slightly as a percent of revenue driven by these same elements. For the quarter, marketing and advertising costs were up 30 basis points over Q4 2012 driven by presale activities. We continue to invest in our LT BUCK$ affinity program and marketing spend in presales, new events and other corporate initiatives. These programs are showing results as evidenced by our growth in dues and in-center revenues.

For 2014, we expect marketing cost to be relatively stable to down slightly as a percent of revenue. For the quarter, G&A expense improved 70 basis points versus last year's fourth quarter as a percent of revenue, at 4.6%, driven by our focus on controlling and leveraging our core G&A, coupled with lower P&L expense on technology initiatives that we incurred earlier in the year.

For 2014, we expect G&A to remain relatively consistent as a percent of revenue. We will invest to support our growth initiatives, as well as continue to drive leverage in other G&A areas.

Fourth quarter 2013 Other operating expense was up 10 basis points. This increase was driven by our investment in sales and operations infrastructure for our total health and media and athletic events businesses. While other operating expenses increasing as a proportion of our total cost structure, as we expect, we have seen significant total year top line growth relative -- related to the synergistic healthy way of life businesses.

In 2014, we expect to continue to see the overall revenue to cost relationship improve.

Depreciation and amortization was down 60 basis points at 10.2% of revenue compared to 10.8% of revenue in Q4 2012. This decrease is primarily driven by faster revenue growth compared to only opening 3 centers in the past 4 quarters. In 2014, we expect depreciation, as a percent of sales, will grow as we bring an increasing number of new investments online.

Interest expense, net of interest income, increased to $6.7 million from $6.1 million last fourth quarter. We expect to see continued growth in both interests -- in interest both as an expense and as a percent of revenue in 2014, as our debt balances increase from funding construction for our new centers and we get the full year of impact of the new mortgages we've closed, as well as potential new financing that are at higher rates than our revolver.

Our tax rate for the quarter was 38.5%, about even with last fourth quarter. We expect our 2014 tax rate to be approximately 40%. That brings us to net income for the quarter of $26 million, up 11.1% over fourth quarter 2012.

Overall, we achieved diluted EPS of $0.63 in the fourth quarter, up 12.5%. For the year we achieved net income of $121.7 million, up 9.1%, and diluted EPS of $2.93, which was a 10.2% increase from 2012.

Our 2013 net income margin grew to 10.1% from 9.8% in 2012.

My next topic will be cash flow and our capital structure. Cash flow from operations totaled $258 million for the year, up from $256 million for 2012. Our focus on center growth and the resulting increased construction activity for late 2013 and 2014 center openings drove a negative $90 million in free cash flow in 2013. As we have discussed, we intend to increase investment in long-term growth opportunities including square footage expansion while maintaining a strong balance sheet. We do not plan to manage to a positive free cash flow.

Given our current EBITDA-to-debt leverage of just below 2.5:1, we feel we can increase this leverage to help drive our growth plans and still maintain a strong balance sheet. We have spent approximately $62 million to repurchase approximately 1.3 million shares in 2013. This includes approximately $21.7 million for 460,000 shares in the fourth quarter.

In August of 2013, the Board of Directors approved a new share buyback plan, allowing for the repurchase of up to $200 million of shares in the open market for a 2-year period ending in August of 2015. We have approximately $169 million remaining under the new plan.

We finished the quarter with weighted average diluted shares of $41.3 million compared with $42 million diluted shares for Q4 2012. For the full year, weighted average diluted shares were $41.5 million. For 2014, we currently expect share count to be flat or down slightly.

Total debt for the quarter, increased to $59.8 million in September 30, 2013 driven by construction costs related to the new club openings and share repurchase activity. As of December 31, we have $521 million outstanding, including letters of credit on our $860 million revolver. That leaves $348 million in cash and revolver availability. Our net debt to total capital was 42.3% at December 31.

During 2013, we added $200 million of availability under our revolving credit facility and closed on 2 new mortgage loans totaling $125 million, with average terms over 10 years and fixed rates under 4.5%. In January of 2014, we closed on a commercial mortgage-backed security, or CMBS, loan from a large bank in the amount of $80 million with the term of 10 years and a fixed rate of 5.06%. The loan is secured by mortgages on 5 of our centers. The proceeds went to pay down some of the outstanding revolver balance. We're pleased with these additions to our capital structure, allowing us to utilize our extensive real estate portfolio to take advantage of historically low, long-term interest rates and keep a comfortable level of availability under our revolver.

For 2013, our cash spend was approximately $349 million of capital expenditures, including acquisitions -- excluding acquisitions, of which roughly 75% was spent on new center and other growth initiatives. For 2014, we are forecasting $375 million to $425 million in capital spend, as we double our center openings in 2014 and look to average at least one new center every other month beyond 2014 for the foreseeable future. This includes $305 million to $335 million for growth CapEx including new centers expansion or major remodel of existing or acquired facilities and other growth initiatives, as well as $79 million to $90 million for maintenance CapEx and corporate initiatives.

A few balance sheet variances for Q4 2013 to note, include, current maturities of long-term debt are up $10 million from Q3 and up $12 million for the year from year end 2012, driven by the planned exercise of a buyout option on a land lease. Construction accounts payable was up approximately $22 million from year end 2012 driven by growth in the planned center openings. And goodwill and other liabilities are both up from year end 2012 driven by acquisition activity.

I would now like to turn the call over to Eric Buss, who will walk you through our financial guidance for 2014. Eric?

Eric J. Buss

Thanks, Mike. In 2014, we planned to open 6 large centers. Our first, in Westchester, New York, opened earlier this month as a Diamond center. Our first center in California, Laguna Niguel in Orange County, is slated to open as a Diamond center in April. Also in April, we plan to enter the Tampa, Florida market with a Diamond center, followed in May with a Platinum center in West Des Moines, Iowa. In June, we plan to open a Diamond center in a high demographic pocket of our Michigan market in Bloomfield Hills.

In the second half of the year, we plan to open one additional center in the Las Vegas market in Henderson. Today it's slated to be a Diamond center. As Mike has stated in the past, as you think about the impact of increasing the number of openings in 2014 and beyond, we encourage you to model the impact center by center, fully incorporating the revenue driven by both the size, pricing level and appropriate membership level of each facility, remembering that the revenue typically lags square footage growth during the ramp period.

Also, remember the impact of presale and startup costs, which can total in the $1.5 million per center range, plus the lease and land lease costs we have on 3 locations opening this year.

In addition, we expect to have lower margin delivery for the centers in the early ramp stages. We are very excited about this increase in center openings, and we expect they will pay off well in the years to come. However, we expect to see operating cost increases and some effect on margin in 2014 and into 2015 as we absorb the incremental costs of the increased number of center openings.

With that, let me discuss our financial guidance for 2014. We expect our revenue will grow 8% to 9.5% to $1.3 billion to $1.32 billion. We expect our net income will grow approximately 3% to 7%, or $125 million to $130 million. This net income growth rate reflects the incremental costs of accelerating our center openings that we just spoke about.

We currently expect our diluted EPS will be $3.05 to $3.15 per share. While we do not give specific quarterly guidance, we currently expect that net income and EPS growth to be weighted more heavily to the second half of the year due to the incremental preopening costs and center ramp expenses we will be absorbing in Q1 and Q2 of 2014, as compared to those same periods in 2013.

As a point of reference, we expect to have twice the number of total months of presale club activity in the first half of 2014, as we did in the first half of 2013.

That concludes our prepared remarks regarding our fourth quarter financial results. Before we take questions, I'd like to say that I am extremely excited about this new responsibility before me and I'm looking forward to meeting as many of you as possible in the very near future. I am passionate about Life Time and being part of the continued growth and evolution of our Healthy Way of Life company.

With that, we are pleased to take your questions.

Question-and-Answer Session


[Operator Instructions] And our first question will come from the line of Sean Naughton, Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

When you guys look at your EPS growth in 2014 versus 2013, you just outlined the 3% to 7%, down a little bit from what you did last year. Can you talk about maybe how much of that slower EPS growth is an impact directly from those preopening expenses that you outlined just from a percentage basis, potentially? And then you also talked about EPS being back-half weighted, do you still expect to have EPS growth in each quarter in 2014?

Michael R. Robinson

So the first part of this, really the difference between the revenue growth and the EPS growth is driven by the startup cost or the incremental startup cost of the new centers moving from 3 centers to 6 centers. And the increase in the interest cost to support the capital that is being put in for that. Those are the 2 main drivers of that slightly lower growth rate and net income versus the revenue growth. As far as EPS growth from a quarter-to-quarter basis, again, we don't give specific quarter-to-quarter guidance, although as I look at it right now, I would expect flat to maybe slightly up first half, and then more heavily weighted on the second half.


Your next question will be from the line of Brian Nagel, Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

So a couple of questions, they are a couple of short questions that center around membership growth. First off, Mike, in the last conference call, if I remember it correctly, you called out maybe some additional, I think it was very preliminary, even premature, on your new facility in Virginia, so maybe an update there. And then second, I followed retail and I've had basically I've been a weatherman for the last 2 months now. As you look at the -- your membership growth, either later last year or early this year, if you think weather has an impact upon that. And how should we think about that, for the next couple of months or so?

Bahram Akradi

I'll take both of those for you, this is Bahram. The Reston facility, we started a little light on membership count and we made some modest price adjustments for the market. And since we have made the adjustments in the prices, the club has exceeded its monthly goals and the membership gains are significantly higher and back to normal number of membership counts that we want for a club that size every single month, since this has happened since December. So the second question, you asked about the weather. No, I guess, what I would like to tell you is we are probably impacted a little bit by the weather, but not nearly as much as maybe other retailers in our business. Our business is far more resilient from that standpoint. It will be no excuse for any numbers not being where they need to be. We expect to meet our goals that we have set for the year at this point. However, there was a slight loss of sales for a number of days in several of the markets in January and in February. We should be able to weather that storm.


Your next question will be from the line of Mike Lasser, UBS.

Michael Lasser - UBS Investment Bank, Research Division

Two quick questions. First, on your outlook for this year. The 2% membership growth expectation, how does that break down between new member adds and attrition? And then I'll have a follow-up question after that.

Bahram Akradi

I'll take that again. This is Bahram. We have had an aggressive change in the price strategy. Our average dues are significantly higher on a monthly basis on every new member that we sell this year versus last year. We had a very, very, very modest price increase on average on our existing members for 2014. However, the rack rate today, across the board, is significantly higher than last year. So the membership counts are slower. The reason for the slower membership count, so we've budgeted fewer membership sold, but delivering higher total dues, new dues that sold every month than we have had even in the past year. So there is a balancing act in there. We've been trying to explain that regularly and the strategy is to deliver a highly, highly comprehensive healthy way of life product to the top 20% of the market. We are very, very purposeful as what customer we're going after and how we're going to monetize this in the future, and the strategies are working relative to what we want to see.

Michael Lasser - UBS Investment Bank, Research Division

Okay, that's helpful. My follow-up question is on the nature of the members that are attritting out, how is it changing? What information can you tell us about those that are leaving more recently versus a year or 2 ago, how often do they use the club? What was their level of membership engagement? Do you think you're losing members to beyond just economic reasons, maybe for competitive reasons as well?

Bahram Akradi

The bulk of our membership loss is either people moving or people not utilizing the club or people having financial issues for the time being. Those are statistics we measure on a weekly basis, monthly basis. We review them constantly. And there is no significant change in the business. The industry, as it has over the many, many decades, is going through a variety of transformations and fragmentation. Incredible number of small studios, small gyms, $10 a month product, $20 a month products, we basically have been focused on delivering the product that makes us not vulnerable to any of those types of what I want to call non-sophisticated threats, and that's what they are. So we're in a really, really great place. We have the strategies to even strengthen our relationship with our existing customers, while we are able to grow the dues at a desired level, with a 35%, 36% attrition rate for decades. We have strategies now with aggressive desire to reduce attrition significantly more by strengthening the relationship we have with the current customers. That is going to take a significant amount of time to deploy and prove the initiatives we have. But nevertheless, the attrition, to give you a short answer, is not radically different in terms of amounts or the reasons why they're leaving.

Michael Lasser - UBS Investment Bank, Research Division

Okay, my one last follow-up question is, in the past -- on the fourth quarter, you've given us some flavor on how the January or early year recruitment trend shaped up just given how important that is to the -- is there anything you could provide on that? And can you see any impact from the weather on your January recruitment?

Bahram Akradi

As I stated, we did lose several days of sales, new membership sales in several markets. But overall, we are focused on growing dues. And as a percentage of the budget that we have written to grow our dues, we were right where we needed to be.


Your next question will be from the line of Greg McKinley, Dougherty.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Mike, I just wanted to ask a clarifying question on other revenue, I know you indicated the seasonality of it. But with the event acquisitions that you've done, maybe just revisit why the revenue number year-over-year was lower in Q4 and how we should think about that going into '14?

Michael R. Robinson

Sure. Q4 was down about 5% and it was really driven by lower media and advertising sales. And the way we've looked at that is really timing, from our perspective. Again, if you look at the progression of revenue in this business, Q4 and Q1 are our lowest and Q2 and Q3 are our biggest, because of the heavy concentration we have on the events business, a lot of the advertising, sponsorship, that stuff come flows through there and certainly our events registration and timing business has flowed through there also. So when we looked at it, we saw some timing challenges in the fourth quarter. But as we look at it long term, again, it was up 39% for the year. It was up 39% driven by very good events business growth and very good total health business growth. And our expectation, as we look into next year, is that you will see -- you will continue to see good growth in those areas. You may not see 39%. I would certainly not be modeling that high. But there will be some areas of emphasis for us, they'd match very, very synergistic with the destination business we have. And our expectation is that you will see very good growth in there and you will also see continuing improvement in that revenue to cost relationship as we started to see this year.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And then I wonder if you could just touch on how, if at all, you've been changing your marketing and promotional efforts in terms of how it's visible to the customer? Enrollment and administrative fees, I think are largely 0 in a lot of the more mature markets. So how does the company keep a fresh sort of promotional effort if those levers are already pulled?

Bahram Akradi

It's a good question. I can tell you that, probably over the last several years, we are either being 0 or near 0 or a little bit above or a little bit below. There are seasons where we can take those enrollment fees up a little bit and there are seasons where we bring them down. The focus for the company in the ongoing forward-looking is significantly more on trying to retain a far more significant portion of our members that we have had historically. And when I mean historically, I talking the last 10 years, 20 years. And try to focus less on the new customer. And then when we go after the customers, if you look at the books that we send out, and describing the whole healthy way of life array of product and services and the quality of it, we are deliberately going after a different kind of customer. So this is a -- these will be a very, very slow gradual transitions with big changes added in a long term perspective. The goal for us is to make sure we will continue to meet our internal goals and the guidance that we give you guys. And so as a result of that, everything we do will be extremely measured and put forward at the right process of time. But the fact that the enrollment fees are 0 or $50 or $60 or back to 0, are virtually non-relevant to how we get the membership count in.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And then, Mike, in your prepared comments, you made a reference to dues growth versus attrition at certain centers. I didn't quite catch that metric. I wonder if you could remind me of that, and then just reconfirm the timing of the openings for the Tampa and Orange county centers.

Michael R. Robinson

Sure. The reference I made was that even though we saw memberships down slightly at our mature centers, overall dues growth across that mature center base was up 3%. I think that's what you were referring to there. And the timing of the openings for our Tampa and for Laguna Niguel are second quarter in the April time frame.


Your next question will be from the line of Steve Wieczynski from Stifel.

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Bahram, you talked a little bit about Westchester and you sounded pretty optimistic about that. Can you also give a little bit of commentary around Laguna, again presales, but can you give a little bit more color that around Orange County, just given it's your first entry into California, maybe compare it to some other markets that have recently opened?

Bahram Akradi

Yes, so we expected a tremendous result out of Westchester and we started the presell and we got all of that and then some. Well, I wasn't sure if California, demographically, based on just the population and the income, it's suggested it should be as good, but you never know until you start the presell. And Laguna has kept up if not surpassed, relative to the timing it's several months behind in terms of the timing of the start and the club opening. But it's been toe-to-toe, if not better from Westchester. So I am extremely pleased from how these large clubs-- Tampa is a very, very small club. It's really not our typical facility, even though it's a Diamond, it's a dry club. It doesn't have a pool, it doesn't have a basketball. It's a small facility relative to the big ones. But the big clubs right now, every one that we are -- the other club that we are in presell with incredible results, as well is Des Moines, Iowa. It's again a very large club, 175,000 square feet facility with tennis. And so we're very, very excited about not only these clubs, but everything else that we have in the pipeline. We have some of the best demographics in the country are slated for 2014, '15 and beyond. So unlike some companies where they start in the East Coast or West Coast, with their early products in those markets, we are coming to the best markets in the United States with our very best product and the results are just incredible.

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then if I can add on to that a little bit. You basically talked about 2015 and beyond still targeting that, the kind of 6 -- that 6 new center openings per year. I guess, it's fair to say what you're seeing right now with Orange County, California still seems like a huge opportunity for you guys?

Bahram Akradi

California is a tremendous opportunity. We're discussing right now potentially hiring a real estate person dedicated to that market, living in that market. We're adding more real estate people for the East Coast as well and Toronto, Canada. So we're just -- we are as we have been trying to explain speeding up our growth rate, again, very thoughtfully, methodically. But even though we're opening only 6 clubs a year, these clubs are relatively almost equivalent of 2 of the clubs we open in terms of investments and what we expect to get out of them as we did in 2006 or 2007.


Your next question will be from the line of Brent Rystrom, Feltl.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Couple of quick things. How do you guys characterize how we should think about the closing of the loss -- the gap in closing the losses in the other businesses? So in events and media, total health, I think you lost about $14.5 million in those line items. Do you see that go down another $2 million to $3 million this year? Should it be less than that, more than that?

Michael R. Robinson

We would hope there would be somewhat more than that.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Okay. And then just one other quick question. Based on your guidance for the year, it kind of implies about half of your -- maybe 60% of your membership dues growth coming from dues rates and then maybe 40%, 45%, or 50% from unit growth as far as memberships. Is that a reasonable way to look at it?

Michael R. Robinson

It is. I think you've got it. It depends on how you bucket mix shift, and membership mix and membership type shift because that's clearly an element too. In my prepared remarks, I talked about the fact that in the last year, we moved from 20 to 27 Onyx and Diamond centers. And so that -- we compartmentalize there or track that differently than pure price, I guess you could put it in the peer price bucket. But those 2 elements, price and mix, are going to be probably slightly more than half of the total driver for that growth.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

And then final quick question. From a simplistic perspective, is it fair to think that also you're seeing substantial benefit from all of the trivial activities from last year, your unit membership growth might not be growing that much, but you're not only seeing higher dues at higher club levels but you're seeing a migration towards more Family memberships?

Bahram Akradi

We -- I'm going to take this, Brent. We have developed some very, very exciting new programming we talked about before Kids Academy. It is largely successful in every club that it's been rolled out. But it's right now only about 2 new clubs have that. We have it rolled out in about 2 or 3 other clubs. We have a strategy to roll that program in significant number of our clubs, probably 20 to 25 clubs by year end in addition to all the new clubs. That programming is helping us to bring in incremental dues for the kids. It's also is allowing us to bring in significantly more Family memberships. And those, as part of our strategy, to have lower attrition because we also have significantly lower attrition on our Family members as we have on the single members.

Michael R. Robinson

So Brent, to your point, that's right. They would show up as one membership rather than 2 or 3. So there are some, either some impact where you've got some lower memberships, but you've got significantly higher dues.


Your next question will be from the line of Scott Hamann, KeyBanc Capital.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Just one quick question here. On the Reston experience that you had to bring pricing down to drive some volume, has is that changed your thinking about some of the clubs you're opening in the future and how you approach pricing or was that kind of a certain situation and kind of how are you thinking about how that affects the model and the unit economics going forward for the rest of the portfolio?

Bahram Akradi

It's a good question, Scott. Let me give you a perspective on that. We are absolutely and positively certain that with the product we deliver is a coveted product in the markets we go to. Pricing is something that it's part of any MBA program, it's 101. So we have a very, very methodical and sophisticated system. We have meetings with our membership acquisition retention teams, several times a week. We measure these things daily and measure the results daily. So my attitude about that is if the product is a product that people want, all you have to do is figure out what price you can get for it. In the past, when we started the company, we gave away the memberships and we were too cheap. Now sometimes, we may be slightly too low but we quickly adjust, and sometimes we might be slightly too high, we quickly adjust. And so it is really not a huge deal. It isn't anything new for us to learn, that we haven't known before. Markets are different. In Virginia market, we had been with 4, 5 clubs in that market with much lower pricing for so long that it was challenging for the market to accept Life Time offering this big price variation from a club that was 6 miles away and nearly looking the same thing, offering the same thing. If we didn't have any other club in the Virginia market, and we had come in with that Diamond pricing, the results would've been exactly the same as we have in Montvale or Westchester. So it was just the dichotomy of the market and the fact that we had been there with a lower price with the other facility. So we got it a little closer, still higher, than the other clubs. And then we brought the other clubs up. And overall we basically are doing what we need to do to make sure the price is accepted by the market because the product is, obviously, is accepted by the market.


At this time, we have no further questions in queue. I would like to turn the conference back over to Mr. John Heller for any closing remarks.

John Heller

Thanks for joining our call today. We look forward to reporting our first quarter 2014 results, which has tentatively been scheduled for Thursday, April 24, 2014, at 10:00 a.m. Eastern. Until then we appreciate your continued interest on Life Time Fitness. Thank you, and have a good day.


Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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